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 MARCH 31, 2001
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 incorporation) (I.R.S. Employer Identification Number)
850 RIDGE LAKE BOULEVARD, SUITE 220,
MEMPHIS, TN 38120
(901) 767-7005
(Address of principal executive offices
including zip code and telephone number)
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 May 14, 2001 was 24,916,881.
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RFS HOTEL INVESTORS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Operations - For the three
months ended March 31, 2001 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows - For the three months ended
March 31, 2001 and 2000 (unaudited) 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 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
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RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Investment in hotel properties, net $ 629,539 $ 635,997
Cash and cash equivalents 16,653 3,681
Restricted cash 5,562 4,929
Accounts receivable 7,195 13,041
Deferred expenses, net 6,559 6,814
Other assets 4,956 9,005
Deferred income taxes 24,531
--------- ---------
Total assets $ 694,995 $ 673,467
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 24,404 $ 12,734
Borrowings on Line of Credit 93,773 50,273
Mortgage notes payable 224,508 227,158
Deferred revenue 1,277
Minority interest in Operating Partnership, 2,484 and 2,562
units issued and outstanding at March 31, 2001 and
December 31, 2000, respectively 32,373 34,848
--------- ---------
Total liabilities 376,335 325,013
--------- ---------
Series B Preferred Stock, $0.01 par value, 5,000 shares
authorized, 250 shares issued and outstanding 23,940
Commitments and contingencies
Shareholders' equity:
Series A Preferred Stock, $.01 par value, 5,000 shares
authorized, 974 shares issued and outstanding at 10
December 31, 2000
Common Stock, $.01 par value, 100,000 shares
authorized, 25,434 and 25,088 shares issued at March 31, 2001 254 251
and December 31, 2000, respectively
Additional paid-in capital 363,943 374,910
Other comprehensive income (1,702)
Treasury stock, at cost, 576 shares (8,100) (8,100)
Distributions in excess of earnings (59,675) (18,617)
--------- ---------
Total shareholders' equity 294,720 348,454
--------- ---------
Total liabilities and shareholders' equity $ 694,995 $ 673,467
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2001 2000
------------ -----------
Revenue:
Rooms $ 49,906
Food and beverage 4,757
Other operating departments 2,426
Lease revenue 1,888 $ 24,619
Deferred revenue (1,277) (13,696)
Other 204 475
-------- --------
Total hotel revenue 57,904 11,398
-------- --------
Hotel operating expenses by department:
Rooms 9,612
Food and beverage 3,508
Other operating departments 540
Undistributed operating expenses:
Property operating costs 5,791
Property taxes, insurance and other 3,245 2,834
Franchise costs 4,390
Maintenance and repair 2,582
Management fees 1,351
General and administrative 3,910
-------- --------
Total hotel operating expenses 34,929 2,834
-------- --------
Net hotel operating income 22,975 8,564
Corporate expenses:
Depreciation 7,394 6,623
Amortization of deferred expenses and unearned compensation 703 421
Interest expense 6,556 5,466
General and administrative 1,173 1,838
Hilton lease termination 64,896
Minority interest in loss of Operating Partnership (2,447) (538)
-------- --------
Loss before income taxes (55,300) (5,246)
Benefit from income taxes (24,479)
-------- --------
Net loss (30,821) (5,246)
Preferred stock dividends (780) (348)
Gain on redemption of preferred stock 5,141
-------- --------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $(26,460) $ (5,594)
======== ========
Earnings per share - basic and diluted $ (1.07) $ (0.23)
Weighted average common shares outstanding - basic and diluted 24,825 24,744
The accompanying notes are an integral part of these
consolidated financial statements.
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RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS)
(UNAUDITED)
2001 2000
---------------- ------------
Cash flows from operating activities:
Net loss $ (30,821) $ (5,246)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 8,097 7,044
Minority interest in Operating Partnership (2,477) (538)
Changes in assets and liabilities:
Accounts receivable 5,846 (2,913)
Other assets 4,049 (644)
Deferred income taxes (24,531)
Accounts payable and accrued expenses 10,995 1,878
Deferred revenue 1,277 13,696
---------------- ------------
Net cash provided (used) by operating activities (27,535) 13,277
---------------- ------------
Cash flows from investing activities:
Investment in hotel properties and hotels under development (4,804) (15,055)
Cash paid for franchise fees (78)
Restricted cash (633) (430)
Proceeds from sale of hotel properties 5,325
---------------- ------------
Net cash used by investing activities (190) (15,485)
---------------- ------------
Cash flows from financing activities:
Purchase of treasury stock (4,444)
Proceeds from borrowings 51,500 18,000
Payments on debt (10,650) (4,554)
Redemption of preferred stock (13,000)
Distributions to common and preferred shareholders (10,138) (9,992)
Distributions to limited partners (986) (986)
Redemption of units (43)
Issuance of common and preferred stock, net of $1,060 issuance costs 24,037 13
Loan fees paid (66) (1,380)
---------------- ------------
Net cash provided (used) by financing activities 40,697 (3,386)
---------------- ------------
Net increase (decrease) in cash and cash equivalents 12,972 (5,594)
Cash and cash equivalents at beginning of period 3,681 5,913
---------------- ------------
Cash and cash equivalents at end of period $ 16,653 $ 319
================ ============
Supplemental disclosure of non-cash activities:
In 2001, the Company:
i. Issued 78 shares of common stock with a value of $1.2 million in
exchange for 78 Operating Partnership units and issued 7 shares of
common stock with a value of $0.1 million for an interest in a
subsidiary partnership.
ii. Recorded a liability of $1.7 million for the fair value of the interest
rate swap at March 31, 2001.
iii. Sold a third hotel that closed on February 20, 2001 in which a loss and
related liability of $1.0 million was recorded in the financial
statements in 2000 as a non-cash transaction at December 31, 2000.
