-----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, WJWKx/wSUmKI80fRHL11zDGzGpQNJBP/E0/KlXkVSs7gzXcaCzBx7co5aSn5jij6 HF0P14Enctq7i4vljYBxBQ== 0000950144-98-012576.txt : 19981116 0000950144-98-012576.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950144-98-012576 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98747232 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 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, 1998 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, 1998 was 24,876,946. ================================================================================ 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, 1998 and December 31, 1997 3 Consolidated Statements of Income - For the three and the nine months ended September 30, 1998 and September 30, 1997 4 Consolidated Statements of Cash Flows - For the three and the nine months ended September 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17
2 3 RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
SEPT 30, DECEMBER 31, 1998 1997 ---- ---- (unaudited) ASSETS Investment in Hotel Properties, net $ 623,135 $ 573,826 Hotels under development 21,417 15,739 Cash and cash equivalents 13,006 4,131 Restricted cash 4,759 2,514 Accounts receivable-Lessees 16,036 9,887 Deferred expenses, net 3,360 4,061 Prepaid and other assets 8,123 6,765 Escrow deposits 510 205 --------- --------- $ 690,346 $ 617,128 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 4,492 $ 6,423 Accrued real estate taxes 5,071 3,491 Borrowings on line of credit 176,343 123,843 Bonds 69,600 71,892 Other debt 25,936 13,174 Deferred revenue 17,877 Minority interest 34,821 36,235 --------- --------- 334,140 255,058 --------- --------- 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, 24,986,946 and 24,389,000 shares outstanding 250 244 Paid-in capital 373,307 363,066 Treasury stock, 110,000 shares (2,012) 0 (Distributions in excess of income) undistributed income (14,988) 337 Unearned directors' and officers' compensation (361) (1,587) --------- --------- Total shareholders' equity 356,206 362,070 --------- --------- $ 690,346 $ 617,128 ========= =========
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 3 MONTHS 3 MONTHS 9 MONTHS 9 MONTHS ENDED ENDED ENDED ENDED 09/30/98 09/30/97 09/30/98 09/30/97 -------- -------- -------- -------- (unaudited) (unaudited) (unaudited) (unaudited) Revenue: Leases $ 35,148 $ 23,853 $ 56,948 $ 63,452 Other 135 9 373 64 -------- -------- -------- -------- Total revenue 35,283 23,862 57,321 63,516 -------- -------- -------- -------- Expenses: Real estate taxes and property and casualty insurance 2,572 2,318 7,540 6,250 Depreciation 5,341 4,664 15,406 12,856 Amortization of franchise fees and unearned compensation 152 219 538 662 Compensation 645 585 1,686 1,812 Franchise taxes 45 75 135 225 General and administrative 449 499 1,826 1,415 Attempted merger expenses 1,617 1,617 Loss on sale of hotel properties 1,133 610 Amortization of loan costs 256 254 772 664 Interest expense, net 4,603 3,466 12,113 7,952 -------- -------- -------- -------- Total expenses 16,813 12,080 42,243 31,836 -------- -------- -------- -------- Income before minority interest 18,470 11,782 15,078 31,680 Minority interest (1,830) (1,115) (1,513) (3,011) -------- -------- -------- -------- Net income 16,640 10,667 13,565 28,669 Preferred stock dividends (356) (356) (1,056) (1,056) -------- -------- -------- -------- Net income applicable to common shareholders $ 16,284 $ 10,311 $ 12,509 $ 27,613 ======== ======== ======== ======== Basic earnings per share 0.65 0.42 0.51 1.13 Diluted earnings per share 0.64 0.42 0.50 1.12 Weighted average common shares outstanding 24,877 24,389 24,713 24,389
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 SEPT 30, SEPT 30, 1998 1997 ---- ---- (unaudited) (unaudited) Cash flows from operating activities: Net income $ 13,565 $ 28,669 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 16,716 14,182 Income allocated to minority interest 1,513 3,011 Loss on sale of hotel properties 610 Attempted merger expenses 1,746 Changes in assets and liabilities: Accounts receivable-Lessees (6,149) (7,559) Prepaids and other assets (2,975) (1,603) Accounts payable and other liabilities (252) 2,533 Deferred revenue 17,877 --------- --------- Net cash provided by operating activities 42,651 39,233 --------- --------- Cash flows from investing activities: Investment in hotel properties and hotels under development (71,350) (124,839) Proceeds from sale of hotel properties 19,627 Escrow deposits and prepayments under purchase agreements (450) 90 Cash paid into