-----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, FxAoQFfAeE+PxclInltJ9y+O6HTJjnNy5l7AS7fefiFbXYqMEZR4cgEgToUU2qEh H/0q1t1bfLaK16oWx70hWw== /in/edgar/work/20000814/0000950144-00-010146/0000950144-00-010146.txt : 20000921 0000950144-00-010146.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950144-00-010146 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RFS HOTEL INVESTORS INC CENTRAL INDEX KEY: 0000906408 STANDARD INDUSTRIAL CLASSIFICATION: [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: 696613 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 e10-q.txt 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 JUNE 30, 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, 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 June 30, 2000 was 24,485,846. 1 2 RFS HOTEL INVESTORS, INC. INDEX
FORM 10-Q REPORT PAGE ---- PART I. FINANCIAL INFORMATION Item 1 Financial Statements RFS Hotel Investors, Inc. Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations - For the three and six months ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows - For the six months ended June 30, 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 Item 4. Submission of Matters to a Vote of Security Holders 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 19
2 3 RFS HOTEL INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
June 30, December 31, 2000 1999 --------- ------------ (unaudited) ASSETS Investment in Hotel Properties, net $ 662,864 $ 651,988 Cash and cash equivalents 678 5,913 Restricted cash 2,142 1,082 Due from Lessees 16,805 10,801 Notes receivable 1,339 5,352 Deferred expenses, net 5,547 4,458 Other assets 7,532 7,648 --------- --------- Total assets $ 696,907 $ 687,242 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 8,653 $ 8,063 Borrowings on Line of Credit 124,807 98,807 Long-term obligations 177,680 183,471 Deferred revenue 27,507 Minority interest in Operating Partnership, 2,561 and 2,565 units issued and outstanding at June 30, 2000 and December 31, 1999, respectively 32,334 35,618 --------- --------- Total liabilities 370,981 325,959 ========= ========= 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 at both June 30, 2000 251 251 and December 31, 1999 Additional paid-in capital 374,508 374,087 Treasury stock, at cost, 671 and 262 shares at June 30, 2000 and December 31, 1999, respectively (8,100) (3,656) Distributions in excess of income (40,743) (9,409) --------- --------- Total shareholders' equity 325,926 361,283 --------- --------- Total liabilities and shareholders equity $ 696,907 $ 687,242 ========= =========
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) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- Revenue: Lease revenue $ 14,471 $ 26,073 $ 25,394 $ 49,588 Other revenue 31 165 510 376 -------- -------- -------- -------- Total revenue 14,502 26,238 25,904 49,964 -------- -------- -------- -------- Expenses: Taxes and insurance 2,763 2,583 5,597 4,992 Depreciation 6,782 5,770 13,404 11,372 Amortization 467 496 889 1,047 General and administrative 1,492 873 3,333 1,885 Loss on sale of hotel properties and franchise termination fees 4,000 4,000 239 Interest expense, net 5,736 4,707 11,203 9,331 Minority interest in Operating Partnership (630) 1,035 (1,168) 1,900 -------- -------- -------- -------- Total expenses 20,610 15,464 37,258 30,766 -------- -------- -------- -------- Net income (loss) (6,108) 10,774 (11,354) 19,198 Preferred stock dividends (351) (352) (699) (700) -------- -------- -------- -------- Net income (loss) applicable to common shareholders $ (6,459) $ 10,422 $(12,053) $ 18,498 -------- -------- -------- -------- Basic earnings per share $ (0.26) $ 0.42 $ (0.49) $ 0.74 Weighted average common shares outstanding 24,486 25,006 24,615 25,006 Diluted earnings per share $ (0.26) $ 0.41 $ (0.49) $ 0.74 Weighted average common shares, preferred shares and dilutive common stock equivalents outstanding 24,486 26,003 24,615 25,993 Pro Forma Amounts: Total revenue $ 13,660 $ 24,211 Total expenses 14,357 28,432 Net loss (697) (4,221) Net loss applicable to common shareholders (1,049) (4,921) Earnings per share, basic and diluted $ (0.04) $ (0.20)