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.
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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, 2001, owned interests in
59 hotels with 8,557 rooms located in 24 states (collectively the "Hotels"). RFS
owns 90.9% 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, 2000. 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. TERMINATION OF LEASES AND RELATED AGREEMENTS WITH HILTON. Under the
REIT Modernization Act (the "RMA") that became effective January 1, 2001, the
Company is permitted to lease its hotels to wholly-owned taxable REIT
subsidiaries of the Company ("TRS Lessees"), provided that the TRS Lessees
engage a third-party management company to manage the hotels. Effective January
1, 2001, the Company terminated its operating leases, management contracts and
related ancillary agreements with Hilton Hotels Corporation ("Hilton") for
approximately $64.9 million. This transaction represents the cancellation of
certain executory contracts some of which extended through 2012 and was recorded
as an expense in the first quarter 2001. The cancellation of these agreements
entitles the TRS Lessees to retain the operating profits from the hotels, which
previously accrued to Hilton under these contracts and, in the opinion of
management, gives the Company (i) more control over the daily operations of the
hotels, (ii) the benefits from any cost efficiencies or ancillary revenues
generated at the hotels, and (iii) flexibility, in that the hotels are not
encumbered by long term leases which are difficult to amend and expensive to
terminate. All of the hotels continue to operate under the same franchise
affiliation as prior to the contract termination.
Simultaneous with the termination of the leases, management contracts
and related agreements, the TRS Lessees entered into new management contracts
with Flagstone Hospitality Management ("Flagstone"). Flagstone is a newly-formed
company jointly owned by Angie Mock, its CEO and formerly Executive Vice
President, Asset Management of the Company, and MeriStar Hotels and Resorts, the
nation's largest independent hotel management company. Effective January 1,
2001, Flagstone manages 52 of the Company's 59 hotels and the remaining seven
hotels are managed by four other third-party management companies. Only five of
the Company's hotels were operated under long term leases with third parties on
January 1, 2001.
In connection with the termination of the leases and related
agreements, the Company redeemed 973,684 shares of its Series A Preferred Stock
owned by Hilton for cash consideration of $13.0 million, which resulted in a
gain on redemption of $5.1 million that is included in net income available to
common shareholders in the first quarter 2001.
The aggregate payments to Hilton (termination of the leases, management
contracts and ancillary costs and redemption of the Preferred Stock) were
financed by the sale of two hotels in 2000 for proceeds of approximately $25
million, proceeds from the sale of a new issue of non-convertible mandatorily
redeemable preferred stock (the "Series B Preferred Stock") for $25 million
(before fees and expenses) and the balance from borrowings under the Company's
line of credit.
Summarized below are the consolidated unaudited pro forma results of
operations for the three months ended March 31, 2000, and the twelve months
ended December 31, 2000, as if the termination of the leases, management
contracts and ancillary agreements, the sales of three hotels in 2000 and early
2001, the redemption of the Company's Series A Preferred Stock and the issuance
of the Company's Series B Preferred Stock had occurred on January 1, 2000. The
pro forma information is based on the Company's consolidated results of
operations for the three months ended March 31, 2000 and the twelve months ended
December 31, 2000, and on data provided by the TRS Lessees, after giving effect
to certain pro forma adjustments. The pro forma financial information does not
purport to be indicative of results of operations that would have occurred had
the transaction occurred on the basis assumed above nor are they indicative of
results of future operations.
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RFS HOTEL INVESTORS, INC.
CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001
AND TWELVE MONTHS ENDED DECEMBER 31, 2000
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
---------------- ------------
Revenue:
Rooms $ 45,427 $ 199,934
Food and beverage 4,517 19,693
Other operating departments 2,364 9,804
Lease revenue 1,690 5,877
Deferred revenue (1,092)
Other 513 939
---------------- -----------
Total hotel revenue 53,419 236,247
---------------- -----------
Hotel operating expenses by department:
Rooms 8,783 38,195
Food and beverage 3,336 14,489
Other operating departments 550 2,287
Undistributed operating expenses:
Property operating costs 5,314 21,601
Property taxes, insurance and other 3,056 13,209
Franchise costs 3,611 16,161
Maintenance and repair 2,357 9,760
Management fees 1,308 5,735
General and administrative 3,725 15,651
---------------- -----------
Total hotel operating expenses 32,040 137,088
---------------- -----------
Net hotel operating income 21,379 99,159
Corporate expenses:
Depreciation 6,467 26,575
Amortization of deferred expenses and unearned compensation 421 1,710
Interest expense 5,819 24,427
General and administrative 1,838 6,304
Loss on sale of hotel properties and franchise termination fees 4,376
Minority interest in income of Operating Partnership 713 3,218
---------------- -----------
Income before income taxes 6,121 32,549
Provision for income taxes 594 2,679
---------------- -----------
Net income 5,527 29,870
Preferred stock dividends (780) (3,125)
---------------- -----------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 4,747 $ 26,745
================ ===========
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3. BASIC AND DILUTED EARNINGS PER SHARE. Basic earnings per share is
computed by dividing net income (loss) applicable to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net loss applicable to common
shareholders 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 months ended March 31, 2001 and 2000, common share equivalents would be
antidilutive, and accordingly, for those periods, are not assumed to be
converted in the computation of diluted earnings per share. In addition, the
Series B Preferred Stock are non-convertible and accordingly are not included in
the computation of diluted earnings per share.
