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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 34-0-22164
RFS HOTEL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1534743
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
850 Ridge Lake Boulevard, Suite 220, Memphis, TN 38120 (901) 767-7005
(Address of Principal Executive Offices) (Registrant's Telephone Number
(Zip Code) Including Area Code)
n/a
(Former address, if changed since last report)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
X Yes No
The number of shares of Registrant's Common Stock, $.01 par value, outstanding
on September 30, 1998 was 24,876,946.
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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 - September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income - For the three and
the nine months ended September 30, 1998 and
September 30, 1997 4
Consolidated Statements of Cash Flows - For the three and
the nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
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RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPT 30, DECEMBER 31,
1998 1997
---- ----
(unaudited)
ASSETS
Investment in Hotel Properties, net $ 623,135 $ 573,826
Hotels under development 21,417 15,739
Cash and cash equivalents 13,006 4,131
Restricted cash 4,759 2,514
Accounts receivable-Lessees 16,036 9,887
Deferred expenses, net 3,360 4,061
Prepaid and other assets 8,123 6,765
Escrow deposits 510 205
--------- ---------
$ 690,346 $ 617,128
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 4,492 $ 6,423
Accrued real estate taxes 5,071 3,491
Borrowings on line of credit 176,343 123,843
Bonds 69,600 71,892
Other debt 25,936 13,174
Deferred revenue 17,877
Minority interest 34,821 36,235
--------- ---------
334,140 255,058
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 973,684 shares outstanding 10 10
Common Stock, $.01 par value, 100,000,000 shares
authorized, 24,986,946 and 24,389,000 shares outstanding 250 244
Paid-in capital 373,307 363,066
Treasury stock, 110,000 shares (2,012) 0
(Distributions in excess of income) undistributed income (14,988) 337
Unearned directors' and officers' compensation (361) (1,587)
--------- ---------
Total shareholders' equity 356,206 362,070
--------- ---------
$ 690,346 $ 617,128
========= =========
The accompanying notes are an integral
part of these consolidated financial statements.
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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 9 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
09/30/98 09/30/97 09/30/98 09/30/97
-------- -------- -------- --------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Leases $ 35,148 $ 23,853 $ 56,948 $ 63,452
Other 135 9 373 64
-------- -------- -------- --------
Total revenue 35,283 23,862 57,321 63,516
-------- -------- -------- --------
Expenses:
Real estate taxes and property and
casualty insurance 2,572 2,318 7,540 6,250
Depreciation 5,341 4,664 15,406 12,856
Amortization of franchise fees and
unearned compensation 152 219 538 662
Compensation 645 585 1,686 1,812
Franchise taxes 45 75 135 225
General and administrative 449 499 1,826 1,415
Attempted merger expenses 1,617 1,617
Loss on sale of hotel properties 1,133 610
Amortization of loan costs 256 254 772 664
Interest expense, net 4,603 3,466 12,113 7,952
-------- -------- -------- --------
Total expenses 16,813 12,080 42,243 31,836
-------- -------- -------- --------
Income before minority interest 18,470 11,782 15,078 31,680
Minority interest (1,830) (1,115) (1,513) (3,011)
-------- -------- -------- --------
Net income 16,640 10,667 13,565 28,669
Preferred stock dividends (356) (356) (1,056) (1,056)
-------- -------- -------- --------
Net income applicable to common shareholders $ 16,284 $ 10,311 $ 12,509 $ 27,613
======== ======== ======== ========
Basic earnings per share 0.65 0.42 0.51 1.13
Diluted earnings per share 0.64 0.42 0.50 1.12
Weighted average common shares outstanding 24,877 24,389 24,713 24,389
The accompanying notes are an integral
part of these consolidated financial statements.
