-----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, EzY3DLIxWBCEeb3Cx3QBIjjbZtwPAEPtMOsYxTOLMhuj7TkLtMDwa/jwNqy2/Zff clTgsP0zT+s1jlAtnmc4mg== 0000950144-97-012074.txt : 19971113 0000950144-97-012074.hdr.sgml : 19971113 ACCESSION NUMBER: 0000950144-97-012074 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-12011 FILM NUMBER: 97716047 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 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 September 30, 1997 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 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, Memphis, TN 38120 (901) 767-7005 (Address of Principal Executive Offices) (Registrant's Telephone Number (Zip Code) Including Area 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 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 September 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 - September 30, 1997 and December 31, 1996 3 Consolidated Statements of Income - For the three months ended September 30, 1997 and 1996 and the nine months ended September 30, 1997 and 1996 4 Consolidated Statements of Cash Flows - For the nine months ended September 30, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 RFS, Inc. Balance Sheets - December 31, 1996 and September 30, 1997 9 Income Statements - For the three months ended September 30, 1997 and 1996 and the nine months ended September 30, 1997 and 1996 10 Statements of Cash Flows - For the nine months ended September 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 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23
3 RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPT. 30, DECEMBER 31, 1997 1996 ----------- ------------ (unaudited) ASSETS Investment in Hotel Properties, net $ 568,587 $ 415,618 Hotels under development 10,556 7,325 Cash and cash equivalents 3,684 57,935 Accounts receivable-Lessees 14,746 7,187 Deferred expenses, net 4,249 3,598 Prepaid and other assets 3,005 1,402 Escrow deposits 100 6,064 --------- --------- $ 604,927 $ 499,129 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 2,619 $ 2,258 Accrued real estate taxes 3,946 1,774 Borrowings on line of credit 115,743 50,000 Bonds 72,630 74,769 Other debt 7,661 8,295 Minority interest 36,594 4,551 --------- --------- 239,193 141,647 --------- --------- 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 4,276 3,005 Unearned directors' and officers' compensation (1,772) (2,325) --------- --------- Total shareholders' equity 365,734 357,482 --------- --------- $ 604,927 $ 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 NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1996 ----------------------------------------------------------------- (unaudited) (unaudited) (unaudited) (unaudited) Revenue: Leases $ 23,853 $ 18,226 $ 63,452 $ 47,594 Interest 9 116 64 259 -------- -------- -------- -------- Total revenue 23,862 18,342 63,516 47,853 -------- -------- -------- -------- Expenses: Real estate taxes and property and casualty insurance 2,318 1,550 6,250 4,459 Depreciation 4,664 2,804 12,856 7,944 Amortization of franchise fees and unearned compensation 219 212 662 543 Compensation 585 572 1,812 1,485 Franchise taxes 75 65 225 195 General and administrative 499 548 1,415 1,475 Loss on sale of a hotel property 244 Amortization of loan costs 254 87 664 264 Interest expense, net 3,466 951 7,952 2,360 -------- -------- -------- -------- Total expenses 12,080 6,789 31,836 18,969 -------- -------- -------- -------- Income before minority interest 11,782 11,553 31,680 28,884 Minority interest (1,115) (161) (3,011) (406) -------- -------- -------- -------- Net income 10,667 11,392 28,669 28,478 Preferred stock dividends (356) (356) (1,056) (839) -------- -------- -------- -------- Net income applicable to common shareholders $ 10,311 $ 11,036 $ 27,613 $ 27,639 ======== ======== ======== ======== Net income per common and common equivalent share $ 0.42 $ 0.45 $ 1.14 $ 1.14 Weighted average shares and partnership units outstanding 26,959 24,700 26,950 24,667
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 NINE FOR THE NINE MONTHS MONTHS ENDED ENDED SEPT. 30, SEPT. 30, 1997 1996 ------------ ------------- (unaudited) (unaudited) Cash flows from operating activities: Net income $ 28,669 $ 28,478 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,182 8,751 Income allocated to minority interest 3,011 406 Loss on sale and write-down of hotel properties 244 Changes in assets and liabilities: Accounts receivable-Lessees (7,559) (5,721) Prepaids and other assets (1,603) (3) Accounts payable and other liabilities 2,533 1,212 --------- -------- Net cash provided by operating activities 39,233 33,367 --------- -------- Cash flows from investing activities: Investment in hotel