4. DECLARATION OF DIVIDENDS. On April 24, 2001, the Company declared a
$0.385 dividend on each share of Common Stock outstanding to shareholders of
record on May 4, 2001. The dividend on Common Stock will be paid on May 15,
2001.
5. REVENUE RECOGNITION. In accordance with Staff Accounting Bulletin (SAB)
101, lease revenue is recognized as income after certain specific annual hurdles
have been achieved by the lessee in accordance with provisions of the Percentage
Lease agreements. SAB 101 effectively defers the recognition of revenue from its
percentage leases for the first and second quarters to the third and fourth
quarters. The lessees are in compliance with their rental obligations under the
Percentage Leases. For the three months ended March 31, 2001 and 2000, five and
fifty-nine hotels were leased to third-party lessees, respectively.
6. DEBT. On March 21, 2001, the Company entered into an interest rate swap
agreement, which effectively fixes the rate on $30 million of the Company's
floating rate debt at 6.775% through July 30, 2003. The 6.775% interest rate
consists of a fixed rate of 4.775% plus the credit spread in effect on the
Company's line of credit (currently 200 basis points). The credit spread can
vary from 150 basis points to 225 basis points, depending on the Company's
leverage ratios. The agreement effectively converts a portion of the Company's
floating rate debt to fixed rate in order to reduce the Company's risk to
increases in interest rates. Such agreements involve the exchange of fixed and
floating interest rate payments over the life of the agreement without the
exchange of the underlying principal amounts.
7. ISSUANCE OF PREFERRED STOCK. On January 2, 2001, the Company issued 250
thousand shares of non-convertible mandatorily redeemable Series B Preferred
Stock for $25 million prior to fees and expenses of approximately $1 million.
Holders of the Series B Preferred Stock are entitled to receive quarterly cash
dividends commencing March 31, 2001 at an annual rate of 12.5%. If not repaid,
beginning January 1, 2006, the dividend rate increases 2.0% per annum up to a
maximum rate of 20.5%. The Company may redeem shares of the Series B Preferred
Stock in whole but not in part, on or after December 31, 2003 at the original
price of $25 million. If the shares are redeemed before December 31, 2003, the
redemption price is at varying premiums over the original share price. The
shares are mandatorily redeemable upon a change of control, dissolution, or
winding up of the Company or on the Company's failure to qualify as a REIT.
8. INCOME TAXES. Prior to January 1, 2001, the Company, as a REIT, was not
subject to federal income taxes. Under the RMA that became effective January 1,
2001, the Company leases its hotels to wholly-owned taxable REIT subsidiaries
that are subject to federal and state income taxes. The Company accounts for
income taxes in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS
109, the Company accounts for income taxes using the asset and liability method
under which deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
The components of income tax expense (benefit) for the three months
ended March 31, 2001 are as follows:
Current:
State $ 52
Deferred:
Federal (24,531)
----------
Benefit from income taxes $ (24,479)
==========
The deferred benefit from income taxes and related deferred tax asset was
calculated using an effective tax rate of 38% applied to the loss of the TRS
Lessees, adjusted for tax timing differences related to the Hilton lease
termination transaction.
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Applicable state income taxes for the three months ended March 31, 2001
of $52 thousand relate to those states where the TRS Lessees lease hotels and
the states have yet to adopt the TRS Provisions of the RMA (Arizona, Indiana and
Texas). The Company believes that these states will ultimately adopt the RMA
retroactive to January 1, 2001 and these expenses will be added back to income
in a later quarter.
The payments to terminate the operating leases, management contracts and
ancillary agreements with Hilton represented the cancellation of executory
contracts and were expensed for financial reporting purposes. For tax purposes,
these payments will be amortized over the lives of the leases and will offset
the income of the TRS Lessees such that the income tax provision in future years
will be primarily a deferred tax provision that will reduce the $24.5 million
deferred tax asset.
The Company believes that the TRS Lessees will generate sufficient
future taxable income to realize in full this deferred tax asset. Accordingly,
no valuation allowance has been recorded at March 31, 2001. The Company
anticipates it will not pay any material federal or state income taxes.
