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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 34-0-22164
RFS HOTEL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1534743
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
850 Ridge Lake Boulevard, Suite 220, Memphis, TN 38120 (901) 767-7005
(Address of Principal Executive Offices) (Registrant's Telephone Number
(Zip Code) Including Area Code)
n/a
(Former address, if changed since last report)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days.
X Yes No
The number of shares of Registrant's Common Stock, $.01 par value,
outstanding on June 30, 1998 was 24,876,946.
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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, 1998 and
December 31, 1997 3
Consolidated Statements of Income - For the three and the
six months ended June 30, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows - For the three and
the six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
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
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RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(UNAUDITED)
ASSETS
Investment in Hotel Properties, net $ 638,400 $ 573,826
Hotels under development 17,179 15,739
Cash and cash equivalents 3,848 4,131
Restricted cash 3,824 2,514
Accounts receivable-Lessees 15,040 9,887
Deferred expenses, net 3,565 4,061
Prepaid and other assets 8,664 6,765
Escrow deposits 85 205
--------- ---------
$ 690,605 $ 617,128
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 4,861 $ 6,423
Accrued real estate taxes 4,128 3,491
Borrowings on line of credit 176,343 123,843
Bonds 70,378 71,892
Other debt 25,989 13,174
Deferred revenue 25,824
Minority interest 33,954 36,235
--------- ---------
341,477 255,058
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 973,684 shares outstanding 10 10
Common Stock, $.01 par value, 100,000,000 shares
authorized, 24,986,946 and 24,389,000 shares outstanding 250 244
Paid-in capital 373,307 363,066
Treasury stock, 110,000 shares (2,012) 0
Undistributed income (21,947) 337
Unearned directors' and officers' compensation (480) (1,587)
--------- ---------
Total shareholders' equity 349,128 362,070
--------- ---------
$690,605 $ 617,128
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the For the For the For the
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
06/30/98 06/30/97 06/30/98 06/30/97
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Revenue:
Leases $ 11,922 $ 21,736 $ 21,800 $ 39,599
Other 152 11 238 55
-------- -------- --------- --------
Total revenue 12,074 21,747 22,038 39,654
-------- -------- --------- --------
Expenses:
Real estate taxes and property and
casualty insurance 2,480 1,985 4,968 3,932
Depreciation 6,147 4,284 10,065 8,192
Amortization of franchise fees and 167 222 386 443
unearned compensation
Compensation 447 606 1,041 1,227
Franchise taxes 45 75 00 150
General and administrative 571 392 1,377 916
Gain on sale of a hotel property (523)
Amortization of loan costs 273 266 516 410
Interest expense, net 3,962 2,548 7,510 4,486
-------- -------- -------- --------
Total expenses 13,082 10,378 25,430 19,756
-------- -------- -------- --------
Income (loss) before minority interest (1,008) 11,369 (3,392) 19,898
Minority interest 94 (1,061) 317 (1,896)
-------- -------- -------- --------
Net income (loss) (914) 10,308 (3,075) 18,002
Preferred stock dividends (352) (352) (700) (700)
-------- -------- -------- --------
Net income (loss) applicable to common
shareholders $ (1,266) $ 9,956 $ (3,775) $ 17,302
======== ======== ======== ========
Basic earnings (loss) per share (0.05) 0.41 (0.15) 0.71
Diluted earnings (loss) per share (0.05) 0.40 (0.15) 0.71
Weighted average common shares outstanding 24,877 24,385 24,630 24,385
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
(in thousands, except share and per share data)
For the Six For the Six
Months Months
June 30, June 30,
1998 1997
-------- ---------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) ($ 3,075) $ 18,002
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,967 9,045
Income allocated to minority interest (317) 1,896
Gain on sale of a hotel property (523)
Write-off of old loan costs 129
Changes in assets and liabilities:
Accounts receivable-Lessees (5,153) (6,601)
Prepaids and other assets (3,209) (507)
Accounts payable and other liabilities (925) 1,057
Deferred revenue 25,824
-------- ---------
Net cash provided by operating activities 23,718 22,792
-------- ---------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (60,708) (111,976)
Proceeds from sale of hotel property 4,440
Escrow deposits and prepayments under
purchase agreements
Refund on franchise agreements 8
-------- ---------
Net cash used by investing activities (50,208) (11 1, 968)
-------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 11,040 72
Purchase of treasury stock (2,012)
Distributions to common and preferred shareholders (19,209) (18,266)
Distributions to limited partners (1,927) (1,850)
Borrowings on revolving credit agreement 52,500 58,000
Redemption of limited partnership units (37)
Payments on debt and bonds (7,868) (2,037)
Loan fees paid (220) (310)
-------- ---------
Net cash provided by financing activities 32,267 35,609
-------- ---------
Net increase (decrease) in cash and cash equivalents (283) (53,567)
Cash and cash equivalents at beginning of period 4,131
-------- ---------
Cash and cash equivalents at end of period $ 3,848 $ 4,368
======== =========
Supplemental disclosures of non-cash investing and financing activities:
In 1998, the Company, through a partnership, assumed $19,169 of debt in
connection with the purchase of a hotel.