reserves (2,245) Refund on franchise agreements (32) --------- --------- Net cash used by investing activities (54,418) (124,781) --------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock 11,040 72 Purchase of treasury stock (2,012) Distributions to common and preferred shareholders (28,890) (27,398) Distributions to limited partners (2,890) (2,775) Borrowings on revolving credit agreement 52,500 65,743 Redemption of limited partnership units (37) Payments on debt and bonds (8,699) (2,773) Loan fees paid (370) (1,392) --------- --------- Net cash provided by financing activities 20,642 31,477 --------- --------- Net increase (decrease) in cash and cash equivalents 8,875 (54,071) Cash and cash equivalents at beginning of period 4,131 57,935 --------- --------- Cash and cash equivalents at end of period $ 13,006 $ 3,864 ========= =========
Supplemental disclosures of non-cash investing and financing activities: In 1998, the Company, through a partnership, assumed $19,169 of debt in connection with the purchase of a hotel. In 1998, the Company applied deposits of $120 towards the purchase of land. In 1998, due to the resignation of an officer, the Company cancelled 45,000 shares of restricted common stock which had not vested. In 1998, the Partnership sold a hotel for which the purchaser paid $2,940 in cash and signed a note to the Company for $1,500. In 1997, the Partnership issued 2,244,934 of limited partnership units valued at $38,200 in accordance with the purchase of four hotels. In 1997, the Company recorded a $6,356 allocation to paid-in capital from minority interest. In 1997, the Partnership applied deposits of $6,064 towards the purchase of hotels. 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 September 30, 1998, the Company owned approximately 90.6% 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. RFS Financing Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote, single purpose Tennessee limited partnership, was formed to issue commercial mortgage bonds (the "Bonds"). During 1997, Ridge Lake General Partner, Inc. ("RLGP") was formed to purchase a hotel. RLGP purchased a second hotel in May 1998. The Company owns 95% of RLGP. In June 1998, the Company purchased a 75% interest in Wharf Associates Partnership ("Wharf"). Wharf and RLGP are consolidated in these consolidated financial statements. The Company, through its subsidiary partnerships, acquires or develops and owns hotel properties which are leased to third parties. 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 1997 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. CHANGE IN ACCOUNTING PRINCIPLE. In May 1998, the Financial Accounting Standards Board's Emerging Issues Task Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim Financial Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. In July 1998 the Task Force issued transition guidance stating that the consensus could be applied on a prospective basis or in a manner similar to a change in accounting principle effective April 1, 1998. The Company reviewed the terms of its percentage leases and has determined that the provisions of EITF 98-9 impacted the Company's previous revenue recognition on an interim basis, but has no impact on the Company's annual percentage lease revenue or interim cash flow from its third party Lessees. The Company adopted the provisions of EITF 98-9 and has applied the change as a change in accounting principle and thereby has restated the first quarter results of 1998 and has recorded the results of the second and third quarters in accordance with the new pronouncement. The effect of the change on the three months ended September 30, 1998 was to increase lease revenues by $7,947, and therefore net income applicable to common shareholders by $7,188 or $0.28 per share-basic and $0.27 6 7 per share diluted to $0.65 per share-basic and $0.64 per share diluted. The effect on the nine months ended September 30, 1998 was to decrease lease revenues by $17,877 and therefore net income applicable to common shareholders by $16,204 or $0.65 per share-basic and diluted. 3. DECLARATION OF DIVIDEND. On October 28, 1998, the Company declared a $.385 dividend on each share of Common Stock outstanding to shareholders of record on November 10, 1998 and a $.36 dividend on each share of Series A Preferred Shares outstanding. The dividends will be paid on November 16, 1998. 4. SUBSEQUENT EVENTS. In October 1998, the Company elected not to replace certain properties with a Lessee which were sold in the third quarter and paid the Lessee approximately $1 million related to such election. 5. CALCULATION OF EARNINGS PER SHARE. Calculations of basic and diluted earnings per share are as follows:
For the Three Months For the Nine Months Ended Ended 9/30/98 9/30/97 9/30/98 9/30/97 ------- ------- ------- ------- Basic EPS: Net income $ 16,640 $ 10,667 $ 13,565 $ 28,669 Less dividends declared on preferred stock (356) (356) (1,056) (1,056) -------- -------- -------- -------- $ 16,284 $ 10,311 $ 12,509 $ 27,613 ======== ======== ======== ======== Weighted average common shares outstanding 24,877 24,389 24,713 24,389 ======== ======== ======== ======== Basic Earnings Per Share $ 0.65 $ 0.42 $ 0.51 $ 1.13 Diluted EPS: Net income $ 16,640 $ 10,667 $ 13,565 $ 28,669 Less dividends declared on preferred stock (1,056) -------- -------- -------- -------- $ 16,640 $ 10,667 $ 12,509 $ 28,669 ======== ======== ======== ======== Weighted average common shares outstanding 24,877 24,389 24,713 24,389 Preferred shares outstanding 974 974 974 Potential dilutive common shares 33 140 110 125 -------- -------- -------- -------- Weighted average common shares and potential dilutive common shares outstanding 25,884 25,503 24,823 25,488 ======== ======== ======== ======== Diluted earnings per share $ 0.64 $ 0.42 $ 0.50 $ 1.12 ======== ======== ======== ========
Note: The preferred shares are anti-dilutive for the nine-month period ended September 30, 1998, and, thus, are not considered in the calculation of earnings per share. 7 8 6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro forma condensed statements of income for the nine months ended September 30, 1998 and 1997 of the Company are presented as if the 60 hotel properties owned at September 30, 1998 and the consummation of the Company's equity offerings and the application of the net proceeds therefrom had occurred on or prior to January 1, 1997, and the hotels had been leased to the Lessees pursuant to the percentage leases. As discussed in Note 2, the Company adopted the provisions of EITF 98-9 which significantly impacted the Company's revenue recognition on an interim basis. The pro forma information below reflects the effect of EITF 98-9 as if the method had been in effect on January 1, 1997 excluding properties under development which are included on the date opened. 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, 1997, nor does it purport to represent the results of operations for future periods.
1998 1997 ---- ---- Operating Data: Total revenue $ 57,052 $ 51,850 Real estate taxes and casualty insurance 7,887 6,734 Depreciation and amortization 16,848 16,848 Compensation 1,686 1,812 Franchise taxes 135 225 General and administrative 1,826 1,415 Attempted merger costs 1,617 Loss on sale of hotel properties 610 Interest expense 13,250 12,331 -------- -------- Income before allocation to minority interest 13,193 12,485 Less minority interest (1,235) (1,169) -------- -------- Net income $ 11,958 $ 11,316 ======== ======== Diluted earnings per share $ 0.48 $ 0.46 Weighted average common shares and potential dilutive common 24,823 24,823 shares
8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, including, without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import. Such forward-looking statements relate to future events and the future financial performance of the Company, and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from the results or achievements expressed or implied by such forward-looking statements. The Company is not obligated to update any such factors or to reflect the impact of actual future events or developments on such forward-looking statements. 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 60 hotels (the "Hotels") owned at September 30, 1998:
Number of Number of Franchise Affiliation Hotel Properties Rooms/Suites - --------------------- ---------------- ------------ Full Service Hotels: Holiday Inn ........................ 6 ......................... 1,208 Sheraton ........................... 5 ......................... 1,019 DoubleTree ......................... 1 ........................... 220 Ramada Plaza ....................... 1 ........................... 234 Independent ........................ 2 ........................... 290 ---- ----- Sub-total ................ 15 ......................... 2,971 ---- ----- Extended Stay Hotels: Residence Inn ..................... 14 ......................... 1,815 Homewood Suites ................... 1 ............................ 83 Hawthorn Suites ................... 1 ........................... 280 ---- ----- Sub-total ................ 16 ......................... 2,178 ---- ----- Limited Service Hotels: Hampton Inn ....................... 19 ......................... 2,367 Courtyard by Marriott ............. 1 ........................... 102 Comfort Inn ....................... 4 ........................... 555 Holiday Inn Express ............... 5 ........................... 637 ---- ----- Sub-total ................ 29 ......................... 3,661 ---- ----- Total .................... 60 ......................... 8,810 ==== =====