9. LEGAL PROCEEDINGS. Three management agreements between the former managers of
three of the Company's hotels and the Company's former lessee, RFS, Inc. (a
wholly-owned subsidiary of Hilton), were terminated by RFS, Inc. in connection
with the termination of the leases, management contracts and related agreements
with Hilton effective January 1, 2001. The former manager has filed suit against
certain subsidiaries of the Company and Hilton, for among other things, wrongful
termination and seeks damages of not less than $12 million, as well as punitive
damages. The Company has agreed to indemnify and defend RFS, Inc. in this matter
as part of the Hilton lease termination agreement. The Company believes these
claims are without merit and intends to defend these claims vigorously.
10. COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
requires the disclosure of the components included in comprehensive income
(loss). For the quarter ended March 31, 2001, the Company's comprehensive loss
was $32.5 million, comprised of a net loss of $30.8 million and a loss on its
interest rate swaps of approximately $1.7 million.
11. SEGMENT INFORMATION. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires the disclosure of selected
information about operating segments. Based on the guidance provided in the
standard, the Company has determined that its business is conducted in one
operating segment.
12. CHANGE IN ACCOUNTING PRINCIPLE. Effective January 1, 2001, Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. On January 1, 2001, the
Company recorded a liability of approximately $0.8 million with a corresponding
charge to other comprehensive income representing the fair value of its interest
rate swap. On March 31, 2001, the interest rate swaps were reported at their
fair value of approximately $1.7 million and included in "Accounts payable and
accrued expenses" on the Consolidated Balance Sheets. If LIBOR interest rates
remain unchanged for the next twelve months, the Company estimates that interest
expense will be $0.8 million higher than if the Company had not entered into the
swaps. In the normal course of business, the Company is exposed to the effect of
interest rate changes. The Company limits these risks by following established
risk management policies and procedures including the use of derivatives (cash
flow hedges). Derivatives are used primarily to fix the rate on debt based on
floating-rate indices. The Company does not use derivatives for trading or
speculative purposes. Further, the Company has a policy of only entering into
contracts with major financial institutions based upon their credit ratings and
other factors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. RFS Hotel Investors, Inc. ("RFS" or the "Company") is a hotel real
estate investment trust which, at March 31, 2001, owned interests in 59 hotels
with 8,557 rooms located in 24 states (collectively the "Hotels"). RFS owns a
90.9% interest in RFS Partnership L.P. (the "Operating Partnership"). RFS, the
Operating Partnership, and their subsidiaries are herein referred to,
collectively, as the "Company".
In 2001, the Company received 46% of its Earnings Before Interest,
Taxes, Depreciation and Amortization ("EBITDA") from full service hotels, 32%
from extended stay hotels and 22% from limited service hotels.
The following summarizes additional information for the 59 hotels owned
at March 31, 2001:
EBITDA (1)
HOTEL THREE MONTHS ENDED
FRANCHISE AFFILIATION PROPERTIES ROOMS/SUITES MARCH 31, 2001
--------------------- ---------- ------------ --------------
Full Service Hotels:
Sheraton 4 864 $ 3,901
Holiday Inn 5 953 2,060
Independent 2 331 1,760
Sheraton Four Points 2 412 1,369
DoubleTree 1 221 968
Hilton 1 234 427
-- ----- --------
15 3,015 10,484
-- ----- --------
Extended Stay Hotels:
Residence Inn by Marriott 14 1,851 6,332
TownePlace Suites by
Marriott 3 285 735
Homewood Suites by
Hilton 1 83 223
-- ----- --------
18 2,219 7,290
-- ----- --------
Limited Service Hotels:
Hampton Inn (1) 17 2,112 3,577
Holiday Inn Express 5 637 1,012
Comfort Inn 3 472 356
Courtyard by Marriott 1 102 278
-- ----- --------
26 3,323 5,224
-- ----- --------
Total 59 8,557 $ 22,998
== ===== ========
(1) Does not include EBITDA of $81 from the Hampton Inn in Plano, Texas
that was sold on February 20, 2001.
At March 31, 2001, the Company leased five hotels to two third-party
lessees. Fifty-two hotels are managed by Flagstone and the remaining seven
hotels are managed by four other third party management companies.
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein may constitute forward-looking
statements. Forward-looking statements are not guarantees of future performance
and are inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy and some of which might not even be anticipated. Such
statements may be identified by words such as anticipate, believe, estimate,
expect, intend, predict, hope or similar expressions. Future events and actual
results could differ materially from those identified or contemplated by such
forward-looking statements. Important factors that could contribute to such
differences are set forth herein and in the Company's other filings with the
SEC. Except as required by the federal securities laws, the Company disclaims
any obligations or undertaking to publicly release any updates or revisions to
any forward-looking statement contained in this quarterly report on Form 10-Q to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
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RESULTS OF OPERATIONS
Comparison of the Three Months ended March 31, 2001 and Pro Forma March 31,
2000.
During 2000, our revenues primarily represented rental income from
third party lessees. As a result of the previously discussed termination of the
leases and related agreements with Hilton by our TRS, beginning January 1, 2001,
our consolidated results of operations primarily reflect hotel-level revenues
and operating costs and expenses. Accordingly, a comparison of historical
results would not be meaningful and is not included herein. In order to provide
a better understanding of the historical results, we have also presented
unaudited pro forma consolidated statements of operations for the quarter ended
March 31, 2000, adjusted to reflect the termination of the leases, management
contracts and ancillary agreements, the sales of three hotels in 2000 and early
2001, the redemption of the Company's Series A Preferred Stock and the issuance
of the Company's Series B Preferred Stock as if these transactions had occurred
on January 1, 2000. The following discussion and analysis compares the actual
results for the three months ended March 31, 2001 to the pro forma results
disclosed herein.