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 Six Months Ended June 30, 2000 June 30, 1999 ------------- ------------- (unaudited) (unaudited) Cash flows from operating activities: Net income (loss) $(11,354) $19,198 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 14,293 12,419 Minority interest in Operating Partnership (1,168) 1,900 Loss on sale of hotel properties 4,000 Changes in assets and liabilities: Due from Lessees (6,004) (4,472) Other assets 116 2,569 Accounts payable and accrued expenses 590 (72) Deferred revenue 27,507 -------- -------- Net cash provided by operating activities 27,980 31,542 -------- -------- Cash flows from investing activities: Investment in hotel properties and hotels under development (24,280) (19,568) Cash paid for franchise fees (90) Restricted cash (1,060) 6,728 -------- -------- Net cash used by investing activities (25,340) (12,930) -------- -------- Cash flows from financing activities: Purchase of treasury stock (4,444) Proceeds from borrowings 26,000 8,000 Payments on debt (5,791) (4,631) Distributions to common and preferred shareholders (19,976) (19,958) Distributions to limited partners (1,972) (1,977) Redemption of units (43) Collections on notes receivable 13 23 Loan fees paid (1,662) (250) -------- -------- Net cash used by financing activities (7,875) (18,793) Net decrease in cash and cash equivalents (5,235) (181) Cash and cash equivalents at beginning of years 5,913 2,014 -------- -------- Cash and cash equivalents at end of periods $ 678 $ 1,833 ======== ======== Supplemental disclosure of non-cash financing activities: In 2000, the Company recorded a $101 allocation to paid-in capital from minority interest.
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 June 30, 2000, owned interests in 62 hotels with 9,089 rooms located in 24 states (collectively the "Hotels"). RFS owns 90.5% 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 Annual Report on Form 10-K for the year ended December 31, 1999. 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. The effect of this change on the six months ended June 30, 2000 statement of operations was to decrease total revenue by approximately $27.5 million, net income applicable to common shareholders by approximately $24.9 million and net income applicable to common shareholders by $1.02 per share on a basic and diluted basis. The pro forma effect of this change on the six months ended June 30, 1999 statement of operations was to decrease total revenue by approximately $25.8 million, net income applicable to common shareholders by approximately $23.4 million and net income applicable to common shareholders by $0.94 per share on a basic and diluted basis. The effect of this change on the three months ended June 30, 2000 statement of operations was to decrease total revenue by approximately $13.8 million, net income applicable to common shareholders by approximately $12.5 million and net income applicable to common shareholders by $0.48 per share on a basic and diluted basis. The pro forma effect of this change on the three months ended June 30, 1999 6 7 statement of operations was to decrease total revenue by approximately $12.6 million, net income applicable to common shareholders by approximately $11.5 million and net income applicable to common shareholders by $0.46 per share on a basic basis and by $0.45 per share on a diluted basis. 3. BASIC AND DILUTED EARNINGS PER SHARE. Basic earnings per share is computed by dividing net income less preferred stock dividends by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and equivalents outstanding. Common share equivalents represent shares issuable upon exercise of options and unvested directors and officers restricted stock grants. For the three and six months ended June 30, 2000 and the three and six months ended June 30, 1999, pro forma, the common share equivalents, if converted to common shares, would be antidilutive. Accordingly, for those periods, common share equivalents are not assumed to be converted in the computation of diluted earnings per share. 4. DECLARATION OF DIVIDEND. On July 27, 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 August 10, 2000. The dividend will be paid on August 15, 2000. 5. NOTES RECEIVABLE. The Company has three notes receivable from prior years' hotel sales which aggregate approximately $5.3 million. During the second quarter, a reserve of $4 million was established against these notes receivable. The following details these hotel sales and the related notes receivable:
NOTES RECEIVABLE BALANCE AT INTEREST HOTEL DATE OF SALE TOTAL SALES PRICE JUNE 30, 2000 RATE DUE DATE ----- ------------ ----------------- ------------- ---- -------- Holiday Inn Express November 1997 $2.8 million $2.2 million 9% November 2002 Tupelo, MS Executive Inn February 1998 $5.0 million 1.5 million 9% August 2000 Tupelo, MS Comfort Inn August 1998 $5.2 million 1.6 million 9% August 2000 Clemson, SC ------------- 5.3 million Reserve for collection (4.0) million ------------- $1.3 million =============