properties and hotels under development (124,839) (56,620) Proceeds from sale of hotel property 3,891 Escrow deposits and prepayments under purchase agreements 90 (1,034) Cash paid for franchise agreements (32) --------- -------- Net cash used by investing activites (124,781) (53,763) --------- -------- 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 (27,398) (25,562) Distributions to limited partners (2,775) (334) Borrowings on revolving credit agreement 65,743 38,750 Payments on revolving credit agreement (12,000) Payments on debt and bonds (2,773) (31) Loan fees paid (1,392) (126) --------- -------- Net cash provided by financing activities 31,477 18,840 --------- -------- Net decrease in cash and cash equivalents (54,071) (1,556) Cash and cash equivalents at beginning of period 57,935 2,680 --------- -------- Cash and cash equivalents at end of period $ 3,864 $ 1,124 ========= ========
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 $6,054 towards the purchase of hotels. In 1996, the Partnership applied deposits of $1,190 towards the purchase of hotels and land. In 1996, the Company issued 75,000 shares of Common Stock to an officer, which at date of issuance, were valued at $17 5/8 per share. 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 the 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 September 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 October 20, 1997, the Company declared a $0.375 dividend on each share of Common Stock outstanding to shareholders of record on November 7, 1997. A similar distribution was declared with respect to the units of the Partnership. The dividend and the distribution will be paid on November 17, 1997. 3. Acquisitions and Dispositions of Real Estate. In September 1997, the Partnership completed addition of 42 rooms to the Residence Inn in Ann Arbor, Michigan. The cost of the addition of $3.7 million was paid for with cash. In September 1997, the Partnership entered into two contracts to sell two hotels in Tupelo, Mississippi for an aggregate of approximately $4.7 million. The sales are expected to occur by the end of 1997. 6 7 4. Implementation of Statements of Financial Accounting Standards. The Financial Accounting Standards Board has issued Stantement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"), No. 130, Reporting Comprehensive Income ("SFAS 130"), No. 129, Disclosure of Information About Capital Structure ("SFAS 129"), and No. 128, Earnings Per Share ("SFAS 128"). SFAS 131 specifies revised guidelines for determining an entity's operating segments and the type of financial information to be disclosed. SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 129 consolidates the existing requirements to disclose certain information about an entity's capital structure, and SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share. These Standards are effective for periods ending after December 31, 1997. The Company believes that the impact of these Standards, when adopted, will not have a material impact on the Company's financial statements and financial statement presentation when presented on a comparable basis. 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 nine months ended September 30, 1997 and 1996:
For the Three Months For the Nine Months Ended Ended Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996 -------------- -------------- -------------- -------------- Income before minority interest $11,782 $11,553 $31,680 $28,884 Less preferred stock dividend (356) (355) (1,056) (839) ------- ------- ------- ------- $11,426 $11,198 $30,624 $28,045 ======= ======= ======= ======= Weighted average common shares and common stock equivalents outstanding 26,959 24,700 26,950 24,667 Net income per common and common equivalent share $ 0.42 $ 0.45 $ 1.14 $ 1.14
7 8 6. Subsequent Events. In October 1997, the Partnership sold a Homewood Suites in Salt Lake City, Utah and a Homewood Suites in Plano, Texas for cash of approximately $15.4 million. In October 1997, the Company, through a non-qualified subsidiary, purchased a 205-room Sheraton in Birmingham, Alabama for a purchase price of approximately $18 million. The purchase price was paid with cash, the assumption of $5.5 million of bonds and includes $3.1 million for land in which the Company has entered into a contract to purchase. The land purchase is expected to occur in the first quarter of 1998. 7. Pro Forma Condensed Consolidated Statements of Income. The unaudited pro forma condensed statements of income for the nine months ended September 30, 1997 and 1996 of the Company are presented as if the hotel properties owned at September 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 forecast the results of operations for future periods.