Revenues
Revenue increased 8.4% from $53.4 million to $57.9 million primarily
due to improved revenue per available room (RevPAR) performance from all market
segments. RevPAR at our extended stay and limited service hotel portfolios
produced the highest first quarter results ever with average increases in RevPAR
of 6.4% and 5.6%, respectively. The comparable California hotels (9 of 10 hotels
excluding the Hilton San Francisco Fisherman's Wharf which was undergoing
renovation in the first quarter of 2000) produced an average RevPAR increase of
13.3%. California hotels represented 36% of first quarter room revenue.
Excluding these California hotels, RevPAR increased 5.7% in the quarter.
The following shows hotel operating statistics for the 57 comparable
hotels for the three months ended March 31, 2001. Excluded from the 57
comparable hotels are the Hilton San Francisco Fisherman's Wharf hotel, which
underwent renovation and was converted from a Ramada Plaza in the second quarter
2000 and the Sheraton Hotel in Birmingham, Alabama which was undergoing
renovation in the first quarter 2000.
COMPARABLE HOTELS OPERATING STATISTICS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
ADR OCCUPANCY REVPAR
--- --------- -------
VARIANCE VARIANCE VARIANCE
HOTEL TYPE 2001 VS. 2000 2001 VS. 2000 2001 VS. 2000
---------- ---- -------- ---- -------- ---- --------
Full Service $ 117.32 8.9% 71.9% 0.8 pts $ 84.38 10.1%
Extended Stay 97.54 1.9% 82.6% 3.5 pts 80.62 6.4%
Limited Service 72.28 3.3% 65.7% 1.4 pts 47.49 5.6%
--------
Total $ 94.39 5.0% 72.3% 1.8 pts $ 68.25 7.6%
========
The 13 full service hotels, which excludes the Hilton San Francisco
Fisherman's Wharf and the Sheraton hotel in Birmingham, AL, produced an average
RevPAR increase of 10.1% in the quarter, which is the second consecutive quarter
of double digit RevPAR gains. The following four full service hotels located in
Silicon Valley had RevPAR increases averaging 19.2% in the quarter.
INCREASE IN
HOTEL LOCATION REVPAR
----- -------- ------
173-room Sheraton Sunnyvale, CA 25.8%
235-room Beverly Heritage Milpitas, CA 8.8%
229-room Sheraton Milpitas, CA 20.6%
214-room Sheraton Four Points Pleasanton, CA 24.3%
This is the fifth consecutive quarter of increases between 10% and 30%
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.
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In addition to the four Silicon Valley full service hotels, the
following three hotels benefited from recent renovations and/or re-brandings:
The Hilton San Francisco Fisherman's Wharf, which was converted from a
Ramada Plaza hotel in April 2000 after an $11 million renovation, operated at
occupancy of 60.8% and ADR of $166.70 in the first quarter of 2001. The 255-room
Sheraton hotel in Clayton, MO, a suburb of St. Louis, which was converted from a
Holiday Inn hotel in August 1999, produced a RevPAR gain of 18.7% through an
increase in occupancy of 14.7 points. The 205-room Sheraton hotel in Birmingham,
AL, which was renovated in the first quarter of 2000, produced a RevPAR increase
of 35.5% in the quarter achieved by an increase in occupancy of 9.0 points to
60.7% and ADR of 15.4% to $90.79.
Other full service hotels include the 94-room Hotel Rex in San
Francisco Union Square where RevPAR decreased 14.7% in the quarter driven by a
decrease in occupancy of 13.6 points resulting from a soft San Francisco market.
The five Holiday Inn hotels, which have an average of 190 rooms per hotel,
experienced a decrease in RevPAR of 2.5% for the quarter. The Holiday Inn at
Crystal Lake, IL (a suburb of Chicago) has been hit by enormous supply increases
over the last 21 months as over 400 primarily limited service rooms have opened
in the hotels primary and secondary market area. Group business remains strong
but transient business has been reduced in that market. In the first quarter of
2001, the Company spent approximately $1.6 million renovating the hotel to
better compete with this new supply. Even though the rest of the Holiday Inn
hotels are located primarily in competitive secondary markets that do not allow
us the opportunity to aggressively increase rate or occupancy, two of our
Holiday Inns, Louisville, KY and Lafayette, LA, produced RevPAR increases of
7.6% and 14.8%, respectively.
