10-Q/A 1 e10-qa.txt RFS HOTEL INVESTORS INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 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, (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 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 March 31, 2000 was 24,485,846. 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 - March 31, 2000 and December 31, 1999 3 Consolidated Statements of Operations - For the three months ended March 31, 2000 and 1999 4 Consolidated Statements of Cash Flows - For the three months ended March 31, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 18
2 3 RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- (UNAUDITED) ASSETS Investment in Hotel Properties, net $ 660,417 $ 651,988 Cash and cash equivalents 319 5,913 Restricted cash 1,512 1,082 Due from Lessees 13,714 10,801 Notes receivable 5,339 4,902 Deferred expenses, net 5,580 4,458 Other assets 8,292 8,098 ----------- --------- Total assets $ 695,173 $ 687,242 =========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 9,941 $ 8,063 Borrowings on Line of Credit 116,807 98,807 Long-term obligations 178,917 183,471 Deferred revenue 13,696 Minority interest in Operating Partnership, 2,561 and 2,565 units issued and outstanding at March 31, 2000 and December 31, 1999, respectively 34,051 35,618 ----------- --------- Total liabilities. 353,412 325,959 ----------- --------- Commitments and contingencies Shareholders' equity: Preferred Stock, $.01 par value, 5,000 shares authorized, 974 shares issued and outstanding 10 10 Common Stock, $.01 par value, 100,000 shares authorized, 25,157 shares issued 251 251 Additional paid-in capital 374,247 374,087 Treasury stock, at cost, 671 and 262 shares at March 31, 2000 and December 31, 1999, respectively (8,100) (3,656) Distributions in excess of income (24,647) (9,409) ---------- --------- Total shareholders' equity 341,761 361,283 ---------- --------- Total liabilities and shareholders' equity $ 695,173 $ 687,242 ========== =========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 RFS HOTEL INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months Ended Pro Forma March 31, 2000 March 31, 1999 March 31, 1999 -------------- -------------- -------------- (unaudited) (unaudited) (unaudited) * Revenue: Lease revenue $ 10,923 $ 23,515 $ 10,937 Other 475 211 211 -------- -------- -------- Total revenue 11,398 23,726 11,148 -------- -------- -------- Expenses: Taxes and insurance 2,834 2,409 2,409 Depreciation 6,623 5,602 5,602 Amortization 421 551 551 General and administrative 1,838 1,012 1,012 Loss on sale of hotel properties and franchise termination fees 239 239 Interest expense, net 5,466 4,624 4,624 Minority interest in Operating Partnership (538) 865 (306) -------- -------- -------- Total expenses 16,644 15,302 14,131 -------- -------- -------- Net income (loss) (5,246) 8,424 (2,983) Preferred stock dividends (348) (348) (348) -------- -------- -------- Net income (loss) applicable to common Shareholders $ (5,594) $ 8,076 $ (3,331) ======== ======== ======== Basic earnings per share $ (0.23) $ .32 $ (0.13) Diluted earnings per share $ (0.23) $ .32 $ (0.13) Weighted average common shares 24,744 25,006 25,006
* As originally filed. 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)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 MARCH 31, 1999 -------------- -------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income (loss) $ (5,246) $ 8,424 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,044 6,153 Minority interest in Operating Partnership (538) 865 Changes in assets and liabilities: Due from Lessees (2,913) (1,942) Other assets (644) 1,851 Accounts payable and accrued expenses 1,878 1,471 Deferred revenue 13,696 -------- -------- Net cash provided by operating activities 13,277 16,822 -------- -------- Cash flows from investing activities: Investment in hotel properties and hotels under development (15,055) (8,888) Restricted cash (430) 7,130 -------- -------- Net cash used by investing activities (15,485) (1,758) -------- -------- Cash flows from financing activities: Purchase of treasury stock (4,444) Proceeds from borrowings 18,000 3,000 Payments on debt (4,554) (3,467) Distributions to common and preferred shareholders (9,992) (9,983) Distributions to limited partners (986) (988) Redemption of units (43) Collections on notes receivable 13 11 Loan fees paid (1,380) (193) -------- -------- Net cash used by financing activities (3,386) (11,620) -------- -------- Net increase (decrease) in cash and cash equivalents (5,594) 3,444 Cash and cash equivalents at beginning of years 5,913 2,014 -------- -------- Cash and cash equivalents at end of periods $ 319 $ 5,458 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 RFS HOTEL