The Holiday Inn Express, Tupelo, MS note receivable is collateralized by a first mortgage on the hotel. The other two notes receivable are collateralized, in part, by an interest in the partnership which owns the respective hotels and, on the note on the Comfort Inn in Clemson, SC, a partial guaranty from certain principals of the buyer. Payments to the Company on the Executive Inn, Tupelo, MS and Comfort Inn, 7 8 Clemson, SC are in arrears and the Company has ceased the accrual of interest income. The Company is evaluating its alternatives for collection of the notes 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 (Series A 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 purchase 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 or cash. 7. SUBSEQUENT EVENTS. On August 1, 2000 the Company concluded an amendment to its line of credit that changed certain definitions and financial covenants that provide the Company with additional flexibility to complete the proposed Hilton lease termination transaction in early 2001. The line of credit maturity remains unchanged at July 30, 2003. The interest rate will continue to range from 150 basis points to 225 basis points above LIBOR. The initial interest rate of 200 basis points above LIBOR is unchanged. On August 9, 2000, the Company completed a $52.2 million long-term secured financing. The financing is secured by eight of the Company's hotel properties, carries a fixed interest rate of 8.0%, has a 25-year amortization and matures in 10 years. The financing allows the Company to extend its debt maturities over a longer term resulting in a weighted average maturity of fixed rate debt of approximately nine years and increases the percentage of fixed interest rate debt to total debt from 58% to 76%. The proceeds from this financing were utilized to reduce borrowings outstanding under its Line of Credit to $74.7 million. 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 June 30, 2000:
HOTEL THREE MONTHS ENDED SIX MONTHS ENDED FRANCHISE AFFILIATION PROPERTIES ROOMS/SUITES JUNE 30, 2000 JUNE 30, 2000 --------------------- ---------- ------------ ------------- ------------- LEASE REVENUE (IN THOUSANDS) Full Service Hotels: Holiday Inn 5 953 $2,581 $4,806 Sheraton Four Points 2 412 1,506 2,669 Sheraton 4 862 3,713 6,541 Independent 2 329 2,299 4,201 DoubleTree 1 219 993 1,849 Hilton 1 234 728 1,456 -- ----- --------- --------- 15 3,009 11,820 21,522 -- ----- --------- --------- Extended Stay Hotels: Residence Inn by Marriott 14 1,851 7,047 13,405 Hawthorn Suites 1 280 777 1,590 TownePlace Suites by Marriott 3 285 624 1,322 Homewood Suites by Hilton 1 83 159 473 -- ----- --------- --------- 19 2,499 8,607 16,790 -- ----- --------- --------- Limited Service Hotels: Hampton Inn 19 2,368 4,873 9,270 Holiday Inn Express 5 637 1,857 3,260 Comfort Inn 3 474 796 1,418 Courtyard by Marriott 1 102 329 641 -- ----- --------- --------- 28 3,581 7,855 14,589 -- ----- --------- --------- Billed Lease Revenue 28,282 52,901 Deferred Lease Revenue (13,811) (27,507) --------- --------- Total 62 9,089 $ 14,471 $ 25,394 == ===== ========= =========
At June 30, 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-two hotels are managed by wholly owned subsidiaries of Hilton and five other third-party management companies manage 10 hotels. 9 10 Results of Operations Comparison of the Three Months ended June 30, 2000 and 1999 and the Six Months Ended June 30, 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 June 30, 2000 is $27.5 million of first and second 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 purposes of comparison, assuming that the amount included in deferred revenue at June 30, 2000 was earned at June 30, 2000, the Company's lease revenue would have increased 8.5% for the quarter and 6.7% year to date over the comparable periods in 1999. These increases over 1999 are due primarily to (i) an average increase in RevPar at the comparable hotels of 5.0% for the quarter and 3.5% year-to-date, (ii) two hotels opened after the second quarter of 1999, (iii) a 40 room addition to the Beverly Heritage hotel in Milpitas, California completed in late 1999 and (iv) conversion in April 2000 of the Company's Ramada Plaza hotel in San Francisco, California to a Hilton hotel. The following shows hotel operating statistics for the 59 comparable hotels for the three months ended June 30, 2000 and for the 57 comparable hotels for the six months ended June 30, 2000. Excluded in the 59 comparable hotels for the three months ended June 30, 2000 are two hotels opened in 1999, and the Hilton San Francisco Fisherman's Wharf hotel, which underwent major renovations and was converted from a Ramada Plaza in the second quarter 2000. Excluded from the 57 comparable hotels for the six months ended June 30, 2000 are the previously described three hotels and the Sheraton Hotel in Birmingham, Alabama which was undergoing major renovation in the first quarter 2000 and one hotel opened in the first quarter 1999. COMPARABLE HOTELS OPERATING STATISTICS FOR THE THREE MONTHS ENDED JUNE 30, 2000