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RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
FOR THE NINE FOR THE NINE
MONTHS MONTHS
SEPT 30, SEPT 30,
1998 1997
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 13,565 $ 28,669
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,716 14,182
Income allocated to minority interest 1,513 3,011
Loss on sale of hotel properties 610
Attempted merger expenses 1,746
Changes in assets and liabilities:
Accounts receivable-Lessees (6,149) (7,559)
Prepaids and other assets (2,975) (1,603)
Accounts payable and other liabilities (252) 2,533
Deferred revenue 17,877
--------- ---------
Net cash provided by operating activities 42,651 39,233
--------- ---------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (71,350) (124,839)
Proceeds from sale of hotel properties 19,627
Escrow deposits and prepayments under
purchase agreements (450) 90
Cash paid into reserves (2,245)
Refund on franchise agreements (32)
--------- ---------
Net cash used by investing activities (54,418) (124,781)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 11,040 72
Purchase of treasury stock (2,012)
Distributions to common and preferred shareholders (28,890) (27,398)
Distributions to limited partners (2,890) (2,775)
Borrowings on revolving credit agreement 52,500 65,743
Redemption of limited partnership units (37)
Payments on debt and bonds (8,699) (2,773)
Loan fees paid (370) (1,392)
--------- ---------
Net cash provided by financing activities 20,642 31,477
--------- ---------
Net increase (decrease) in cash and cash equivalents 8,875 (54,071)
Cash and cash equivalents at beginning of period 4,131 57,935
--------- ---------
Cash and cash equivalents at end of period $ 13,006 $ 3,864
========= =========
Supplemental disclosures of non-cash investing and financing activities:
In 1998, the Company, through a partnership, assumed $19,169 of debt in
connection with the purchase of a hotel.
In 1998, the Company applied deposits of $120 towards the purchase of land.
In 1998, due to the resignation of an officer, the Company cancelled 45,000
shares of restricted common stock which had not vested.
In 1998, the Partnership sold a hotel for which the purchaser paid $2,940 in
cash and signed a note to the Company for $1,500.
In 1997, the Partnership issued 2,244,934 of limited partnership units valued
at $38,200 in accordance with the purchase of four hotels.
In 1997, the Company recorded a $6,356 allocation to paid-in capital from
minority interest.
In 1997, the Partnership applied deposits of $6,064 towards the purchase of
hotels.
The accompanying notes are an integral
part of these consolidated financial statements.
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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 September 30,
1998, the Company owned approximately 90.6% of the Partnership. RFS Managers,
Inc. ("Managers") a wholly-owned subsidiary of the Company, was formed effective
January 1, 1995 to provide management services to the Company. RFS Financing
Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote, single
purpose Tennessee limited partnership, was formed to issue commercial mortgage
bonds (the "Bonds"). During 1997, Ridge Lake General Partner, Inc. ("RLGP") was
formed to purchase a hotel. RLGP purchased a second hotel in May 1998. The
Company owns 95% of RLGP. In June 1998, the Company purchased a 75% interest in
Wharf Associates Partnership ("Wharf"). Wharf and RLGP are consolidated in these
consolidated financial statements.
The Company, through its subsidiary partnerships, acquires or develops and
owns hotel properties which are leased to third parties.