INVESTORS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION. RFS Hotel Investors, Inc. ("RFS or the Company"), is a hotel real estate investment trust which, at March 31, 2000, owned interests in 62 hotels with 9,086 rooms located in 24 states (collectively the "Hotels"). RFS owns 90.7% of RFS Partnership, L.P. (the "Operating Partnership"). RFS, the Operating Partnership, and their subsidiaries are herein referred to, collectively, as the "Company". These unaudited consolidated financial statements include the accounts of the Company 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 1999 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 December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. The Company has reviewed the terms of its percentage leases and has determined that the provisions of SAB 101 will significantly impact the Company's revenue recognition on an interim basis, effectively deferring the recognition of revenue from its percentage leases from the first and second quarters of the calendar year to the third and fourth quarters. SAB 101 will not impact the Company's revenue recognition on an annual basis given that the Company has only calendar year leases. SAB 101 will have no impact on the Company's interim or annual cash flow from its third party leases, and therefore on its ability to pay dividends. The Company is accounting for SAB 101 as a change in accounting principle and recorded the results of the 2000 first quarter in accordance with SAB 101. The effect of this change on the three months ended March 31, 2000 statement of operations was to decrease total revenue by approximately $13.7 million, net income applicable to common shareholders by approximately $12.4 million and net income applicable to common shareholders by $0.50 per share on a basic and diluted basis. The pro forma effect of this change on the three months ended March 31, 1999 statement of operations was to decrease total revenue by approximately $12.6 million, net income applicable to common shareholders by approximately $11.4 million and net income applicable to common shareholders by $0.45 per share on a basic and diluted basis. 6 7 Upon initial adoption of SAB 101, the Company filed its first quarter 2000 10-Q reflecting the enclosed 1999 proforma statement of operations as historical 1999 data. The Company has subsequently refiled its first quarter 2000 10-Q to reflect the originally filed 1999 statement of operations as the Company's historical 1999 data and has included the 1999 proforma statement of operations as proforma data. 3. DECLARATION OF DIVIDEND. On April 25, 2000, the Company declared a $0.385 dividend on each share of Common Stock outstanding and a $0.3625 dividend on each share of Series A Preferred Stock outstanding to shareholders of record on May 10, 2000. The dividend will be paid on May 15, 2000. 4. DEBT. The Company increased the availability under its Line of Credit from $100 million to $140 million during the first quarter of 2000. The increased Line of Credit matures on July 30, 2003. The interest rate remained substantially unchanged ranging from 150 basis points to 225 basis points above LIBOR, depending on the Company's ratio of total debt (as defined) to its investment (prior to depreciation) in hotel properties. The interest rate was approximately 8.2% at March 31, 2000. The Line of Credit is collateralized by first priority mortgages on 16 hotels and agreements restricting the transfer, pledge or other hypothecation of an additional 16 hotels (collectively, the "Collateral Pool"). The Company can obtain a release of the pledge of any hotel in the Collateral Pool if the Company provides a substitute hotel or reduces the total availability under the Line of Credit. The Line of Credit contains various covenants including the maintenance of a minimum net worth, minimum debt coverage and interest coverage ratios, and total indebtedness and total liabilities limitations. The Company was not aware of any failure to comply with these covenants at March 31, 2000. 5. NOTES RECEIVABLE. The Company has three notes receivable from prior years' hotel sales which aggregate approximately $5.3 million. The following details these hotel sales and the related notes receivable:
NOTES RECEIVABLE TOTAL SALES BALANCE AT INTEREST HOTEL DATE OF SALE PRICE MARCH 31, 2000 RATE DUE DATE ----- ------------ ----- -------------- ---- -------- Holiday Inn November 1997 $2.8 million $2.2 million 9% November 2002 Express Tupelo, MS Executive Inn February 1998 $4.5 million $1.5 million 9% August 2000 Tupelo, MS Comfort Inn August 1998 $4.5 million $1.6 million 9% August 2000 Clemson, SC