1996 1997 ---- ---- Operating Data: Total revenue $65,626 $58,794 Real estate taxes and property and casualty insurance 6,404 4,689 Depreciation and amortization 15,483 14,964 Compensation 1,812 1,485 Franchise taxes 225 195 General and administrative 1,415 1,475 Loss on sale of a hotel property 244 Interest expense, net 9,153 8,638 ------- ------- Income before minority interest 31,134 27,104 Less minority interest (2,967) (2,583) ------- ------- Net income $28,167 $24,521 ======= ======= Net income per common and common equivalent share $ 1.12 $ 0.97 Weighted average shares and partnership units outstanding 26,959 26,959
8 9 RFS, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS)
December 31, September 30, 1996 1997 ---- ---- (unaudited) Assets Cash and cash equivalents $ 7,108 $ 9,429 Accounts receivable, net 3,287 5,134 Due from Parent 1,749 13,081 Other 522 1,308 ------- ------- Total current assets 12,666 28,952 Notes and other receivables, net of current portion 3,000 1,795 Investment in RFS Hotel Investors, Inc. 20,032 20,023 Leasehold improvements and office equipment, net 300 303 Capitalized franchise costs 2,563 2,425 Deferred costs and other assets, net 656 1,776 ------- ------- $39,217 $55,274 ======= ======= Liabilities and Stockholder's Equity Accounts payable and accrued expenses $ 6,350 $ 9,165 Note payable 324 0 Lease payable 6,775 13,250 ------- ------- Total current liabilities 13,449 22,415 Net deficit in partnerships and ventures 314 314 Deferred income taxes 61 0 ------- ------- Total liabilities 13,824 22,729 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) (88) Unrealized gain on marketable securities 114 166 Retained earnings 6,638 13,685 ------- ------- Total stockholder's equity 25,393 32,545 ------- ------- $39,217 $55,274 ======= =======
The accompanying notes are an integral part of these financial statements. 9 10 RFS, INC. INCOME STATEMENTS (DOLLARS IN THOUSANDS)
Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- (unaudited) (unaudited) Revenues: Management and consulting fees $ 419 $ 356 $ 1,247 $ 471 Hotel revenues 52,388 41,069 148,112 113,792 Other fees and income 420 498 1,229 1,272 ------- ------- -------- -------- Total revenues 53,227 41,923 150,588 115,535 ------- ------- -------- -------- Operating Expenses: General and administrative 1,031 895 3,041 2,741 Hotel expenses 47,865 37,735 136,076 104,848 Depreciation and amortization 94 73 239 189 ------- ------- -------- -------- Total operating expenses 48,990 38,703 139,356 107,778 ------- ------- -------- -------- Operating Income 4,237 3,220 11,232 7,757 Interest expense (1) (3) (5) (14) Interest income 45 71 195 75 ------- ------- -------- -------- Income before income taxes 4,281 3,288 11,422 7,818 Provision for income taxes (1,640) (1,151) (4,375) (2,736) ------- ------- -------- -------- Net Income $ 2,641 $ 2,137 $ 7,047 $ 5,082 ======= ======= ======== ========
The accompanying notes are an integral part of these financial statements. 10 11 RFS, INC. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Nine Months Ended September 30, 1997 1996 ---- ---- (unaudited) (unaudited) Cash flows from operating activities: Net income $ 7,047 $ 5,082 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 239 189 Other non-cash expenses 114 53 Deferred income taxes (61) - (Increase) decrease in accounts receivable (1,847) (1,392) (Increase) decrease in other assets (786) (406) Increase in current liabilities 9,290 7,883 -------- -------- Net cash provided by operations 13,996 11,409 -------- -------- Cash flows from investing activities: Purchases of furniture and equipment (77) (37) Investment in RFS Hotel Investors, Inc. - (18,500) Distributions from partnerships and joint ventures - 2 Increase in deferred costs and other assets (1,147) (2,626) Loans to owners of managed hotels, net 1,205 (3,000) -------- -------- Net cash used by investing activities (19) (24,161) -------- -------- Cash flows from financing activities: Advances from (repayments to) Parent (11,332) 18,500 Principal repayments (324) (672) -------- -------- Net cash provided by (used in) financing activities (11,656) 17,828 -------- -------- Net increase in cash and cash equivalents 2,321 5,076 Cash and cash equivalents at beginning of year 7,108 9,238 -------- -------- Cash and cash equivalents at end of year $ 9,429 $ 14,314 -------- --------