These unaudited consolidated financial statements include the accounts of
the Company, and its subsidiaries, and have been prepared pursuant to the
Securities and Exchange Commission ("SEC") rules and regulations and should be
read in conjunction with the financial statements and notes thereto of the
Company included in the Company's 1997 Annual Report on Form 10-K. The following
notes to the consolidated financial statements highlight significant changes to
notes included in the Form 10-K and present interim disclosures required by the
SEC. The accompanying consolidated financial statements reflect, in the opinion
of management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
2. CHANGE IN ACCOUNTING PRINCIPLE. In May 1998, the Financial Accounting
Standards Board's Emerging Issues Task Force issued EITF number 98-9,
"Accounting for Contingent Rent in Interim Financial Periods" (EITF 98-9). EITF
98-9 provides that a lessor shall defer recognition of contingent rental income
in interim periods until specified targets that trigger the contingent income
are met. In July 1998 the Task Force issued transition guidance stating that the
consensus could be applied on a prospective basis or in a manner similar to a
change in accounting principle effective April 1, 1998. The Company reviewed the
terms of its percentage leases and has determined that the provisions of EITF
98-9 impacted the Company's previous revenue recognition on an interim basis,
but has no impact on the Company's annual percentage lease revenue or interim
cash flow from its third party Lessees. The Company adopted the provisions of
EITF 98-9 and has applied the change as a change in accounting principle and
thereby has restated the first quarter results of 1998 and has recorded the
results of the second and third quarters in accordance with the new
pronouncement. The effect of the change on the three months ended September 30,
1998 was to increase lease revenues by $7,947, and therefore net income
applicable to common shareholders by $7,188 or $0.28 per share-basic and $0.27
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per share diluted to $0.65 per share-basic and $0.64 per share diluted. The
effect on the nine months ended September 30, 1998 was to decrease lease
revenues by $17,877 and therefore net income applicable to common shareholders
by $16,204 or $0.65 per share-basic and diluted.
3. DECLARATION OF DIVIDEND. On October 28, 1998, the Company declared a $.385
dividend on each share of Common Stock outstanding to shareholders of record on
November 10, 1998 and a $.36 dividend on each share of Series A Preferred Shares
outstanding. The dividends will be paid on November 16, 1998.
4. SUBSEQUENT EVENTS. In October 1998, the Company elected not to replace
certain properties with a Lessee which were sold in the third quarter and paid
the Lessee approximately $1 million related to such election.
5. CALCULATION OF EARNINGS PER SHARE. Calculations of basic and diluted earnings
per share are as follows:
For the Three Months For the Nine Months
Ended Ended
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
Basic EPS:
Net income $ 16,640 $ 10,667 $ 13,565 $ 28,669
Less dividends declared on preferred stock (356) (356) (1,056) (1,056)
-------- -------- -------- --------
$ 16,284 $ 10,311 $ 12,509 $ 27,613
======== ======== ======== ========
Weighted average common shares outstanding 24,877 24,389 24,713 24,389
======== ======== ======== ========
Basic Earnings Per Share $ 0.65 $ 0.42 $ 0.51 $ 1.13
Diluted EPS:
Net income $ 16,640 $ 10,667 $ 13,565 $ 28,669
Less dividends declared on preferred stock (1,056)
-------- -------- -------- --------
$ 16,640 $ 10,667 $ 12,509 $ 28,669
======== ======== ======== ========
Weighted average common shares outstanding 24,877 24,389 24,713 24,389
Preferred shares outstanding 974 974 974
Potential dilutive common shares 33 140 110 125
-------- -------- -------- --------
Weighted average common shares and potential
dilutive common shares outstanding 25,884 25,503 24,823 25,488
======== ======== ======== ========
Diluted earnings per share $ 0.64 $ 0.42 $ 0.50 $ 1.12
======== ======== ======== ========
Note: The preferred shares are anti-dilutive for the nine-month period ended
September 30, 1998, and, thus, are not considered in the calculation of earnings
per share.
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6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro
forma condensed statements of income for the nine months ended September 30,
1998 and 1997 of the Company are presented as if the 60 hotel properties owned
at September 30, 1998 and the consummation of the Company's equity offerings and
the application of the net proceeds therefrom had occurred on or prior to
January 1, 1997, and the hotels had been leased to the Lessees pursuant to the
percentage leases. As discussed in Note 2, the Company adopted the provisions of
EITF 98-9 which significantly impacted the Company's revenue recognition on an
interim basis. The pro forma information below reflects the effect of EITF 98-9
as if the method had been in effect on January 1, 1997 excluding properties
under development which are included on the date opened. These unaudited pro
forma condensed statements of income are not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed as of January 1, 1997, nor does it purport to
represent the results of operations for future periods.