BILLED LEASE REVENUE* ADR OCCUPANCY REVPAR --------------------- --- --------- ------ VARIANCE VARIANCE VARIANCE VARIANCE SEGMENT 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999 ------- ---- -------- ---- -------- ---- -------- ---- --------- Full Service $11,078 16.0 % $108.70 5.9% 76.9% 2.2 pts $83.63 9.2% Extended Stay 8,164 3.2 % 96.10 1.7% 83.2% 1.8 pts 79.97 4.0% Limited Service 7,855 (0.2)% 69.03 0.2% 73.3% 0.4 pts 50.62 0.8% ------- Total $27,097 7.0 % 89.49 3.1% 77.1% 1.4 pts 69.01 5.0% =======
* Billed lease revenue equals lease revenue plus deferred revenue. 10 11 COMPARABLE HOTELS OPERATING STATISTICS FOR THE SIX MONTHS ENDED JUNE 30, 2000
BILLED LEASE REVENUE* ADR OCCUPANCY REVPAR --------------------- --- --------- ------ VARIANCE VARIANCE VARIANCE VARIANCE SEGMENT 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999 ------- ---- -------- ---- -------- ---- -------- ---- -------- Full Service $19,899 13.4 % $109.01 5.4% 74.7% 1.9 pts $81.40 8.0 % Extended Stay 15,468 3.0 % 97.89 2.7% 81.3% (0.1)pts 79.55 2.4 % Limited Service 14,589 (1.3)% 69.37 0.1% 68.8% (0.6)pts 47.75 (0.8)% ------- Total $49,956 5.5 % 89.97 3.1% 73.9% 0.2 pts 66.51 3.5 % =======
*Billed lease revenue equals lease revenue plus deferred revenue. The 15 full service hotels produced an average RevPar increase of 9.2% in the quarter and 8.0% year to date. The following four full service hotels located in Silicon Valley had RevPar increases averaging 10.0% in the quarter and 9.1% year to date.
PERCENTAGE INCREASE IN REVPAR -------------------------------- HOTEL LOCATION SECOND QUARTER YEAR TO DATE - ----- -------- -------------- ------------ 173-room Sheraton Sunnyvale, CA 16.7% 15.6% 235-room Beverly Heritage Milpitas, CA 4.2% 2.1% 229-room Sheraton Milpitas, CA 11.0% 8.4% 214-room Sheraton Four Points Pleasanton, CA 19.9% 11.6%
This is the third consecutive quarter of increases between 10% and 20% in RevPar for the Sunnyvale hotel since it was renovated and converted from a Sheraton Four Points to a full service Sheraton in December 1998. Occupancy increased 6.5 points to 85.1% and ADR increased 7.7% to $159.29, for the three months ended June 30, 2000 as compared to the same period in 1999. In November 1999 a 40-room addition was opened at the Beverly Heritage hotel. In spite of a 20% increase in rooms at the hotel, occupancy for the quarter was 0.5 points higher and ADR increased 3.6%. Additionally, lease revenues increased 29.4% in the quarter and 27.1% year to date. Occupancy at the Sheraton in Milpitas increased 3.9 pts. to 80.2% for the quarter and ADR increased 5.6% to $151.98. Occupancy at the Sheraton Four Points in Pleasanton increased 12.1 points to 82.0% and ADR rose 2.3% to $112.55 in the quarter. Other full service hotels include the 94-room Hotel Rex in San Francisco Union Square which produced a RevPar increase of 17.7% in the quarter on an occupancy increase of 1.4 pts. and an ADR increase of 17.7%. Year to date RevPar at the Hotel Rex has increased 20.1%. The five Holiday Inn hotels, which have an average of 190 rooms per hotel, produced average RevPar increases of 3.1% for the quarter 11 12 and 2.9% year to date. These hotels are located primarily in competitive secondary markets. The 255-room Sheraton hotel in Clayton, MO, a suburb of St. Louis, produced RevPar gains of 15.6% in the quarter and 15.2% year to date. The Sheraton Clayton was renovated and converted from a Holiday Inn hotel to a Sheraton in August 1999. In the second quarter, ADR increased 12.6% and occupancy increased 2.6%. The Hilton San Francisco Fisherman's Wharf was converted from a Ramada Plaza hotel in April 2000 after approximately an $11 million renovation. For the quarter, RevPar increased 8.1% and for the month of June, RevPar increased 32.0% due to a 27.1% increase in ADR and a 3.5 point increase in occupancy. June RevPar was $170.72 based on an occupancy of 92.9% and an average