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 by 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 and RFS, Inc. 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. SIGNIFICANT ACCOUNTING POLICIES. Investments Investments in partnerships and joint ventures are accounted for using the equity method when the Company has a general partnership interest or its limited partnership interest exceeds 5% and the Company does not exercise control over the venture. Profits and losses of these joint ventures are allocated in accordance with the joint venture agreements. All other investments are accounted for using the cost method with the exception of the marketable equity securities which are classified as available-for-sale and recorded at fair value with unrealized gains or losses reflected in stockholder's equity pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." If a joint venture experiences operating losses which reduce the other joint venture partner's equity to a zero balance, the loss which would otherwise be attributable to the other joint venturer is absorbed within the Company's operating results. 12 13 3. 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 beginning in February, 2003. 4. 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, subject to mandatory reductions in the event certain of the hotels are sold or refinanced: $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 In July 1997, the note receivable was reduced by approximately $1.4 million due to the refinancing of certain of the hotels by the owner. 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 September 30, 1997:
Number of Number of Franchise Affiliation Hotel Properties Rooms/Suites - --------------------- ---------------- ------------ Full Service Hotels: Holiday Inn............................. 6 .................. 1,208 Sheraton................................ 4 .................... 814 Doubletree.............................. 1 .................... 219 Independent............................. 2 .................... 311 -- ----- Sub-total.......................... 13 .................. 2,552 -- ----- Extended Stay Hotels: Residence Inn.......................... 12 .................. 1,606 Homewood................................ 2 .................... 197 Hawthorn Suites......................... 1 .................... 280 -- ----- Sub-total.......................... 15 .................. 2,083 -- ----- Limited Service Hotels: Hampton Inn............................ 19 .................. 2,358 Courtyard by Marriott................... 1 .................... 102 Comfort Inn............................. 6 .................... 787 Holiday Inn Express..................... 7 .................... 861 -- ----- Sub-total.......................... 33 .................. 4,108 -- ----- Total.............................. 61 .................. 8,743 == =====
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 September 30, 1997 to 1996 Increases in lease revenue for the three months ended September 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 period 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 nine 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 51 of the 61 hotels owned at September 30, 1997 were owned by the Partnership throughout both periods; it excludes seven newly opened hotels and three expanded hotels where the room additions were not open for all of both periods presented.
for the three months ended September 30, 1997 ------------------------------------------------------------ Actual Pro Forma ------------------------------ ---------------------------- % Increase % Increase 1997 1996 (Decrease) 1997 1996 (Decrease) ---- ---- ---------- ---- ---- ---------- Occupancy 78.2% 81.1% (3.5) 78.9% 80.8% (1.3) ADR $77.66 $72.45 7.2 $78.14 $74.17 5.4 Revpar $60.76 $58.74 3.4 $62.33 $59.96 4.0
Decreases in interest income are a result of funds from the sale of preferred stock in February 1996 being invested during 1996. These funds were used to purchase properties in 1997. Increases in real estate taxes and property and casualty insurance and increases in 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. Decreases in general and administrative expense in 1997 over 1996 are primarily due to stock exchange listing fees incurred in 1996 and not in 1997 offset by increased home office expenses and the write-off of costs related to potential acquisitions in the third quarter of 1997. Increases in amortization of loan costs in 1997 over 1996 are due to amortization in 1997 of costs related to the Bonds and amortization of commitment fees related to the Line of Credit. Interest expense increased in 1997 over 1996 due to Bonds being outstanding during 1997 and increased borrowings on the Line of Credit. 15 16 Comparison of the Nine Months Ended September 30, 1997 to 1996 Increases in lease revenue for the nine months ended September 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 period, 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 nine 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 51 of the 61 hotels owned at September 30, 1997 were owned by the Partnership throughout both periods; it excludes seven newly opened hotels and three expanded hotels where room additions were not open for all of both periods presented.