1998 1997
---- ----
Operating Data:
Total revenue $ 57,052 $ 51,850
Real estate taxes and casualty
insurance 7,887 6,734
Depreciation and amortization 16,848 16,848
Compensation 1,686 1,812
Franchise taxes 135 225
General and administrative 1,826 1,415
Attempted merger costs 1,617
Loss on sale of hotel properties 610
Interest expense 13,250 12,331
-------- --------
Income before allocation to minority
interest 13,193 12,485
Less minority interest (1,235) (1,169)
-------- --------
Net income $ 11,958 $ 11,316
======== ========
Diluted earnings per share $ 0.48 $ 0.46
Weighted average common shares
and potential dilutive common 24,823 24,823
shares
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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 60 hotels
(the "Hotels") owned at September 30, 1998:
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
Full Service Hotels:
Holiday Inn ........................ 6 ......................... 1,208
Sheraton ........................... 5 ......................... 1,019
DoubleTree ......................... 1 ........................... 220
Ramada Plaza ....................... 1 ........................... 234
Independent ........................ 2 ........................... 290
---- -----
Sub-total ................ 15 ......................... 2,971
---- -----
Extended Stay Hotels:
Residence Inn ..................... 14 ......................... 1,815
Homewood Suites ................... 1 ............................ 83
Hawthorn Suites ................... 1 ........................... 280
---- -----
Sub-total ................ 16 ......................... 2,178
---- -----
Limited Service Hotels:
Hampton Inn ....................... 19 ......................... 2,367
Courtyard by Marriott ............. 1 ........................... 102
Comfort Inn ....................... 4 ........................... 555
Holiday Inn Express ............... 5 ........................... 637
---- -----
Sub-total ................ 29 ......................... 3,661
---- -----
Total .................... 60 ......................... 8,810
==== =====
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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 (5)
---- ----
Hotels owned at end of period 60 61
==== ====
The Hotels are located in 24 states. Management believes it is prudent
to diversify geographically and among franchise brands.
The Partnership leases 57 of the Hotels to third parties (collectively,
the "Lessees") pursuant to leases (the "Percentage Leases") which provide for
annual rent equal to the greater of (i) fixed base rent, or (ii) rent payments
based on percentages of the Hotels' revenues ("Percentage Rent"). Base rent is
payable monthly. Percentage rent is payable quarterly. The Lessees operate 54
Hotels. Four Hotels are operated by other third parties, (the "Operators"),
pursuant to management agreements between the Lessees and the Operators. Two
hotels are operated by a subsidiary. One of the Lessees has a right of first
refusal, subject to certain exceptions, to lease hotels acquired by the
Partnership, through February 27, 2006.
CHANGE IN ACCOUNTING PRINCIPLE
In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim
Financial Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger the contingent income are met. In July 1998 the Task Force
issued transitional guidance stating that the consensus could be applied on a
prospective basis or in a manner similar to a change in accounting principle
effective April 1, 1998. The Company reviewed the terms of its percentage leases
and has determined that the provisions of EITF 98-9 impacted the Company's
previous revenue recognition method on an interim basis, but has no impact on
the Company's annual percentage lease revenue or interim cash flow from its
third party Lessees. The Company adopted the provisions of EITF 98-9 and has
applied the change as a change in accounting principle and therefore restated
the first quarter results of 1998 and recorded the results of the second and
third quarters in accordance with the new pronouncement. The effect of the
change on the three months ended September 30, 1998 was to increase lease
revenues and therefore net income applicable to common shareholders by $0.28 per
share-basic and $0.27 per share-diluted to $0.65 per share-basic and $0.64 per
share-diluted. The effect of the change on the nine months ended September 30,
1998 was to decrease net income applicable to common shareholders $0.65 per
share-basic and diluted.
The Company's Percentage Leases provide for the greater of (i) annual
fixed base rent or (ii) Percentage Rent to be remitted to the Company annually.