In 1998, the Company applied deposits of $120 towards the purchase of land.
In 1998, due to the resignation of an officer, the Company cancelled 45,000
shares of restricted common stock which had not vested.
In 1998, the Partnership sold a hotel for which the purchaser paid $2,940
in cash and signed a note to the Company for $1,500.
In 1997, the Partnership issued 2,244,934 of limited partnership units
valued at $38,200 in accordance with the purchase of four hotels.
In 1997, the Company recorded a $6,356 allocation to paid-in capital from
minority interest.
In 1997, the Partnership applied deposits of $6,064 towards the purchase of
hotels.
The accompanying notes are an integral
part of these consolidated financial statements.
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RFS HOTEL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE, UNIT AND PER SHARE DATA)
1. ORGANIZATION AND PRESENTATION. RFS Hotel Investors, Inc. (the "Company") was
incorporated in Tennessee on June 1, 1993, and is a self-administered real
estate investment trust ("REIT"). The Company contributed substantially all of
the net proceeds of its public offerings to RFS Partnership, L.P. (the
"Partnership") in exchange for the sole general partnership interest in the
Partnership. The Partnership began operations in August 1993. At June 30, 1998,
the Company owned approximately 90.6% of the Partnership. RFS Managers, Inc.
("Managers") a wholly-owned subsidiary of the Company, was formed effective
January 1, 1995 to provide management services to the Company. RFS Financing
Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote, single
purpose Tennessee limited partnership, was formed to issue commercial mortgage
bonds (the "Bonds"). During 1997, Ridge Lake General Partner, Inc. ("RLGP") was
formed to purchase a hotel. RLGP purchased a second hotel in May 1998. The
Company owns 95% of RLGP. In June 1998, the Company purchased a 75% interest in
Wharf Associates Partnership ("Wharf"). Wharf and RLGP are consolidated in these
consolidated financial statements.
The Company, through its subsidiary partnerships, acquires or develops
and owns hotel properties which are leased to third parties.
These unaudited consolidated financial statements include the accounts
of the Company, and its subsidiaries, and have been prepared pursuant to the
Securities and Exchange Commission ("SEC") rules and regulations and should be
read in conjunction with the financial statements and notes thereto of the
Company included in the Company's 1997 Annual Report on Form 10-K. The following
notes to the consolidated financial statements highlight significant changes to
notes included in the Form 10-K and present interim disclosures required by the
SEC. The accompanying consolidated financial statements reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
2. CHANGE IN ACCOUNTING PRINCIPLE. In May 1998, the Financial Accounting
Standards Board's Emerging Issues Task Force issued EITF number 98-9,
"Accounting for Contingent Rent in Interim Financial Periods" (EITF 98-9). EITF
98-9 provides that a lessor shall defer recognition of contingent rental income
in interim periods until specified targets that trigger the contingent income
are met. In July 1998 the Task Force issued transition guidance stating that the
consensus could be applied on a prospective basis or in a manner similar to a
change in accounting principle effective April 1, 1998. The Company has reviewed
the terms of its percentage leases and has determined that the provisions of
EITF 98-9 will impact the Company's current revenue recognition on an interim
basis, but will have no impact on the Company's annual percentage lease revenue
or interim cash flow from its third party Lessees. The Company adopted the
provisions of EITF 98-9 and has applied the change as a change in accounting
principle and thereby has restated the first quarter results of 1998 and has
recorded the results of
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the second quarter in accordance with the new pronouncement. The effect of the
change on the three months ended March 31, 1998 was to decrease lease revenues
by $12,145, and therefore net income applicable to common shareholders by