daily rate of $183.78. The extended stay hotels, which comprised approximately 30% of billed lease revenue, produced an increase in RevPar of 4.0% for the quarter and 2.4% year to date. The limited service hotels, which comprise approximately 29% of billed lease revenue, experienced an increase in RevPar of 0.8% in the quarter, but a decrease in RevPar of (0.8)% year to date. The improvement in room revenue significantly impacts the Company because its principal source of revenue is lease payments from the Lessees under the Percentage Leases. The Percentage Leases provide for rent based on a percentage of room revenue and other hotel revenue. Expenses As a percentage of billed lease revenue, expenses, before the $4 million reserve on notes receivable included in loss on sale of hotel properties, increased from 56.8% for the six months ended June 30, 1999 to 62.9% for the six months ended June 30, 2000. Taxes and insurance expense for the quarter increased $180,000 over the prior year. Year to date, taxes and insurance expenses represent 10.6% of billed lease revenue versus 10.1% of billed lease revenue for the comparable period of 1999. This increase is due, in part, to renovations that have increased the values used in the taxing authorities' reassessments. Year to date depreciation increased 17.9% due to increases in depreciable assets in 2000 and 1999 relating to two hotels opened in 1999 and renovation expenditures at certain of the hotels, including the Hilton San Francisco Fisherman's Wharf. As a percentage of billed lease revenue, year to date depreciation increased from 22.9% to 25.3%. General and administrative expenses increased to 5.3% of billed lease revenues in the quarter. Excluding first quarter non-recurring items, year to date general and administrative expenses were 5.4% of billed lease revenues. 12 13 Interest expense increased $1.0 million over the prior year's quarter and $1.9 million year to date. This increase is due to a weighted average increase in borrowings of approximately $20 million in 2000 over 1999 and an increase in borrowing costs of approximately 60 basis points. Borrowings increased primarily due to funding of renovation costs. From 1998 through year to date 2000, approximately $61.8 million, or approximately 12.1% of gross hotel revenues has been spent renovating, expanding and rebranding hotels. The interest rate increase is due to a general increase in interest rates that impacted variable rate debt. At June 30, 2000 variable rate debt was 42% of total debt. After the $52.2 million long-term financing discussed in Note 7 in Notes To Consolidated Financial Statement, Subsequent Events, variable rate debt will be 24% of total debt. Net Loss Net loss applicable to common shareholders for 2000 was ($12.1 million), or ($0.49) per diluted share, compared with net income of $18.5 million, or $0.74 per diluted share, for 1999. This change is due primarily to the adoption of SAB 101 as previously discussed. 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 exceptions that deferred revenue has been added and franchise termination fees have been excluded in 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 FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- -------- -------- -------- Net income (loss) $ (6,108) $ 10,774 $(11,354) $ 19,198 Minority interest in Operating Partnership (630) 1,035 (1,168) 1,900 Deferred revenue 13,811 27,507 Depreciation 6,782 5,770 13,404 11,372 Loss on sale of hotel properties and franchise termination fees 4,000 4,000 239 Preferred stock dividends (351) (352) (699) (700) -------- -------- -------- -------- FFO $ 17,504 $ 17,227 $ 31,690 $ 32,009 ======== ======== ======== ======== Weighted average shares, partnership units and potential dilutive shares outstanding 27,052 27,597 27,180 27,587 FFO per share $ 0.65 $ 0.62 $ 1.17 $ 1.16
The following details the computation of EBITDA (in thousands):
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ------- ------- ------- ------- FFO $17,504 $17,227 $31,690 $32,009 Interest expense, net 5,736 4,707 11,203 9,331 Amortization 467 496 889 1,047 Preferred stock dividends 351 352 699 700 ------- ------- ------- ------- EBITDA $24,058 $22,782 $44,481 $43,087 ======= ======= ======= =======