for the nine months ended September 30, 1997 ------------------------------------------------------------- Actual Pro Forma ---------------------------- ----------------------------- % Increase % Increase 1997 1996 (Decrease) 1997 1996 (Decrease) ---- ---- ---------- ---- ---- ---------- Occupancy 76.2% 78.7% (3.1) 77.5% 78.3% (1.0) ADR $75.67 $69.44 9.0 $76.93 $71.85 7.1 Revpar $57.67 $54.63 5.6 $59.65 $56.25 6.0
Increases in real estate 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. Increases in compensation expense in 1997 over 1996 is due to the addition of several employees in the 1997 period. Decreases in general and administrative expense in 1997 over 1996 are due to stock exchange listing fees incurred in 1996 and not in 1997 and decreased write-offs of costs related to potential acquisitions in 1997, offset by increased home office expenses. Increases in amortization of loan costs in 1997 over 1996 are due to amortization in 1997 of costs related to the Bonds and amortization of commitment fees related to the Line of Credit. Increases in interest expense in 1997 over 1996 are due to the Bonds being outstanding during 1997 and increased borrowings on the Line of Credit. 16 17 LIQUIDITY AND CAPITAL RESOURCES The Company has a 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 1.45%. The Line of Credit is secured by first priority mortgages on 29 hotels and agreements restricting the transfer, pledge or other hypothecation of 9 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 had borrowed $115.7 million on the Line of Credit at September 30, 1997. 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 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 September 30, 1997, was approximately three and one half percent (3.5%) 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 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 $25.9 million for capital expenditures in 1997 at the 61 hotels owned at September 30, 1997. At September 30, 1997, the Partnership had spent approximately $11.6 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. 17 18 In October 1997, the Partnership sold two Homewood Suites hotels for cash of approximately $15.4 million. Also, in October 1997, the Company, through a non-qualified subsidiary, purchased a Sheraton Hotel in Birmingham, AL for a purchase price of approximately $18 million. Cash from the sale of the two Homewood Suites hotels of $9.4 million and the assumption of $5.5 million of Industrial Development Bonds were used to purchase the hotel. The purchase price for land associated with the hotel is approximately $3.1 million. The Company has entered into a contract to purchase the land; the land purchase is expected to occur in the first quarter of 1998. The bonds were issued in 1988, are due in January 1, 2004 and bear interest at a variable rate that will result in the market value of the bonds being 100% of the principal amount, not to exceed 10.4%. The bonds currently bear interest at approximately 3.75%. The Partnership is developing the following hotels:
Estimated Estimated Number of Development Opening Franchise Location Rms/Suites Costs Quarter(Q) --------- -------- --------- ----- ---------- Residence Inn West Palm Beach, FL 78 $6.4 million 4Q97 Hampton Inn Jacksonville, FL 118 $6.2 million 1Q98 Homewood Suites Chandler, AZ (Phoenix) 83 $6.7 million 2Q98 Marriott Courtyard Crystal Lake, IL 90 $6.6 million 4Q98 TownePlace Suites Fort Worth, TX 95 $6.2 million 3Q98 by Marriott
The Partnership is constructing a 36-suite addition to the Residence Inn in Charlotte, North Carolina. Construction costs are estimated at $3.6 million. Completion of the addition is expected in the second quarter of 1998. The Partnership is also constructing a 39-room addition to the Beverly Heritage hotel in Milpitas, California. Construction costs are estimated at $3.0 million. Completion of the addition is expected in the third quarter of 1998. There can be no assurance that any or all of such hotels or additions 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 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 18 19 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 September 30, 1997, made cash distributions to its partners, including the Company, of $30.2 million or $1.08 per Partnership unit, from which the Company made cash distributions to common shareholders of $27.4 million, or $1.08 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. 19 20 FUNDS FROM OPERATIONS The National Association of Real Estate Investment Trusts has adopted a new definition of funds from operations ("FFO"). Under the definition, which many not be comparable to similar entitled items reported by other real estate investment trusts as all entities may not define FFO exactly the same, 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 Nine Months Ended September 30 September 30 --------------------------- ------------------------- 1997 1996 1997 1996 (in thousands, except per share amounts) Income before allocation to minority interest $11,782 $11,553 $31,680 $28,884 Add depreciation 4,664 2,804 12,856 7,944 Add loss on sale of hotel 244 Less preferred dividend (356) (356) (1,056) (839) ------- ------- ------- ------- FFO $16,090 $14,001 $43,480 $36,233 ======= ======= ======= ======= Weighted average shares and partnership units outstanding 26,959 24,700 26,950 24,667 FFO per share $ 0.60 $ 0.57 $ 1.61 $ 1.47