The extended stay hotels, which comprised approximately 32% of EBITDA,
produced an increase in RevPAR of 6.4% for the quarter which represents the
largest ever increase in RevPAR for the Company's portfolio of extended stay
hotels. Fourteen of the eighteen extended stay properties are Residence Inns by
Marriott which produced an increase in RevPAR of 5.3% from increases in
occupancy of 2.1 points and ADR of 2.6%. Per Marriott International's first
quarter earnings release, the Residence Inn brand first quarter RevPAR increase
of 4.7% was 3 percentage points higher than all of the other Marriott brands,
excluding Courtyard which increased 4.9%
The limited service hotels, which comprise approximately 22% of EBITDA,
experienced an increase in RevPAR of 5.6% in the quarter. Seventeen of the
twenty-six limited service hotels are Hampton Inns that produced increased
RevPAR of 9.7% from increases in occupancy of 4.0 points and ADR of 3.3%. These
increases are due to a combination of slowing limited service room supply, the
slowing economy that translated into guests trading down in price points to stay
at limited service hotels, and the benefit of the Hilton Honors program. Our
Hampton performance is similar to the nationwide Hampton performance recently
published by Hilton. Nationwide, Hampton Inns RevPAR increased 10.6% in the
first quarter far surpassing all other Hilton brands other than Hilton Garden
Inns.
Expenses
As a percentage of total hotel revenue, hotel operating expenses
increased slightly to 60.3% from 60.0% for the quarter driven by increased
energy and franchise costs. Corporate expenses, before the Hilton lease
termination and minority interest in Operating Partnership, remained flat at
27.3% and 27.2%, respectively.
Property operating costs increased $477 thousand over the prior year
due primarily to an increase in energy costs of 26%. At our ten California
properties, energy costs rose 64% over first quarter 2000 levels. The Company is
implementing several initiatives, including the use of high efficiency lighting,
to lessen the impact of energy costs going forward. These increases were
partially offset by the collection of $76 thousand of energy surcharges at the
California hotels.
Franchise costs increased $779 thousand or approximately 22% primarily
due to the brands frequency programs (specifically the Hilton Honors program
which is now accepted at our Hampton Inns). While these costs are not directly
attributable to increased revenues, the Company has seen the significant effect
it has made on RevPAR growth at our limited service hotels.
For the quarter, depreciation increased 14.3% due to the increases in
depreciable assets resulting from renovation expenditures at certain of the
hotels, including the Hilton San Francisco Fisherman's Wharf. As a percentage of
hotel revenue, depreciation increased from 12.1% to 12.8%. The Company is now
substantially finished with the renovations and expects depreciation to level
off. The Company expects future capital expenditures to approximate 5% to 6% of
hotel revenue.
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Corporate general and administrative expenses decreased $0.7 million to
2.0% from 3.4% of hotel revenue in the quarter. In the first quarter 2000, the
Company wrote off development and due diligence costs, for potential projects
that the Company decided not to pursue, of $246,000 and incurred severance
expense of approximately $300,000 associated with a former employee.
Interest expense increased $0.8 million over the prior year's quarter
due to a weighted average increase in borrowings for the quarter of
approximately $36 million. Borrowings increased primarily due to the funding of
the Hilton lease termination transaction as well as renovation costs.
The Hilton lease termination of $64.9 million represents the
expenditures incurred in connection with the termination of the leases,
management contracts and related ancillary agreements with Hilton. For
accounting purposes, this transaction represented the cancellation of executory
contracts and was required to be expensed as incurred.
For income tax purposes, the $64.9 million Hilton lease termination
expenses are deductible through 2012. For financial reporting purposes, these
amounts were expensed on January 1, 2001. As such a deferred tax asset and
income tax benefit were recorded using an effective tax rate of 38%. Also
included in the income tax benefit is a provision of $52 thousand, which
represents state income taxes for those states where the TRS Lessees lease
hotels, but the states have yet to adopt the TRS Provisions of the RMA (Arizona,
Indiana and Texas). The Company believes that these states will ultimately adopt
the RMA retroactive to January 1, 2001 and these expenses will be added back to
income in a later quarter.
Net Income
Net income (loss) applicable to common shareholders for the first
quarter 2001 and 2000 was $(26.5) million and $4.7 million, respectively.
Included in the net loss applicable to common shareholders for the first quarter
2001 is a gain of $5.1 million recognized on the redemption of the Series A
Preferred Stock from Hilton.
FUNDS FROM OPERATIONS AND EBITDA
The Company considers Recurring Funds From Operations ("Recurring FFO")
and EBITDA to be appropriate measures of a REIT's performance that 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 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. Recurring FFO represents FFO, as defined by
NAREIT, adjusted for significant non-recurring items. However, Recurring FFO and
EBITDA as presented may not be comparable to amounts calculated by other
companies. Recurring 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.
The following details the computation of Recurring FFO for the three months
ended March 31 (in thousands):
2001 2000
---- ----
Net income (loss) $(30,821) $ (5,246)
Minority interest in Operating Partnership (2,447) (538)
Deferred revenue 1,277 13,696
Depreciation 7,394 6,623
Hilton lease termination 64,896
Deferred income tax provision (24,531)
Preferred stock dividends (780) (348)
-------- --------
Recurring FFO $ 14,988 $ 14,187
======== ========
Weighted average common shares,
partnership units and potential
dilutive shares outstanding 27,468 27,305
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The following details the computation of EBITDA for the three months ended
March 31 (in thousands):
2001 2000
---- ----
Recurring FFO $14,988 $14,187
Interest expense 6,556 5,466
Amortization 703 421
Current income taxes 52
Preferred stock dividends 780 348
------- -------
EBITDA $23,079 $20,422
======= =======
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. For the three months ended March
31, 2001, cash flow used by operating activities was $27.5 million. The Company
believes that its cash provided by operating activities will be adequate to meet
some of its liquidity needs. The Company currently expects to fund its strategic
objectives and any other liquidity needs by borrowing on its Line of Credit,
exchanging equity for hotel properties or possibly accessing the capital markets
if market conditions permit. At March 31, 2001, the Company had $16.7 million of
cash and cash equivalents and had borrowed $93.8 million under its $140.0
million Line of Credit.