7 8 The Holiday Inn Express, Tupelo, MS note receivable is collateralized by a first mortgage on the hotel. The other two notes receivable are secured by an interest in the partnership which owns the respective hotels. Payments to the Company on the Executive Inn, Tupelo, MS note receivable are in arrears and the Company has ceased the accrual of interest income. The Company is currently evaluating its alternatives for collection of the Executive Inn, Tupelo, MS note receivable and past due interest. 6. AGREEMENT WITH HILTON. On January 26, 2000, the Company entered into an agreement with Hilton which gives the Company the right to terminate 52 leases and related ancillary agreements with Hilton. In the event that the Company elects to exercise this right, the Company will be required to pay Hilton approximately $60 million, in cash, at closing. Specifically, in order to exercise its right to terminate the lease, the Company must notify Hilton on or before November 30, 2000, that the Company intends to terminate the leases and related agreements and must complete the termination on or before January 31, 2001. In connection with termination of the leases, Hilton may elect, at the earlier of (i) ten days after receipt of the Company's notice of its intention to terminate the Leases, or (ii) November 30, 2000, to require the Company to repurchase the 973,684 shares of the Company's convertible preferred stock that it currently owns. If the Company elects to terminate the leases, then Hilton will have the right to require the Company to purchase the Series A Preferred Stock for $13 million. If the Company elects not to terminate the leases, Hilton will have the right to require the Company to redeem the Series A Preferred Stock for $13.75 million. The Company may elect, in its sole discretion, to pay all or part of the purchase price for the preferred shares in the form of shares of its Common Stock. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. The following chart summarizes information regarding the 62 Hotels owned at March 31, 2000:
FRANCHISE AFFILIATION HOTEL PROPERTIES ROOMS/SUITES 1ST QUARTER 2000 --------------------- ---------------- ------------ ---------------- LEASE REVENUE (IN THOUSANDS) Full Service hotels: Holiday Inn 5 953 $ 2,225 Sheraton Four Points 2 516 1,080 Sheraton 4 757 2,792 Independent 2 326 2,016 DoubleTree 1 220 857 Ramada Plaza (1) 1 234 728 ---- ------ -------- 15 3,006 9,698 ---- ------ -------- Extended Stay hotels: Residence Inn by Marriott 14 1,851 6,358 Hawthorn Suites 1 280 813 TownePlace Suites by Marriott 3 285 699 Homewood Suites by Hilton 1 83 313 ---- ------ -------- 19 2,499 8,183 ---- ------ -------- Limited Service hotels: Hampton Inn 19 2,368 4,398 Holiday Inn Express 5 637 1,404 Comfort Inn 3 474 626 Courtyard by Marriott 1 102 310 ---- ------ -------- 28 3,581 6,738 ---- ------ -------- Deferred lease revenue (13,696) -------- Total 62 9,086 $ 10,923 ==== ====== ========
(1) Converted to a Hilton full-service hotel in April 2000. At March 31, 2000, the Company leased 52 hotels to wholly owned subsidiaries of Hilton, six hotels to three other lessees and four hotels were not leased. Fifty-one hotels are managed by wholly owned subsidiaries of Hilton and 11 hotels are managed by six other third-party management companies. 9 10 RESULTS OF OPERATIONS Comparison of the Three Months ended March 31, 2000 and 1999 Revenues The decrease in lease revenue for 2000 from 1999 is attributable to the adoption of SAB 101 as of January 1, 2000. Included in deferred revenue at March 31, 2000 is $13.7 million of first quarter billed lease revenue collected or due from the Lessees, which management expects the Company to recognize as lease revenue in the third and fourth quarters of 2000. For comparability purposes only, assuming that the amount included in deferred revenue at March 31, 2000 was earned at March 31, 2000, the Company would have had lease revenue of $28,459,000 from the Lessees compared with $25,806,000 for 1999. This 4.7% increase over 1999 is due primarily to (i) an average increase in RevPar at the 57 comparable hotels of 2.1%, (ii) two hotels opened after the first quarter of 1999, and, (iii) a 40 room addition to the Beverly Heritage hotel in Milpitas, California completed in late 1999. The following shows hotel operating statistics for the 57 comparable hotels for the three months ended March 31, 2000. Excluded are three hotels opened in 1999, and two hotels undergoing major renovations (Ramada Plaza in the Fisherman's Wharf district of San Francisco, California converted to a Hilton full service hotel in April 2000 and the Sheraton hotel in Birmingham, Alabama): 57 COMPARABLE HOTELS OPERATING STATISTICS