$10,986 or $0.45 per share-basic and diluted to $(0.10) per share-basic and
diluted. The effect on the three months ended June 30, 1998 was to decrease
lease revenues by $13,679 and therefore net income applicable to common
shareholders by $12,406 or $0.50 per share-basic and $0.49 per share diluted to
$(0.05) per share-basic and diluted. The pro forma per share amounts below
reflect the effect on prior periods had the new method been in effect. The 1998
amounts are presented for comparative purposes only. The 1997 periods have not
been restated.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
1998 1997 1998 1997
--------- --------- --------- ----------
Pro forma amounts:
Net income (loss) applicable to common
shareholders $(1,266) $(1,339) $(3,775) $(2,384)
Net income (loss) per common
share-basic and diluted (0.05) (0.05) (0.15) (0.09)
Amounts actually reported:
Net income (loss) applicable to common
shareholders (1,266) 9,956 (3,775) 17,302
Net income (loss) per common
share-basic (0.05) 0.41 (0.15) 0.71
-diluted (0.05) 0.40 (0.15) 0.71
3. DECLARATION OF DIVIDEND. On July 29, 1998, the Company declared a $.375
dividend on each share of Common Stock outstanding to shareholders of record on
August 10, 1998 and a $.36 dividend on each share of Series A Preferred Stock
outstanding. The dividends will be paid on August 17, 1998.
4. ACQUISITIONS OF REAL ESTATE. In April 1998, the Partnership completed
development of an 83-suite Homewood Suites in Chandler, AZ. Development costs
were approximately $6.6 million and were paid with cash and borrowings from the
Line of Credit. This property is not leased but is operated by a third party
pursuant to a management contract.
In April 1998, the Partnership acquired The Hotel Rex, a 94-room hotel,
in San Francisco, CA for a purchase price of approximately $15 million. The
purchase price was paid with funds from the sale of 547,946 shares of common
stock in March 1998 and borrowings under the Line
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of Credit. This property is not leased but is operated by a third party pursuant
to a management contract.
In June 1998, the Company, through a subsidiary, purchased a 75%
interest in Wharf, which owns a 234-room full service hotel in San Francisco, CA
for approximately $34 million, including the assumption of $19.2 in debt.
5. SUBSEQUENT EVENTS. In July 1998, the Partnership sold two hotels to third
parties for an aggregate sales prices of $8.9 million. The Company will realize
a gain of $712 as a result of these sales. The sale price was paid with cash. In
August 1998, the Partnership sold a hotel for a sales price of $4.7 million. The
Purchaser paid cash of $3.5 million and signed a note to the Company for $1.2
million.
6. CALCULATION OF EARNINGS PER SHARE. Calculations of basic and diluted earnings
per share are as follows:
For the Three Months For the Six Months
Ended Ended
6/30/98 6/30/97 6/30/98 6/30/97
-------- -------- -------- --------
Basic EPS:
Net income $ (914) $ 10,308 $ 3,075 $ 18,002
Less dividends declared on preferred stock (352) (352) (700) (700)
-------- -------- -------- --------
$ (1,266) $ 9,956 $ (3,775) $ 17,302
======== ======== ======== ========
Weighted average common shares outstanding 24,877 24,385 24,630 24,385
======== ======== ======== ========
Basic Earnings Per Share $ (0.05) $0. 41 $ (0.15) $ (0.71)
Diluted EPS:
Net income $ (914) $ 10,308 $ (3,075) $ 18,002
Less dividends declared on preferred stock (352) (700)
-------- -------- -------- --------
$ (1,266) $ 10,308 $ (3,775) $ 18,002
======== ======== ======== ========
Weighted average common shares outstanding 24,877 24,385 24,630 24,385
Preferred shares outstanding 974 974
Common stock equivalents 140 125
-------- -------- -------- --------
Weighted average common shares and
dilutive common stock equivalents
outstanding 24,877 25,499 24,630 25,484
======== ======== ======== ========
Diluted earnings per share $ (0.05) $ 0.40 $ (0.15) $ 0.71
======== ======== ======== ========
The preferred shares and common stock equivalents are anti-dilutive for the
three month and six month periods ended June 30, 1998 and are thus not
considered in the calculation of diluted earnings per share.