The following details the Company's debt outstanding at March 31, 2001
(dollar amounts in thousands):
COLLATERAL
------------------------------------
# OF NET BOOK VALUE AT
BALANCE INTEREST RATE MATURITY HOTELS MARCH 31, 2001
------- ------------- -------- ------ --------------
Line of Credit $93,773 LIBOR + 200bp Fixed/Variable July 2003 23 $201,459
Mortgage 36,048 6.83% Fixed August 2008 15 144,649
Mortgage 25,000 7.30% Fixed November 2011 (a) (a)
Mortgage 93,100 7.83% Fixed December 2008 10 129,536
Mortgage 18,842 8.22% Fixed November 2007 1 45,867
Mortgage 51,877 8.00% Fixed August 2010 8 87,211
-------- --------
$318,281 $608,722
======== ========
(a) This mortgage is also collateralized by the fifteen properties pledged
against the previous mortgage in the table.
The interest rate on the Line of Credit ranges from 150 basis points to
225 basis points above LIBOR, depending on the Company's ratio of total debt to
its investment in hotel properties (as defined). The interest rate was
approximately 8.2% at March 31, 2001. The Line of Credit is collateralized by
first priority mortgages on 23 hotels that restrict the transfer, pledge or
other hypothecation of the 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 and interest
coverage ratios, and total indebtedness and liability limitations. The Company
was in compliance with these covenants at March 31, 2001.
On March 21, 2001, the Company entered into an interest rate swap
agreement, which effectively fixes the rate on $30 million of the Company's
floating rate debt at 6.775% through July 20, 2003. The 6.775% interest rate
consists of a fixed rate of 4.775% plus the credit spread in effect on the
Company's line of credit (currently 200 basis points). The credit spread can
vary from 150 basis points to 225 basis points, depending on the Company's
leverage ratios. The agreement effectively converts a portion of the Company's
floating rate debt to fixed rate in order to reduce the Company's risk to
increases in interest rates. Such agreements involve the exchange of fixed and
floating interest rate payments over the life of the agreement without the
exchange of the underlying principal amounts.
In addition, the Company participates in a second interest rate swap
agreement for a notional amount of $40 million maturing in July 2003. Under the
interest rate swap agreement, the Company receives payments based on the
one-month LIBOR rate of 5.2925% at March 31, 2001 and pays a fixed rate of
6.535%.
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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. At March 31, 2001, approximately 93% of RFS' debt is
fixed at an average interest rate of 7.7%.
Future scheduled principal payments of debt obligations at March 31,
2001 are as follows (in thousands):
AMOUNT
--------
2001 $4,573
2002 6,547
2003 100,817
2004 7,547
2005 8,152
Thereafter 190,645
--------
$318,281
========
On January 2, 2001, the Company issued 250 thousand shares of
non-convertible mandatorily redeemable Series B Preferred Stock for $25 million
prior to fees and expenses of approximately $1 million. Holders of the Series B
Preferred Stock are entitled to receive quarterly cash dividends commencing
March 31, 2001 at an annual rate of 12.5%. If not repaid, beginning January 1,
2006, the dividend rate increases 2.0% per annum up to a maximum rate of 20.5%.
The Company may redeem shares of the Series B Preferred Stock in whole but not
in part, on or after December 31, 2003 at the stated value of $25 million. If
the shares are redeemed before December 31, 2003, the redemption price is at
varying premiums over the original share price. The shares are mandatorily
redeemable upon a change of control, dissolution, or winding up of the Company
or on the Company's failure to qualify as a REIT.
Certain significant credit statistics at March 31, 2001 are as follows:
- Trailing twelve month interest coverage ratio of 3.8x
- Total debt to EBITDA of 3.3x
- Weighted average maturity of fixed rate debt of 8.3 years
- Fixed interest rate debt equal to 93% of total debt
- Debt equal to 41% of investment in hotel properties, at cost
(before depreciation and after capital expenditures and includes
the costs associated with the Hilton lease termination of
approximately $60 million)
During the three months ended March 31, 2001, the Company spent $4.8
million on capital improvements to its hotels. The Company expects to spend
approximately $19 million on capital improvements to its hotels in 2001, which
the Operating Partnership is expected to fund from cash generated from
operations and borrowings under the Line of Credit.
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 45% of the
Company's investment in hotel properties, at cost, (as defined). The Board of
Directors may change the debt policy at any time without shareholder approval.
The Company intends to fund cash distributions to shareholders
principally out of cash generated from operations. The Company may incur, or
cause the Operating 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 90%
(effective January 1, 2001) of its taxable income to the extent that working
capital and cash flow from the Company's investments are insufficient to make
such distributions.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates daily to reflect the effects of inflation. However, competitive pressures
may limit the ability of the lessees and management companies to raise room
rates.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to certain financial market risks, one 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 $36 thousand, based on balances outstanding during
the quarter ended March 31, 2001.