BILLED LEASE REVENUE* ADR OCCUPANCY REVPAR --------------------- --- --------- ------ VARIANCE VARIANCE VARIANCE VARIANCE SEGMENT 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999 ------- ---- -------- ---- -------- ---- -------- ---- -------- (IN THOUSANDS) Full Service $ 9,156 11.6% $107.76 4.0% 71.1% 1.7 pts $76.61 6.6% Extended Stay 7,485 2.3% 98.05 3.4% 79.1% (1.7) pts 77.57 1.2% Limited Service 6,735 (2.5)% 69.76 0.0% 64.3% (1.6) pts 44.88 (2.3)% --------- Total $ 23,376 4.2% 89.99 2.9% 70.3% (0.6) pts $63.28 2.1% =========
* Billed lease revenue equals lease revenue plus deferred revenue. 10 11 The 15 full service hotels produced an average RevPar increase of 6.6% in the first quarter of 2000. The following four full service hotels located in Silicon Valley had average RevPar increases of 5.8%:
HOTEL LOCATION PERCENTAGE CHANGE IN REVPAR ----- -------- --------------------------- 173-room Sheraton Sunnyvale, CA 14.5% 201-room Beverly Heritage Milpitas, CA 0.0 229-room Sheraton Milpitas, CA 5.8 214-room Sheraton Four Points Pleasanton, CA 2.8
The Sunnyvale hotel was renovated and converted from a Sheraton Four Points hotel to a Sheraton in December 1998. As a result, full year 1999 ADR increased 13.1%. In the first quarter of 2000, ADR increased 2.0% and occupancy increased 8.4 pts to 77.2%. RevPar was essentially unchanged at the Beverly Heritage due to the opening of a 40-room addition in November 2000. However, room revenues from the Beverly Heritage increased 21.3% in the quarter. The first quarter of 2000 RevPar increase at the Sheraton hotel in Milpitas of 5.8% was consistent with the 5.2% increase in the fourth quarter of 1999. Occupancy increased 5.9 pts. to 73.9%. Occupancy at the Sheraton Four Points in Pleasanton increased 5.7 pts. in the first quarter while ADR declined 5.9%. A major account was lost in early 1999 which has taken some time to replace. Other full service hotels include the 94-room Hotel Rex in San Francisco Union Square which produced a RevPar increase of 23.3% in the quarter on an occupancy increase of 5.6 pts. and an ADR increase of 14.2%, five Holiday Inn hotels that produced an average RevPar increase of 2.9% for the quarter and the 255-room Sheraton hotel in Clayton, MO, a suburb of St. Louis, which produced RevPar gains of 15.0% in the quarter. The Clayton hotel was renovated and converted from a Holiday Inn hotel to a Sheraton in August 1999. The Ramada Plaza hotel in the Fisherman's Wharf district of San Francisco, California and the Sheraton hotel in Birmingham, Alabama were undergoing major renovations during the first quarter of 2000. RevPar decreased 30.6% and 22.2%, respectively. The Ramada Plaza hotel was converted to a Hilton full service hotel in April 2000 after a $10 million renovation. The Sheraton Birmingham hotel renovation of $1 million was primarily to correct construction-related defects and was completed in April 2000. The extended stay hotels, which comprised approximately 33% of billed lease revenue, produced an increase in RevPar of 1.2%. 11 12 The limited service hotels, which comprise approximately 27% of billed lease revenue, experienced a decrease in RevPar of 2.3% in the quarter. Nineteen of the Company's twenty-eight limited service hotels are Hampton Inn hotels. Expenses Taxes and insurance increased 17.6% in 2000 over 1999 primarily due to an average increase in real estate taxes of 10.4% for the 57 comparable hotels and real estate taxes attributable to two hotels opened following the end of the first quarter of 1999. Depreciation increased 18.2% in 2000 over 1999 due to increases in depreciable assets in 2000 relating to two hotels opened in 1999 and renovation expenditures at certain of the hotels. As a percentage of lease revenue, depreciation increased from 23.8% to 26.9%. This increase is the result of an increase in short-lived assets relative to total fixed assets from the Company's renovation expenditures. General and administrative expenses increased $826,000 in 2000 over 1999 due, in part, to the write-off of development and due diligence costs of $246,000 associated with potential projects that the Company decided not to pursue and to increased compensation costs due to additional employees. Interest expense increased $842,000 in 2000 over 1999 due to an increase in the weighted average debt balance outstanding in 2000 by approximately $17 million and an increase in the weighted average interest rate in 2000 from 7.2% to 7.8%. Net Income Net income (loss) applicable to common shareholders for 2000 was ($5.6 million), or ($0.23) per diluted share, compared with $8.1 million, or $0.32 per diluted share, for 1999. This change is due primarily to the adoption of SAB 101 in the first quarter of 2000 as discussed above. 