9 10 The following chart summarizes ownership history for the periods presented:
1998 1997 ---- ---- Hotels owned at beginning of year 60 53 Acquisitions and developed Hotels placed into service 5 8 Sales of Hotels (5) ---- ---- Hotels owned at end of period 60 61 ==== ====
The Hotels are located in 24 states. Management believes it is prudent to diversify geographically and among franchise brands. The Partnership leases 57 of the Hotels to third parties (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 ("Percentage Rent"). Base rent is payable monthly. Percentage rent is payable quarterly. The Lessees operate 54 Hotels. Four Hotels are operated by other third parties, (the "Operators"), pursuant to management agreements between the Lessees and the Operators. Two hotels are operated by a subsidiary. One of the Lessees has a right of first refusal, subject to certain exceptions, to lease hotels acquired by the Partnership, through February 27, 2006. CHANGE IN ACCOUNTING PRINCIPLE In May 1998, the Financial Accounting Standards Board's Emerging Issues Task Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim Financial Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. In July 1998 the Task Force issued transitional guidance stating that the consensus could be applied on a prospective basis or in a manner similar to a change in accounting principle effective April 1, 1998. The Company reviewed the terms of its percentage leases and has determined that the provisions of EITF 98-9 impacted the Company's previous revenue recognition method on an interim basis, but has no impact on the Company's annual percentage lease revenue or interim cash flow from its third party Lessees. The Company adopted the provisions of EITF 98-9 and has applied the change as a change in accounting principle and therefore restated the first quarter results of 1998 and recorded the results of the second and third quarters in accordance with the new pronouncement. The effect of the change on the three months ended September 30, 1998 was to increase lease revenues and therefore net income applicable to common shareholders by $0.28 per share-basic and $0.27 per share-diluted to $0.65 per share-basic and $0.64 per share-diluted. The effect of the change on the nine months ended September 30, 1998 was to decrease net income applicable to common shareholders $0.65 per share-basic and diluted. The Company's Percentage Leases provide for the greater of (i) annual fixed base rent or (ii) Percentage Rent to be remitted to the Company annually. The leases contain annual room revenue thresholds used to calculate two tiers of Percentage Rent which are applied to annualized room revenues on a quarterly basis to determine quarterly Percentage Rent payments. The provisions of EITF 98-9 call for straight-line recognition of the annual Base Rent throughout the year and for the deferral of any additional lease amounts collected or due from the Lessees until such amounts exceed 10 11 the annual fixed Base Rent. This will generally result in Base Rent being recognized in the first and second quarters and Percentage Rents already collected or due from the Lessee being deferred and then recognized in the third and fourth quarters due to the structure of the Company's percentage leases and the seasonality of the hotel operations. Historically, the Company has recorded lease revenue in interim periods on a basis similar to that used to determine quarterly Lessee Percentage Rent payments, resulting in the second and third quarters being the strongest quarters. At September 30, 1998 deferred revenue of $17,877 represents Percentage Rent collected or due from the Lessees under the leases which the Company expects to recognize as lease revenue in the fourth quarter of 1998. The Company's quarterly distributions are based on Quarterly Percentage Rent calculations collected as opposed to percentage lease revenue recognized. Management expects its hotel portfolio to yield Percentage Rent annually, based on the historical revenues of the hotels prior to their acquisition and based on the negotiation of the related leases. RESULTS OF OPERATIONS Comparison of the three Months