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7. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro
forma condensed statements of income for the six months ended June 30, 1998 and
1997 of the Company are presented as if the 64 hotel properties owned at June
30, 1998 and the consummation of the Company's equity offerings and the
application of the net proceeds therefrom had occurred on or prior to January 1,
1997, and the hotels had been leased to the Lessees pursuant to our percentage
leases. As discussed in Note 2, the Company adopted the provisions of EITF 98-9
which significantly impacted the Company's revenue recognition on an interim
basis. The pro forma information below reflects the effect of EITF 98-9 as if
the method had been in effect on January 1, 1997 excluding properties under
development which are included on the date opened. These unaudited pro forma
condensed statements of income are not necessarily indicative of what actual
results of operations of the Company would have been assuming such transactions
had been completed as of January 1, 1997, nor does it purport to represent the
results of operations for future periods.
1998 1997
-------- --------
Operating Data:
Total revenue $ 23,680 22,860
Real estate taxes and casualty insurance 5,430 4,346
Depreciation and amortization 11,496 11,496
Compensation 386 443
Franchise taxes 90 150
General and administrative 1,377 916
Gain on sale of a hotel property (523)
Interest expense 8,647 8,949
-------- --------
Income before allocation to minority
interest (3,223) (3,440)
Less minority interest 302 322
-------- --------
Net income $ (2,921) $ (3,118)
======== ========
Diluted earnings per share $ (0.12) $ (0.12)
Weighted average common shares
and common stock equivalents 25,051 25,051
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import. Such forward-looking statements relate to future events and
the future financial performance of the Company, and involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from the
results or achievements expressed or implied by such forward-looking statements.
The Company is not obligated to update any such factors or to reflect the impact
of actual future events or developments on such forward-looking statements.
BACKGROUND
The Company commenced operations in August 1993 upon completion of its initial
public offering and the simultaneous acquisition of seven hotels with 1,118
rooms. The following chart summarizes information regarding the 64 hotels (the
"Hotels") owned at June 30, 1998:
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
Full Service Hotels:
Holiday Inn ........................ 6 ......................... 1,208
Sheraton ........................... 5 ......................... 1,018
DoubleTree.......................... 1 ......................... 220
Ramada Plaza........................ 1 ......................... 234
Independent......................... 2 ......................... 290
------ -----
Sub-total................. 15 ......................... 2,970
------ -----
Extended Stay Hotels:
Residence Inn...................... 14 ......................... 1,815
Homewood Suites.................... 1 ......................... 83
Hawthorn Suites.................... 1 ......................... 280
------ -----
Sub-total................. 16 ......................... 2,178
------ -----
Limited Service Hotels:
Hampton Inn........................ 20 ......................... 2,478
Courtyard by Marriott.............. 1 ......................... 102
Comfort Inn........................ 6 ......................... 786
Holiday Inn Express................ 6 ......................... 737
------ -----
Sub-total................. 33 ......................... 4,103
------ -----
Total..................... 64 ......................... 9,251
====== =====
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The following chart summarizes ownership history for the periods presented:
1998 1997
---- ----
Hotels owned at beginning of year 60 53
Acquisitions and developed Hotels placed into service 5 8
Sales of Hotels (1)
---- ----
Hotels owned at end of period 64 61
==== ====
The Hotels are located in 24 states. Management believes it is prudent
to diversify geographically and among franchise brands.
The Partnership leases 61 of the Hotels to third parties (collectively,
the "Lessees") pursuant to leases (the "Percentage Leases") which provide for
annual rent equal to the greater of (i) fixed base rent, or (ii) rent payments
based on percentages of the Hotels' revenues ("Percentage Rent"). Base rent is
payable monthly. Percentage rent is payable quarterly. The Lessees operate 58
Hotels. Four Hotels are operated by other third parties, (the "Operators"),
pursuant to management agreements between the Lessees and the Operators. Two
hotels are operated by a subsidiary. One of the Lessees has a right of first
refusal, subject to certain exceptions, to lease hotels acquired by the
Partnership, through February 27, 2006.