12 13 FUNDS FROM OPERATIONS AND EBITDA The Company considers Funds From Operations ("FFO") and Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to be appropriate measures of a REIT's performance which should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company's operating performance and liquidity. The National Association of Real Estate Investment Trusts ("NAREIT"), defines FFO as net income (computed in accordance with generally accepted accounting principles or "GAAP"), excluding gains (losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization and after comparable adjustments for the Company's portion of these items related to unconsolidated partnerships and joint ventures. The Company computes FFO in accordance with standards established by NAREIT, with the exception that deferred revenue and franchise termination fees have been included as a component of the calculation, which may not be comparable to FFO reported by other REITS that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company. FFO and EBITDA do not represent cash flows from operations as determined by GAAP and should not be considered as an alternative to net income as an indication of the Company's financial performance or to cash flow from operating activities determined in accordance with GAAP as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. 13 14 The following details the computation of FFO (in thousands except per share amounts):
FOR THE THREE MONTHS ENDED MARCH 31 2000 1999 ---- ---- Net income (loss) $ (5,246) $ 8,424 Minority interest in Operating Partnership (538) 865 Deferred revenue 13,696 Depreciation 6,623 5,602 Loss on sale of hotel properties and franchise termination fees 239 Preferred stock dividends (348) (348) -------- -------- FFO $ 14,187 $ 14,782 ======== ======== Weighted average shares and partnership units outstanding 27,305 27,574
The following details the computation of EBITDA (in thousands):
FOR THE THREE MONTHS ENDED MARCH 31 2000 1999 ---- ---- FFO $ 14,187 $ 14,782 Interest expense, net 5,466 4,624 Amortization 421 551 Preferred stock dividends 348 348 -------- -------- $ 20,422 $ 20,305 ======== ========
HILTON AGREEMENT On January 26, 2000, the Company entered into an agreement with Hilton which gives the Company the right to terminate 52 leases and related ancillary agreements with Hilton. In the event that the Company elects to exercise this right, the Company will be required to pay Hilton approximately $60 million, in cash, at closing. Specifically, in order to exercise its right to terminate the leases, the Company must notify Hilton on or before November 30, 2000, that the Company intends to terminate the leases and related agreements and must complete the termination on or before January 31, 2001. The Company may finance this termination payment through a combination of additional borrowings or asset sales. In connection with termination of the leases, Hilton may elect, at the earlier of (i) ten days after receipt of the Company's notice of its intention to terminate the Leases, or (ii) November 30, 2000, to require the Company to repurchase the 973,684 shares of the Company's convertible preferred stock that it currently owns. If the Company elects to terminate the leases, then Hilton will have the right to require the Company to purchase the Series A Preferred Stock for $13 million. If the Company elects not to terminate the leases, Hilton will have the right to require 14 15 the Company to redeem the Series A Preferred Stock for $13.75 million. The Company may elect, in its sole discretion, to pay all or part of the purchase price for the preferred shares in the form of shares of its Common Stock. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to meet its cash requirements, including distributions to shareholders and repayments of indebtedness, is its share of the Operating Partnership's cash flow from the Percentage Leases. For the three months ended March 31, 2000, cash flow provided by operating activities, consisting primarily of Percentage Lease revenue, was $13.3 million and FFO was $14.2 million. The lessees' obligations under the Percentage Leases are unsecured. However, the leases with Hilton contain certain covenants including the maintenance of a ratio of total debt to consolidated net worth (as defined) of the lessee of not more than 50%. Management fees paid to affiliates of Hilton are subordinated to the lease payments. The lessees have limited capital resources, and accordingly, their ability to make lease payments under the Percentage Leases is substantially dependent on the ability of the lessees to generate sufficient cash flow from the operations of the Hotels. At May 5, 2000, the lessees had paid all amounts due the Company under the Percentage Leases as of March 31, 2000. At March 31, 2000, the Company had utilized $116.8 million under its $140 million Line of Credit. The following details the Company's debt outstanding at March 31, 2000 (dollar amounts in thousands):