ended September 30, 1998 to 1997 and the Nine Months Ended September 30, 1998 to 1997. The increase in Lease revenue for the three months ended September 30, 1998 from the comparable period in 1997 is primarily attributable to the change in the Company's revenue recognition as discussed above which resulted in certain contingent rent being deferred until the contingencies have been met. Approximately $7.9 million of deferred revenue recorded as of June 30, 1998 was included as revenue during the three months ended September 30, 1998 when the contingencies related to such Percentage Rent were satisfied. The remaining increases in revenue are the result of increases in revenue per available room ("REVPAR") at the hotels owned throughout both periods. 11 12 The following table shows statistical data regarding the Hotels on an actual and a pro forma basis. The pro forma assumes 52 of the 60 hotels owned at September 30, 1998 were owned by the Partnership throughout both periods; it excludes four hotels which were opened since January 1997 and one expanded hotel where the room addition was not open for all of both periods presented and three hotels which were undergoing major renovations:
for the Three Months Ended September 30, ------------------------------------------------------------------------ Actual Pro Forma ------ --------- % Increase % Increase 1998 1997 (Decrease) 1998 1997 (Decrease) ---- ---- ---------- ---- ---- ---------- Occupancy 78.3% 78.8% (0.6) 79.3% 79.8% (0.6) ADR $ 85.81 $ 77.45 10.8 $ 85.15 $ 80.01 6.4 RevPAR $ 67.20 $ 61.00 10.2 $ 67.55 $ 63.85 5.8 for the Nine Months Ended September 30, ------------------------------------------------------------------------ Actual Pro Forma ------ --------- % Increase % Increase 1998 1997 (Decrease) 1998 1997 (Decrease) ---- ---- ---------- ---- ---- ---------- Occupancy 75.8% 76.7% (1.2) 77.2% 77.7% (0.6) ADR $ 83.34 $ 75.43 10.5 $ 83.46 $ 78.33 6.5 RevPAR $ 63.20 $ 57.87 9.2 $ 64.41 $ 60.83 5.9
Increases in real estate taxes and property and casualty insurance in 1998 over 1997 are due to the increased number of hotels owned during 1998, increased real estate tax assessments, as well as an increased real estate tax assessments at certain hotels. Increases in depreciation in 1998 over 1997 are due to the increased number of hotels owned during 1998 and capitalized improvements at certain of the Hotels. Decreases in general and administrative expenses for the three months ended September 30, 1998 over 1997 are due to decreased professional fees. Increases in general and administrative expenses for the nine months ended September 30, 1998 over 1997 are due to the write-off of costs incurred in considering formation of a new REIT, Lodging Trust USA, which transaction was not completed. A write-off was made in September 1998 of $1,617 for expenses incurred by the Company in connection with its planned merger with Equity Inns, Inc. which was terminated in the third quarter of 1998. The loss on the sale of hotel properties in the three months ended September 30, 1998, relates to the sale of four hotels. A gain on the sale of a hotel property was recorded in February 1998. Increases in amortization of loan costs in 1998 over 1997 are due to costs associated with the assumption of the industrial development bond financing for the Birmingham Sheraton Hotel and the amortization of increased commitment fees on the Line of Credit. 12 13 Increases in interest expense in 1998 over 1997 are primarily due to increased borrowings on the Line of Credit. LIQUIDITY AND CAPITAL RESOURCES The Company has a bank line of credit (the "Line of Credit") for $190 million. Borrowings under the Line of Credit bear interest at LIBOR plus 157.5 basis points at September 30, 1998. The Line of Credit is secured by first priority mortgages on 23 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 the 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 was in violation of a certain debt covenant at September 30, 1998, relating to the percentage of liabilities to the total market equity capitalization of the Company. The Company has received a written waiver relating to this covenant and has initiated steps which the Company anticipates will remove this covenant from its loan agreement. The Company had borrowed $176.3 million on the Line of Credit at September 30, 1998. The Line of Credit is due July 30, 2000. In November 1996, the Company, through a subsidiary, issued $75 million of commercial mortgage bonds, (the "Bonds") series 1996-1 as follows:
Initial Class Principal Amount Rate Stated Maturity ----- ---------------- ---- --------------- Class A $50 Million 6.83% August 20, 2008 Class B $25 Million 7.30% November 21, 2011
Principal payments due 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 $.7 million. In connection with the purchase of a hotel in Fishkill, NY, the Partnership assumed approximately $2.4 million of indebtedness pursuant to industrial development bonds issued in 1988 and which are due December 1, 2002. The industrial development bonds bear interest at a variable rate which, as of September 30, 1998, 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 July 1998, a note payable with a principal balance of $5.9 million became due. Funds from the Line of Credit were used to pay-off this debt. In connection with the purchase of a Sheraton Hotel in Birmingham, AL, Ridge Lake General Partners, Inc. ("RLGP"), a subsidiary of the Company, assumed industrial development bonds ("Birmingham IDB's"), which are due in 2001. The Birmingham IDB's bear interest at a variable rate 13 14 which, at September 30, 1998, was approximately 4% per year. Interest is payable quarterly; principal is payable annually. The outstanding balance on the Birmingham IDB's is $5.0 million. The Birmingham hotel is collateral for the Birmingham IDB's. Wharf has non-recourse debt of $19.2 million. This debt bears interest at 8.22%. Principal, interest and escrow of $202 are due monthly. The Ramada Plaza is collateral for this debt. The Company has budgeted approximately $20.6 million in 1998 for capital improvements at 55 of the Hotels owned at September 30, 1998. At September 30, 1998, the Partnership had spent approximately $15.3 million of the budgeted amounts. The Partnership is developing the following hotels:
ANTICIPATED NUMBER OF ESTIMATED OPENING FRANCHISE LOCATION ROOMS/SUITES DEVELOPMENT COSTS QUARTER --------- -------- ------------ ----------------- ------- TownePlace Suites Fort Worth, TX 95 $6.5 million 4Q98 TownePlace Suites Miami Lakes, FL 95 $6.5 million 2Q99 TownePlace Suites Tampa, FL 95 $6.3 million 3Q99 Residence Inn Olathe, KS 90 $7.1 million 4Q99 TownePlace Suites Miami Airport- 95 $6.5 million 4Q99 West, FL Courtyard by Marriott Crystal Lake, IL 90 $7.5 million 4Q99
The Partnership is constructing a 40-room addition to the Beverly Heritage Hotel in Milpitas, CA. Construction costs are estimated at $3.8 million. Completion of the addition is expected in the third quarter of 1999. Additionally, the Partnership is constructing a 36-suite addition to the Residence Inn in Charlotte, NC. Construction costs are estimated at $3.6 million. Completion of the addition is expected in the fourth quarter of 1998. The construction costs are being funded with borrowings under the Line of Credit. In addition to purchasing existing hotel properties, 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 capital stock, borrowings under the Line of Credit or other securities or 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. Although the Company has no charter restrictions on the amount of indebtedness the Company may incur, the Board of Directors of the Company has adopted a current 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 14 15 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 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 1998, the Partnership has, through September 30, 1998, made cash distributions to its partners, including the Company, of $30.8 million or $.375 per Partnership unit, from which the Company made cash distributions to common shareholders of $27.7 million, or $.375 per share. The Company also made cash distributions to the preferred shareholder of $1.1 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. The provisions of EITF 98-9 call for straight-line recognition of the annual base rent throughout the year and for the deferral of any Percentage Rent amounts collected or due from the Lessees until such amounts exceed the annual fixed base rent. This will generally result in base rent being recognized in the first and second quarters and Percentage Rents collected or due from the Lessee being deferred and then recognized in the third and fourth quarters due to the structure of the Company's percentage leases and the seasonality of the hotel operations. Prior to the adoption of EITF 98-9, the Company recorded lease revenue in interim periods on a basis similar to that used to determine quarterly Lessee Percentage Rent payments, resulting in the second and third quarters being the strongest quarters. YEAR 2000 MANAGEMENT Beginning in the fourth quarter of 1997, the Company began evaluating the impact of the Year 2000 (Y2K) problem on its systems. The Company also began inquiring of its Lessees regarding the operation of the Lessee's systems at properties owned by the Company. The only software package that was not Y2K compliant was the accounting system of the Company The Company purchased a new accounting system in January of 1998. The Company has been converting to the new format and plans to go live on January 1, 1999. All computers passed the Y2K check, as well as the phone system and other hardware. The Company has been advised that the systems at the properties (reservation, accounting, etc.) are being upgraded where necessary by the appropriate management company. 