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 and/or asset sales. 14 15 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 (Series A 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 purchase 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 or cash. 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 Percentage Leases and the net operating income from hotels not leased to third parties. For the six months ended June 30, 2000, cash flow provided by operating activities, consisting primarily of Percentage Lease revenue, was $28.0 million and FFO was $31.7 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 August 5, 2000, the lessees had paid substantially all amounts due the Company under the Percentage Leases as of June 30, 2000. At June 30, 2000, the Company had utilized $124.8 million under its $140 million Line of Credit. The following details the Company's debt outstanding at June 30, 2000 (dollar amounts in thousands):
COLLATERAL # OF NET BOOK VALUE BALANCE INTEREST RATE MATURITY HOTELS AT JUNE 30, 2000 ------- ------------- -------- ------ ---------------- Line of Credit $124,807 LIBOR + 200bp Variable July 2003 32 $291,136 Mortgage 38,791 6.83% Fixed August 2008 Mortgage 25,000 7.03 Fixed November 2011 15 145,314 Mortgage 94,096 7.83 Fixed December 2008 10 130,640 Mortgage 18,668 8.22 Fixed November 2007 1 43,606 Mortgage 1,125 3.50 Variable January 2001 1 21,426 ------- -------- $302,487 $632,122 ======== ========
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 8.7% at June 30, 2000. The Line of Credit is collateralized by first priority mortgages 15 16 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 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 June 30, 2000. The amendment to the line of credit in August, 2000, as previously discussed, includes some definitional and covenant changes that provides the Company with additional flexibility. 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 June 30, 2000 are as follows (in thousands):
AMOUNT -------- Remainder of 2000 $ 3,809 2001 6,574 2002 5,857 2003 129,920 2004 6,747 2005 7,274 Thereafter 142,306 -------- $302,487 ========
Certain significant credit and debt statistics at June 30, 2000 are as follows: - - Total debt to trailing twelve month EBITDA is 3.5x - - Weighted average maturity of fixed rate debt of 8.7 years - - Trailing twelve month interest coverage ratio of 4.1x - - Fixed interest rate debt equal to 58% of total debt - - Debt equal to 41% of investment in hotel properties, at cost (before depreciation and after capital expenditures) After the completion of the $52.2 million long-term debt financing in August, 2000, the weighted average maturity of fixed rate debt is approximately nine years and the percentage of fixed interest rate debt increases from 58% to 76%. 16 17 The Company has spent approximately $22.8 million on capital improvements to its hotels year to date, including approximately $11 million spent at the Hilton San Francisco Fisherman's Wharf. The Company expects to spend approximately an additional $11.3 million on capital improvements to its hotels during the remainder of 2000. 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 $80,000, based on balances outstanding during the quarter ended June 30, 2000. 17 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 26, 2000, the annual meeting of shareholders was held to elect three Class I directors to serve on the Board of Directors until the annual meeting of shareholders in 2003. The shareholders voted to elect the following three directors:
Class I Directors: Votes For Votes Withheld ---------- -------------- Michael S. Starnes 22,747,956 1,401,446 John W. Stokes, Jr. 22,708,120 1,441,282 Richard Reiss, Jr. 23,998,506 150,896
The following directors' terms of office continued after the meeting: Class II Directors (terms expiring in 2001) - Bruce Campbell and H. Lance Forsdick, Sr. Class III Directors (terms expiring in 2002) - Robert M. Solmson, Harry J. Phillips, Sr., and R. Lee Jenkins 18 19 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 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. RFS HOTEL INVESTORS, INC. August 14, 2000 /s/ KEVIN M. LUEBBERS - --------------- -------------------------------------------- Date Kevin M. Luebbers, Secretary and Treasurer (Principal Financial and Accounting Officer) August 14, 2000 /s/ ROBERT M. SOLMSON - --------------- -------------------------------------------- Date Robert M. Solmson, Chairman and Chief Executive Officer 20 EX-27 2 ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS, INC. FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 678 0 16,805 0 0 0 741,187 78,323 696,907 8,653 302,487 0 10 251 325,665 696,907 0 25,904 0 0 26,055 0 11,203 (11,354) 0 (11,354) 0 0 0 (11,354) (.49) (.49)
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