The leases contain annual room revenue thresholds used to calculate two tiers of
Percentage Rent which are applied to annualized room revenues on a quarterly
basis to determine quarterly Percentage Rent payments. The provisions of EITF
98-9 call for straight-line recognition of the annual Base Rent throughout the
year and for the deferral of any additional lease amounts collected or due from
the Lessees until such amounts exceed
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the annual fixed Base Rent. This will generally result in Base Rent being
recognized in the first and second quarters and Percentage Rents already
collected or due from the Lessee being deferred and then recognized in the third
and fourth quarters due to the structure of the Company's percentage leases and
the seasonality of the hotel operations. Historically, the Company has recorded
lease revenue in interim periods on a basis similar to that used to determine
quarterly Lessee Percentage Rent payments, resulting in the second and third
quarters being the strongest quarters.
At September 30, 1998 deferred revenue of $17,877 represents Percentage
Rent collected or due from the Lessees under the leases which the Company
expects to recognize as lease revenue in the fourth quarter of 1998. The
Company's quarterly distributions are based on Quarterly Percentage Rent
calculations collected as opposed to percentage lease revenue recognized.
Management expects its hotel portfolio to yield Percentage Rent annually, based
on the historical revenues of the hotels prior to their acquisition and based on
the negotiation of the related leases.
RESULTS OF OPERATIONS
Comparison of the three Months ended September 30, 1998 to 1997 and the Nine
Months Ended September 30, 1998 to 1997.
The increase in Lease revenue for the three months ended September 30,
1998 from the comparable period in 1997 is primarily attributable to the change
in the Company's revenue recognition as discussed above which resulted in
certain contingent rent being deferred until the contingencies have been met.
Approximately $7.9 million of deferred revenue recorded as of June 30, 1998 was
included as revenue during the three months ended September 30, 1998 when the
contingencies related to such Percentage Rent were satisfied. The remaining
increases in revenue are the result of increases in revenue per available room
("REVPAR") at the hotels owned throughout both periods.
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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 52 of the 60 hotels owned at
September 30, 1998 were owned by the Partnership throughout both periods; it
excludes four hotels which were opened since January 1997 and one expanded hotel
where the room addition was not open for all of both periods presented and three
hotels which were undergoing major renovations:
for the Three Months Ended September 30,
------------------------------------------------------------------------
Actual Pro Forma
------ ---------
% Increase % Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- ---------- ---- ---- ----------
Occupancy 78.3% 78.8% (0.6) 79.3% 79.8% (0.6)
ADR $ 85.81 $ 77.45 10.8 $ 85.15 $ 80.01 6.4
RevPAR $ 67.20 $ 61.00 10.2 $ 67.55 $ 63.85 5.8
for the Nine Months Ended September 30,
------------------------------------------------------------------------
Actual Pro Forma
------ ---------
% Increase % Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- ---------- ---- ---- ----------
Occupancy 75.8% 76.7% (1.2) 77.2% 77.7% (0.6)
ADR $ 83.34 $ 75.43 10.5 $ 83.46 $ 78.33 6.5
RevPAR $ 63.20 $ 57.87 9.2 $ 64.41 $ 60.83 5.9
Increases in real estate taxes and property and casualty insurance in
1998 over 1997 are due to the increased number of hotels owned during 1998,
increased real estate tax assessments, as well as an increased real estate tax
assessments at certain hotels.
Increases in depreciation in 1998 over 1997 are due to the increased
number of hotels owned during 1998 and capitalized improvements at certain of
the Hotels.
Decreases in general and administrative expenses for the three months
ended September 30, 1998 over 1997 are due to decreased professional fees.
Increases in general and administrative expenses for the nine months ended
September 30, 1998 over 1997 are due to the write-off of costs incurred in
considering formation of a new REIT, Lodging Trust USA, which transaction was
not completed.