The Company's primary market risk exposure is to changes in interest
rate as a result of its Line of Credit and long-term debt. At March 31, 2001,
the Company had outstanding total indebtedness of approximately $318.3 million.
The Company's interest rate risk objective is to limit the impact of interest
rate fluctuations on earnings and cash flows and to lower it's overall borrowing
costs. To achieve this objective, the Company manages its exposure to
fluctuations in market interest rates for its borrowings through the use of
fixed rate debt instruments to the extent that reasonably favorable rates are
obtainable with such arrangements and derivative financial instruments such as
interest rate swaps, to effectively lock the interest rate on a portion of its
variable debt. The Company does not enter into derivative or interest rate
transactions for speculative purposes. Approximately 93% of the Company's
outstanding debt was subject to fixed rates with a weighted average interest
rate of 7.7% at March 31, 2001. On March 21, 2001, the Company entered into an
interest rate swap agreement for a notional amount of $30.0 million that
effectively locked an interest rate (before the spread of LIBOR) of 4.775%
through an interest rate swap agreement. The Company participates in a second
interest rate swap agreement for a notional amount of $40.0 million that
effectively locked an interest rate (before the spread of LIBOR) of 6.535%. The
Company regularly reviews interest rate exposure on its outstanding borrowings
in an effort to minimize the risk of interest rate fluctuations.
The following table provides information about the Company's
instruments that are sensitive to changes in interest rates. For debt
obligations outstanding at March 31, 2001, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates.
Weighted average variable rates are based on implied forward rates in the yield
curve as of March 31, 2001. For the interest rate swap, the table presents
notional amounts and weighted average interest rates by expected contractual
maturity dates. The fair value of the Company's fixed rate debt indicates the
estimated principal amount of debt having similar debt service requirements,
which could have been borrowed by the Company at March 31, 2001. The rate
assumed in the fair value calculation of fixed rate debt is equal to 6.7%, which
consists of the 7-year treasury of 4.7% as of March 31, 2001, plus 200 basis
points.
EXPECTED PRINCIPAL CASH FLOWS
(IN THOUSANDS)
--------- -------- ---------- --------- --------- ------------ ----------- ------------
Fair
Value
Liabilities 2001 2002 2003 2004 2005 Thereafter Total Total
---- ---- ---- ---- ---- ---------- ----- -----
Long-Term Debt:
Fixed Rate $4,573 $6,547 $77,044 $7,547 $8,152 $190,645 $294,508 $305,961
Average Interest Rate 7.71% 7.71% 7.71% 7.68% 7.68% 7.68%
Variable Rate -- $23,773 -- -- -- $23,773 $23,773
Average Interest Rate 8.09%
Interest Rate Derivatives:
Variable to Fixed $70,000 $70,000 $(1,702)
Average Pay Rate (1) 5.78% 5.78% 5.78%
Average Receive Rate (1) 4.81% 4.74% 5.08%
(1) Before the spread on LIBOR of 200 basis points.
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The table incorporates only those exposures that exist as of March 31,
2001 and does not consider exposures or positions that could arise after that
date. In addition, because firm commitments are not represented in the table
above, the information presented therein has limited predictive value. As a
result, the Company's ultimate realized gain or loss with respect to interest
rate fluctuations would depend on the exposures that arise during future
periods, prevailing interest rates, and the Company's strategies at that time.
There is inherent rollover risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or predictable
because of the variability of future interest rates and the Company's financing
requirements.
PART II - OTHER INFORMATION
ITEM 6B. REPORTS ON FORM 8-K AND 8-K/A
- January 16, 2001 - Report of the termination of the leases, management
contracts and ancillary agreements with Hilton for approximately $60
million in cash effective January 1, 2001 and to report that in
connection with the termination, the Company purchased 973,684 shares
of the Company's convertible preferred stock (Series A Preferred Stock)
owned by Hilton for approximately $13 million.
- January 31, 2001 - Report of the issuance of a press release announcing
that the Company's operating results for the fourth quarter and the
year ended December 31, 2000 substantially exceeded analyst's
expectations and to announce the characterization of the Company's 2000
dividends on its common shares for income tax purposes.
- March 20, 2001 - Report on Form 8-K/A to amend the Form 8-K dated
January 16, 2001 to present the audited financial statements of the
acquired business, RFS, Inc. (a wholly owned subsidiary of Hilton), and
to present the unaudited pro forma financial information of the Company
as if the terminations of the leases, management contracts and
ancillary agreements, the sales of three hotels in 2000 and early 2001,
the redemption of the Company's Series A Preferred Stock and the
issuance of the Company's Series B Preferred Stock had occurred on
January 1, 2000.
- May 3, 2001 - Report of the issuance of a press release announcing that
the Company's operating results for the first quarter ended March 31,
2001 exceeded analysts expectations and represented the best first
quarter operating results in the Company's history.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RFS HOTEL INVESTORS, INC.
May 14, 2001 /s/ KEVIN M. LUEBBERS
- ------------ -----------------------------------------
Date Kevin M. Luebbers, Secretary and Treasurer
(Principal Financial and Accounting
Officer)
17