15 16 Testing will continue throughout 1999 on both the new and old software to verify its operation. The Company is in the process of obtaining a statement from its vendors about their Y2K status. The Company estimates its total cost related to the Y2K problem to be approximately $80. FUNDS FROM OPERATIONS The Company considers Funds From Operations ("FFO") a widely accepted and appropriate measure of performance for an equity REIT that provides a relevant basis for comparison among REITs. FFO, as defined by the National Association of Real Estate Investment Trusts (NAREIT), means income (loss) before minority interest (determined in accordance with GAAP), excluding gains (losses) from debt restructuring and sales of property, plus real estate depreciation and after adjustments for unconsolidated partnerships and joint ventures. FFO is presented to assist investors in analyzing the performance of the Company. The Company's method of calculating FFO may be different from the methods used by other REITs and, accordingly, may not be comparable to such other REITs. The computation of FFO below is consistent with the NAREIT White Paper Definition of FFO with the exception that deferred revenue and the non-recurring write-off of merger costs have been added back to calculate FFO. FFO (i) does not represent cash flows from operations as defined by GAAP, (ii) is not indicative of cash available to fund all cash flow needs and liquidity, including its ability to make distributions, and (iii) should not be considered as an alternative to net income (as determined in accordance with GAAP) for purposes of evaluating the Company's operating performance. The Company's FFO for the periods ended September 30, 1998 and 1997 was computed as follows:
For the Three Months Ended For the Nine Months Ended September 30 September 30 -------------------------- -------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (in thousands, except per share amounts) Income (loss) before allocation to minority interest $ 18,470 $ 11,782 $ 15,078 $ 31,680 Deferred revenue (7,947) 17,877 Add depreciation 5,341 4,664 15,406 12,856 Add write-off of merger costs 1,617 1,617 Add loss on sale of hotel 1,133 610 Less preferred dividend (356) (356) (1,056) (1,056) -------- -------- -------- -------- FFO $ 18,258 $ 16,090 $ 49,532 $ 43,480 ======== ======== ======== ======== Weighted average shares and partnership units outstanding 27,445 26,959 27,281 26,950 FFO per share $ 0.67 $ 0.60 $ 1.82 $ 1.61
16 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Pursuant to the general instructions to Item 305 of SEC Regulation S-K, the quantitative and qualitative disclosures called for by this Item 3 and by Rule 305 of Regulation S-K are inapplicable to the Company at this time. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - Financial Data Schedule (SEC Use Only) (b) The Company filed one Current Report on Form 8-K during the period covered by this Quarterly Report on Form 10-Q. The Form 8-K, filed on September 11, 1998 reported the Company's execution of a Termination Agreement by and among the Company, RHI Acquisition, Inc., Equity Inns, Inc., RFS Partnership, L. P. and Equity Inns Partnership, L.P. 17 18 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. 11/13/98 /s/ Michael J. Pascal - ------------------------ -------------------------------------------- Date Michael J. Pascal, Secretary and Treasurer (Principal Financial and Accounting Officer) 11/13/98 /s/ Robert M. Solmson - ------------------------ -------------------------------------------- Date Robert M. Solmson, Chairman and Chief Executive Officer 18 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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 JAN-01-1998 SEP-30-1998 13,006 0 16,036 0 0 0 697,611 53,059 690,346 27,440 271,879 0 18,500 353,055 (361) 690,346 0 35,283 0 0 12,210 0 4,603 0 0 16,640 0 0 0 0 $0.65 0.64
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