COLLATERAL ---------- # OF NET BOOK VALUE BALANCE INTEREST RATE MATURITY HOTELS AT MARCH 31, 2000 ------- ------------- -------- ------ ----------------- Line of Credit $ 116,807 LIBOR + 200bp Variable July 2003 32 $ 291,816 Mortgage 39,646 6.83% Fixed August 2008 Mortgage 25,000 7.03 Fixed November 2011 15 145,622 Mortgage 94,395 7.83 Fixed December 2008 10 130,888 Mortgage 18,750 8.22 Fixed November 2007 1 40,417 Mortgage 1,125 3.50 Variable January 2001 1 21,320 ---------- --------- $ 295,723 $ 630,063 ========== =========
The Company increased the availability under its Line of Credit from $100 million to $140 million during the first quarter of 2000. The increased Line of Credit matures on July 30, 2003. The interest rate remained substantially unchanged ranging from 150 basis points to 225 basis points above LIBOR, depending on the Company's ratio of total debt (as defined) to its investment in hotel properties. The interest rate was approximately 8.2% at March 31, 2000. The Line of Credit is collateralized by first priority mortgages on 16 hotels and agreements restricting the transfer, pledge or other hypothecation on an additional 16 hotels (collectively, the "Collateral Pool"). The Company can obtain a release of the pledge of any hotel in the Collateral Pool if the Company provides a substitute hotel or reduces the total availability under the Line of Credit. The Line of Credit contains various covenants including the 15 16 maintenance of a minimum net worth, minimum debt coverage and interest coverage ratios, and total indebtedness and total liabilities limitations. The Company was not aware of any failure to comply with these covenants at March 31, 2000. The Company's other borrowings are nonrecourse to the Company and contain provisions allowing for the substitution of collateral, upon satisfaction of certain conditions, after the respective loans have been outstanding for approximately four years. Most of the mortgage borrowings are repayable and subject to various prepayment penalties, yield maintenance, or defeasance obligations. Future scheduled principal payments at March 31, 2000 are as follows (in thousands):
AMOUNT ------ Remainder of 2000 $ 3,809 2001 6,574 2002 5,857 2003 123,103 2004 6,747 2005 7,274 Thereafter 142,360 --------- $ 295,724 =========
Certain significant credit and debt statistics at March 31, 2000 are as follows: - Total debt to trailing twelve month EBITDA is 3.4x - Weighted average maturity of fixed rate debt of 9.2 years - Trailing twelve month interest coverage ratio of 4.2x - Fixed interest rate debt equal to 60% of total debt - Debt equal to approximately 40% of investment in hotel properties, at cost (before depreciation and after capital expenditures) The Company expects to spend approximately $21.3 million on capital improvements to its hotels in 2000. Additionally, approximately $6.5 million will be spent in 2000 at the Company's hotel in the Fisherman's Wharf district of San Francisco, California which was converted from a Ramada Plaza to a Hilton full service hotel in April 2000. 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 (as defined). The Board of Directors may modify its debt limitation at anytime without shareholder approval. 16 17 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. 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. 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 including those described in the Company's Form 8-K filed with the Securities and Exchange Commission on May 12, 1999 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. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates. The Company monitors interest rate fluctuations as an integral part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results. The effect of interest rate fluctuations historically has been small relative to other factors affecting operating results, such as occupancy. Our operating results are affected by changes in interest rates primarily as a result of borrowing under our line of credit. If interest rates increased by 25 basis points, our quarterly interest expense would have increased by approximately $100,000, based on balances outstanding during the quarter ending March 31, 2000. 17 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - Financial Data Schedule (b) Reports on Form 8-K - None 18 19 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. May 15, 2000 /s/ MICHAEL J. PASCAL ------------- -------------------------------------------- Date Michael J. Pascal, Secretary and Treasurer (Principal Financial and Accounting Officer) May 15, 2000 /s/ ROBERT M. SOLMSON ------------- -------------------------------------------- Date Robert M. Solmson, Chairman and Chief Executive Officer 19