20 21 RFS, INC. BACKGROUND RFS, Inc. leases 59 and operates 55 of the Hotels owned by the Partnership. RESULTS OF OPERATIONS Three Months Ended September 30, 1997 Compared with Three Months Ended September 30, 1996 Total revenues increased $11.3 million or 27% to $53.2 million for three months ended September 30, 1997 compared to $41.9 million for the three months ended September 30, 1996. The increase in hotel revenues of $11.3 million was attributable primarily to the net addition of ten leased properties as compared to the comparable period of 1996. The margin on hotel results (hotel revenues less hotel expenses) increased $1.2 million or 36% from $3.3 million for the quarter ended September 30, 1996 to $4.5 million for the comparable period in 1997, reflecting the addition of the eleven properties discussed above and an improvement in the operating margins of the hotels from 8.1% in the three months ended September 30, 1996 to 8.6% in the three months ended September 30, 1997. Management and franchise fees increased nominally to $0.4 million reflecting improvements in revenues principally from eight management contracts that commenced late in the second quarter of 1996. Other fees and income decreased to $0.4 million for the three months ended September 30, 1997 from $0.5 million for the three months ended September 30, 1996. General and administrative expenses increased slightly to $1.0 million for the three months ended September 30, 1997 compared to $0.9 million for the three months ended September 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, a portion of which was repaid in the second quarter of 1997. 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). Nine Months Ended September 30, 1997 Compared with Nine Months Ended September 30, 1996 Total revenues increased $35.1 million or 30% to $150.6 million for nine months ended September 30, 1997 compared to $115.6 million for the nine months ended September 30, 1996. The increase in hotel revenues of $34.3 million was attributable, in part, to the net addition of twelve leased properties as compared to the comparable period of 1996. The margin on hotel results (hotel revenues less hotel expenses) increased $3.1 million or 35% from $8.9 million to $12.0 million reflecting the addition of the eleven properties in comparison to the prior period and an improvement in the margins of the hotels from 7.9% in the nine months ended September 30, 1996 to 8.1% in the nine months ended September 30, 1997. 21 22 Management and franchise fees increased to $1.2 million reflecting the net addition of eight management contracts that commenced late in the second quarter of 1996. Other fees and income decreased slightly. General and administrative expenses increased by $0.3 million or 11% to $3.0 million for the nine months ended September 30, 1997 compared to $2.7 million for the nine months ended September 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 nine months ended September 30, 1997, RFS, Inc. generated cash flow from operations of $13.9 million as compared to $11.4 million for the comparable period of 1996. The increase was principally attributable to increased earnings and an increase in the lease payment due to the Lessor that is paid on a quarterly basis in arrears. 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. 22 23 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. 23 24 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. /s/ Michael J. Pascal - -------------------- ------------------------------------------- Date Michael J. Pascal, Secretary and Treasurer (Principal Financial and Accounting Officer) /s/ Robert M. Solmson - --------------------- ------------------------------------------- Date Robert M. Solmson, Chairman and Chief Executive Officer 24 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 3,684 0 14,746 0 0 0 615,271 36,128 604,927 0 196,034 0 10 244 365,480 604,927 0 63,516 0 0 23,884 0 7,952 31,680 0 31,680 0 0 0 28,669 1.14 1.14
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