CHANGE IN ACCOUNTING PRINCIPLE
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim
Financial Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger the contingent income are met. In July 1998 the Task Force
issued transitional guidance stating that the consensus could be applied on a
prospective basis or in a manner similar to a change in accounting principle
effective April 1, 1998. The Company has reviewed the terms of its percentage
leases and has determined that the provisions of EITF 98-9 will impact the
Company's current revenue recognition on an interim basis, but will have no
impact on the Company's annual percentage lease revenue or interim cash flow
from its third party Lessees. The Company has adopted the provisions of EITF
98-9 and has elected to restate the first quarter results of 1998 and recorded
the results of the second quarter in accordance with the new pronouncement. The
effect of the change on the three months ended March 31, 1998 was to decrease
lease revenues and therefore net income applicable to common shareholders by
$0.45 per share-basic and diluted to $(0.10) per share-basic and diluted. The
effect of the change on the three months ended June 30, 1998 was to decrease net
income applicable to common shareholders $0.50 per share-basic and $0.49 per
share diluted.
The Company's percentage leases provide for a greater of (i) annual fixed base
rent or (ii) Percentage rent to be remitted to the Company annually. The leases
contain annual room revenue thresholds used to calculate two tiers of percentage
rent which are applied to annualized room revenues on a quarterly basis to
determine quarterly Lessee Percentage Rent payments. The provisions of EITF 98-9
call for straight-line recognition of the annual base rent throughout the
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year and for the deferral of any additional lease amounts collected or due from
the Lessees until such amounts exceed the annual fixed base rent. This will
generally result in base rent being recognized in the first and second quarters
and percentage rents already collected or due from the Lessee being deferred and
then recognized in the third and fourth quarters due to the structure of the
Company's percentage leases and the seasonality of the hotel operations.
Historically, the Company has recorded lease revenue in interim periods on a
basis similar to that used to determine quarterly Lessee Percentage Rent
payments, resulting in the second and third quarters being the strongest
quarters.
At June 30, 1998 deferred revenue of $25,824 represents Percentage Rent
collected or due from the Lessees under the leases which the Company expects to
recognize as lease revenue in the third and fourth quarters of 1998. The
Company's quarterly distributions are based on Quarterly Percentage rent
calculations collected as opposed to percentage lease revenue recognized.
Management expects its hotel portfolio to yield "Percentage Rent" annually,
based on its cash flow analyses of the hotels prior to their acquisition and
based on the negotiation of the related leases.
RESULTS OF OPERATIONS
Comparison of the Three Months ended June 30, 1998 to 1997 and the Six Months
Ended June 30, 1998 to 1997.
The decrease in Lease revenue for the three months ended June 30, 1998 from the
comparable period in 1997 is attributable to the change in the Company's revenue
recognition as discussed above. Included in deferred revenue at June 30, 1998 is
$25.8 million of second quarter Percentage Rents collected or due from the
Lessee which Management expects the Company to recognize as revenue in the third
and fourth quarters of 1998. After considering such amounts included in deferred
revenue in June 30, 1998, Percentage Rents collected or due from the Lessee
under the terms of the leases during the three months ended June 30, 1998 were
approximately $25.6 million compared to $21.7 million for the three months ended
June 30, 1997 and $47.6 million compared to $39.6 million for the six months
ended June 30, 1997. The increases are the result of (i) an increased number of
hotels being owned by the Partnership during the 1998 periods and (ii) increases
in revenue per available room ("REVPAR") at the hotels owned throughout both
periods.