A write-off was made in September 1998 of $1,617 for expenses incurred
by the Company in connection with its planned merger with Equity Inns, Inc.
which was terminated in the third quarter of 1998.
The loss on the sale of hotel properties in the three months ended
September 30, 1998, relates to the sale of four hotels. A gain on the sale of a
hotel property was recorded in February 1998.
Increases in amortization of loan costs in 1998 over 1997 are due to
costs associated with the assumption of the industrial development bond
financing for the Birmingham Sheraton Hotel and the amortization of increased
commitment fees on the Line of Credit.
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Increases in interest expense in 1998 over 1997 are primarily due to
increased borrowings on the Line of Credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a bank line of credit (the "Line of Credit") for $190
million. Borrowings under the Line of Credit bear interest at LIBOR plus 157.5
basis points at September 30, 1998. The Line of Credit is secured by first
priority mortgages on 23 hotels and agreements restricting the transfer, pledge
or other hypothecation of 9 hotels (collectively, the "Collateral Pool"). The
Line of Credit contains various covenants including the maintenance of a minimum
net worth, minimum debt coverage and interest coverage ratios, total
indebtedness and total liabilities limitations and borrowing base to value
limitations. The Company was in violation of a certain debt covenant at
September 30, 1998, relating to the percentage of liabilities to the total
market equity capitalization of the Company. The Company has received a written
waiver relating to this covenant and has initiated steps which the Company
anticipates will remove this covenant from its loan agreement. The Company had
borrowed $176.3 million on the Line of Credit at September 30, 1998. The Line of
Credit is due July 30, 2000.
In November 1996, the Company, through a subsidiary, issued $75 million
of commercial mortgage bonds, (the "Bonds") series 1996-1 as follows:
Initial
Class Principal Amount Rate Stated Maturity
----- ---------------- ---- ---------------
Class A $50 Million 6.83% August 20, 2008
Class B $25 Million 7.30% November 21, 2011
Principal payments due on the Class A Bonds are payable based on a
141-month amortization schedule beginning in December 1996; principal payments
on the Class B Bonds are payable based on a 39-month amortization schedule
beginning in September 2008. The total monthly principal and interest payments
approximate $.7 million.
In connection with the purchase of a hotel in Fishkill, NY, the
Partnership assumed approximately $2.4 million of indebtedness pursuant to
industrial development bonds issued in 1988 and which are due December 1, 2002.
The industrial development bonds bear interest at a variable rate which, as of
September 30, 1998, was approximately three and one-half percent (3.5%) per
annum. Principal is payable in installments of $0.6 million every three years
with the next installment due in 2000.
In July 1998, a note payable with a principal balance of $5.9 million
became due. Funds from the Line of Credit were used to pay-off this debt.
In connection with the purchase of a Sheraton Hotel in Birmingham, AL,
Ridge Lake General Partners, Inc. ("RLGP"), a subsidiary of the Company, assumed
industrial development bonds ("Birmingham IDB's"), which are due in 2001. The
Birmingham IDB's bear interest at a variable rate
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which, at September 30, 1998, was approximately 4% per year. Interest is payable
quarterly; principal is payable annually. The outstanding balance on the
Birmingham IDB's is $5.0 million. The Birmingham hotel is collateral for the
Birmingham IDB's.
Wharf has non-recourse debt of $19.2 million. This debt bears interest
at 8.22%. Principal, interest and escrow of $202 are due monthly. The Ramada
Plaza is collateral for this debt.
The Company has budgeted approximately $20.6 million in 1998 for
capital improvements at 55 of the Hotels owned at September 30, 1998. At
September 30, 1998, the Partnership had spent approximately $15.3 million of the
budgeted amounts.