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The following table shows statistical data regarding the Hotels on an
actual and a pro forma basis. The pro forma assumes 47 of the 64 hotels owned at
June 30, 1998 were owned by the Partnership throughout both periods; it excludes
six hotels which were opened since January 1997 and two expanded hotels where
the room additions were not open for all of both periods presented, three hotels
which were undergoing major renovations and six hotels which the Company intends
to sell:
for the Three Months Ended June 30,
---------------------------------------------------------------------------
Actual Pro Forma
----------------------------------- -----------------------------------
% Increase % Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
------ ------ --------- ------ ------ -----------
Occupancy 77.2% 78.3% (1.4) 79.3% 80.4% (1.5)
ADR $82.65 $75.19 9.9 $85.02 $79.70 6.7
RevPAR $63.79 $58.87 8.4 $67.38 $64.11 5.1
for the Six Months Ended June 30,
---------------------------------------------------------------------------
Actual Pro Forma
----------------------------------- -----------------------------------
% Increase % Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
------ ------ --------- ------ ------ -----------
Occupancy 74.6% 75.1% (0.8) 76.3% 76.8% (0.7)
ADR $82.04 $74.57 10.0 $84.10 $78.83 6.7
RevPAR $61.17 $56.02 9.2 $64.15 $60.54 5.9
Increases in real estate taxes and property and casualty insurance in
1998 over 1997 are due to the increased number of hotels owned during 1998,
increased real estate tax assessments, as well as an estimate for increased real
estate tax assessments at certain hotels.
Increases in depreciation in 1998 over 1997 are due to the increased
number of hotels owned during 1998 and capitalized improvements at certain of
the Hotels.
Increases in general and administrative expenses for the three months
ended June 30, 1998 over 1997 are due to increased professional fees. Increases
in general and administrative expenses for the six months ended June 30, 1998
over 1997 are due to the write-off of costs incurred in considering formation of
a new REIT, Lodging Trust USA, which transaction was not completed and increased
professional fees.
The gain on the sale of a hotel property relates to the sale of the
Executive Inn in Tupelo, MS which was sold in February 1998.
Increases in amortization of loan costs in 1998 over 1997 are due to
costs associated with the assumption of the industrial development bond
financing for the Birmingham Sheraton Hotel and the amortization of increased
commitment fees on the Line of Credit.
Increases in interest expense in 1998 over 1997 are primarily due to
increased borrowings on the Line of Credit.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has a bank line of credit (the "Line of Credit") for $185
million. Borrowings under the Line of Credit bear interest at LIBOR plus 157.5
basis points at June 30, 1998, The Line of Credit is secured by first priority
mortgages on 28 hotels and agreements restricting the transfer, pledge or other
hypothecation of 9 hotels (collectively, the "Collateral Pool"). The Line of
Credit contains various covenants including the maintenance of a minimum net
worth, minimum debt coverage and interest coverage ratios, total indebtedness
and total liabilities limitations and borrowing base to value limitations. The
Company was in compliance with these covenants at June 30, 1998. The Company had
borrowed $176.3 million on the Line of Credit at June 30, 1998. The Line of
Credit is due July 30, 2000.
In November 1996, the Company, through a subsidiary, issued $75 million
of commercial mortgage bonds, (the "Bonds") series 1996-1 as follows:
Initial
Class Principal Amount Rate Stated Maturity
- ----- ---------------- ---- ---------------
Class A $50 Million 6.83% August 20, 2008
Class B $25 Million 7.30% November 21, 2011
Principal payments due on the Class A Bonds are payable based on a
141-month amortization schedule beginning in December 1996; principal payments
on the Class B Bonds are payable based on a 39-month amortization schedule
beginning in September 2008. The total monthly principal and interest payments
approximate $.7 million.
In connection with the purchase of a hotel in Fishkill, NY, the
Partnership assumed approximately $2.4 million of indebtedness pursuant to
industrial development bonds issued in 1988 and which are due December 1, 2002.
The industrial development bonds bear interest at a variable rate which, as of
June 30, 1998, was approximately three and one-half percent (3.5%) per annum.
Principal is payable in installments of $0.6 million every three years with the
next installment due in 2000.
In July 1998, a note payable with a Principal balance of $5.9 became
due. Funds from the Line of Credit were used to pay-off this debt.
In connection with the purchase of a Sheraton Hotel in Birmingham, AL,
Ridge Lake General Partners, Inc. ("RLGP"), a subsidiary of the Company, assumed
industrial development bonds ("Birmingham IDB's"), which are due in 2001. The
Birmingham IDB's bear interest at a variable rate which, at June 30, 1998, was
approximately 4% per year. Interest is payable quarterly; principal is payable
annually. The outstanding balance on the Birmingham IDB's is $5.0 million. The
Birmingham hotel is collateral for the Birmingham IDB's.
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Wharf has non-recourse debt of $19.2 million. This debt bears interest
at 8.22%. Principal, interest and escrow of $202 are due monthly. The Ramada
Plaza is collateral for this debt.
The Company budgeted $26.0 million for 1997 capital improvements at the
60 hotels owned at December 31, 1997, At June 30, 1998, the Partnership had
spent approximately $23.3 million of the budgeted amounts. The Company will use
cash generated from operations and borrowings under the Line of Credit to fund
the remaining $2.7 million of expenditures. The Company intends to substantially
complete these improvements by the end of the third quarter of 1998.
Additionally, the Company has budgeted approximately $20.6 MILLION IN 1998 for
capital improvements at 55 of the Hotels owned June 30, 1998. At June 30, 1998,
the Partnership had spent approximately $11.7 million of the budgeted amounts.
The Partnership is developing the following hotels:
Anticipated
Number of Estimated Opening
Franchise Location Rooms/Suites Development Costs Quarter
- --------- -------- ------------ ----------------- -------
TownePlace Suites Fort Worth, TX 95 $6.5 million 3Q98
Courtyard by Marriott Crystal Lake, IL 95 $7.5 million 4Q99
TownePlace Suites Miami Lakes, FL 95 $6.5 million IQ99
TownePlace Suites Pinellas Park, FL 95 $6.3 million 3Q99
Residence Inn Olathe, KS 90 $7.1 million 4Q99
TownePlace Suites Miami West, FL 95 $6.5 million 2Q99
The Partnership is constructing a 40-room addition to the Beverly Heritage Hotel
in Milpitas, CA. Construction costs are estimated at $3.9 million. Completion of
the addition is expected in the third quarter of 1998. Additionally, the
Partnership is constructing a 36-suite addition to the Residence Inn in
Charlotte, NC. Construction costs are estimated at $3.6 million. Completion of
the addition is expected in the third quarter of 1998. The construction costs
are being funded with borrowings under the Line of Credit.
In addition to purchasing existing hotel properties, management
anticipates that the Company will both develop additional hotels and enter into
contracts to acquire hotels from third parties after completion of development.
It is expected that future investments in hotel properties will be financed, in
whole or in part, with cash generated from operations, short-term investments,
proceeds from additional issuances of capital stock, borrowings under the Line
of Credit or other securities or borrowings.
The Company in the future may seek to increase further the amount of
its credit facilities, negotiate additional credit facilities, or issue
corporate debt instruments. Although the Company has no charter restrictions on
the amount of indebtedness the Company may incur, the Board of Directors of the
Company has adopted a policy limiting the amount of indebtedness that the
Company will incur to an amount not in excess of approximately 40% of the
Company's
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investment in hotel properties, at cost, after giving effect to the Company's
use of proceeds from any indebtedness and accounting for all investments in
hotel properties under the purchase method of accounting. Any debt incurred or
issued by the Company may be secured or unsecured, long-term or short-term, may
charge a fixed or variable interest rate and may be subject to such other terms
as the Board of Directors of the Company in its discretion, may approve.
The Company has filed a Shelf Registration Statement on Form S-3 (the
"Shelf") with the Securities and Exchange Commission for the issuance from time
to time of preferred stock, common stock and depositary shares representing
entitlement to all rights and preferences of a fraction of a share of preferred
stock of a specified series ("Depositary Shares") in the aggregate amount of up
to $250 million. The Shelf became effective July 30, 1996.
The Company intends to fund cash distributions to shareholders
principally out of cash generated from operations. The Company may incur, or
cause the Partnership to incur, indebtedness to meet distribution requirements
imposed on a REIT under the Internal Revenue Code (including the requirement
that a REIT distribute to its shareholders annually at least 95% of its taxable
income) to the extent that working capital and cash flow from the Company's
investments are insufficient to make such distributions. In 1998, the
Partnership has, through June 30, 1998, made cash distributions to its partners,
including the Company, of $20.4 million or $.375 per Partnership unit, from
which the Company made cash distributions to common shareholders of $18.5
million, or $.375 per share. The Company also made cash distributions to the
preferred shareholder of $.7 million, or $.72 per share. The Company and the
Partnership utilized available cash to fund such distributions.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy during the second and third quarters. The provisions
of EITF 98-9 call for straight-line recognition of the annual base rent
throughout the year and for the deferral of any Percentage Rent amounts
collected or due from the Lessees until such amounts exceed the annual fixed
base rent. This will generally result in base rent being recognized in the first
and second quarters and Percentage Rents collected or due from the Lessee being
deferred and then recognized in the third and fourth quarters due to the
structure of the Company's percentage leases and the seasonality of the hotel
operations. Historically, the Company has recorded lease revenue in interim
periods on a basis similar to that used to determine quarterly Lessee Percentage
Rent payments, resulting in the second and third quarters being the strongest
quarters.
YEAR 2000 MANAGEMENT
In order to address the computer industry's "Year 2000" problem, the
Company is in the process of upgrading the accounting software and network
server. Management does not believe the costs for this upgrade will be
significant. The Company is in the process of determining whether the companies
that manage the Hotels are in the process of studying the "Year 2000" issue.
Upon completion, the Company will determine the extent to which it is vulnerable
to third
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parties' failure to remediate their own "Year 2000" issues and the costs
associated with resolving this issue.
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") a widely accepted
and appropriate measure of performance for an equity REIT that provides a
relevant basis for comparison among REITs. FFO, as defined by the National
Association of Real Estate Investment Trusts (NAREIT), means income (loss)
before minority interest (determined in accordance with GAAP), excluding gains
(losses) from debt restructuring and sales of property, plus real estate
depreciation and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from the
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. The formulation of FFO below is consistent with the NAREIT White
Paper Definition of FFO with the exception that deferred revenue has been
included as a component of the computation, FFO (i) does not represent cash
flows from operations as defined by GAAP, (ii) is not indicative of cash
available to fund all cash flow needs and liquidity, including its ability to
make distributions, and (iii) should not be considered as an alternative to net
income (as determined in accordance with GAAP) for purposes of evaluating the
Company's operating performance.
The Company's FFO for the periods ended June 30, 1998 and 1997 was
computed as follows:
For the Three Months Ended For the Six Months Ended
June 30 June 30
------------------------ --------------------------
1998 1997 1998 1997
-------- --------- ---------- -------
(in thousands, except per share amounts)
Income (loss) before allocation
to minority interest $(1,008) 11,369 $ (3,392) $19,898
Deferred revenue 13,679 25,824
Add depreciation 5,147 4,284 10,065 8,192
Less gain on sale of hotel (523)
Less preferred dividend (352) (352) (700) (700)
-------- --------- ---------- -------
FFO $ 17,466 $ 15,301 $ 31,274 $27,390
======== ========= ========== =======
Weighted average shares and
partnership units outstanding 27,445 26,959 27,198 26,946
FFO per share $ 0.64 $ 0.57 $ 1.15 $ 1.02
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Pursuant to the general instructions to Item 305 of SEC Regulation S-K,
the quantitative and qualitative disclosures called for by this Item 3 and by
Rule 305 of Regulation S-K are inapplicable to the Company at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 30, 1998, the annual meeting of shareholders was held to elect
two Class II directors to serve on the Board of Directors until the annual
meeting of shareholders in 2001.
The shareholders voted to elect the two following directors:
Votes For Votes Against
--------- -------------
Class II Directors:
Bruce E. Campbell 21,174,980 1,864,251
H. Lance Forsdick, Sr. 22,884,308 154,923
The following directors terms of office continued after the meeting:
Class I Directors (terms expiring in 2000) - Michael S. Starnes and
John W. Stokes, Jr.
Class III Directors (terms expiring in 1999) - Robert M. Solmson, Harry
J. Phillips, Sr., and R. Lee Jenkins
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) The Company filed one Current Report on Form 8-K during the
period covered by this Quarterly Report on Form 10-Q. The Form
8-K, filed on May 21, 1998 reported the Company's execution of
an Asset Sale Agreement and Plans of Merger by and among the
Company, RHI Acquisition, Inc., Equity Inns, Inc., RFS
Partnership, L. P. and Equity Inns Partnership, L.P.
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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 13, 1998 /s/ Michael J. Pascal
- ------------------- -----------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting Officer)
August 13, 1998 /s/ Robert M. Solmson
- ------------------- -----------------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
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