The Partnership is developing the following hotels:
ANTICIPATED
NUMBER OF ESTIMATED OPENING
FRANCHISE LOCATION ROOMS/SUITES DEVELOPMENT COSTS QUARTER
--------- -------- ------------ ----------------- -------
TownePlace Suites Fort Worth, TX 95 $6.5 million 4Q98
TownePlace Suites Miami Lakes, FL 95 $6.5 million 2Q99
TownePlace Suites Tampa, FL 95 $6.3 million 3Q99
Residence Inn Olathe, KS 90 $7.1 million 4Q99
TownePlace Suites Miami Airport- 95 $6.5 million 4Q99
West, FL
Courtyard by Marriott Crystal Lake, IL 90 $7.5 million 4Q99
The Partnership is constructing a 40-room addition to the Beverly Heritage Hotel
in Milpitas, CA. Construction costs are estimated at $3.8 million. Completion of
the addition is expected in the third quarter of 1999. Additionally, the
Partnership is constructing a 36-suite addition to the Residence Inn in
Charlotte, NC. Construction costs are estimated at $3.6 million. Completion of
the addition is expected in the fourth quarter of 1998. The construction costs
are being funded with borrowings under the Line of Credit.
In addition to purchasing existing hotel properties, management
anticipates that the Company will both develop additional hotels and enter into
contracts to acquire hotels from third parties after completion of development.
It is expected that future investments in hotel properties will be financed, in
whole or in part, with cash generated from operations, short-term investments,
proceeds from additional issuances of capital stock, borrowings under the Line
of Credit or other securities or borrowings.
The Company in the future may seek to increase further the amount of
its credit facilities, negotiate additional credit facilities, or issue
corporate debt instruments. Although the Company has no charter restrictions on
the amount of indebtedness the Company may incur, the Board of Directors of the
Company has adopted a current policy limiting the amount of indebtedness that
the Company will incur to an amount not in excess of approximately 40% of the
Company's investment in hotel properties, at cost, after giving effect to the
Company's use of proceeds from any indebtedness and
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accounting for all investments in hotel properties under the purchase method of
accounting. Any debt incurred or issued by the Company may be secured or
unsecured, long-term or short-term, may charge a fixed or variable interest rate
and may be subject to such other terms as the Board of Directors of the Company
in its discretion, may approve.
The Company has filed a Shelf Registration Statement on Form S-3 (the
"Shelf") with the Securities and Exchange Commission for the issuance from time
to time of preferred stock, common stock and depositary shares representing
entitlement to all rights and preferences of a fraction of a share of preferred
stock of a specified series ("Depositary Shares") in the aggregate amount of up
to $250 million. The Shelf became effective July 30, 1996.
The Company intends to fund cash distributions to shareholders
principally out of cash generated from operations. The Company may incur, or
cause the Partnership to incur, indebtedness to meet distribution requirements
imposed on a REIT under the Internal Revenue Code (including the requirement
that a REIT distribute to its shareholders annually at least 95% of its taxable
income) to the extent that working capital and cash flow from the Company's
investments are insufficient to make such distributions. In 1998, the
Partnership has, through September 30, 1998, made cash distributions to its
partners, including the Company, of $30.8 million or $.375 per Partnership unit,
from which the Company made cash distributions to common shareholders of $27.7
million, or $.375 per share. The Company also made cash distributions to the
preferred shareholder of $1.1 million, or $1.08 per share. The Company and the
Partnership utilized available cash to fund such distributions.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy during the second and third quarters. The provisions
of EITF 98-9 call for straight-line recognition of the annual base rent
throughout the year and for the deferral of any Percentage Rent amounts
collected or due from the Lessees until such amounts exceed the annual fixed
base rent. This will generally result in base rent being recognized in the first
and second quarters and Percentage Rents collected or due from the Lessee being
deferred and then recognized in the third and fourth quarters due to the
structure of the Company's percentage leases and the seasonality of the hotel
operations. Prior to the adoption of EITF 98-9, the Company recorded lease
revenue in interim periods on a basis similar to that used to determine
quarterly Lessee Percentage Rent payments, resulting in the second and third
quarters being the strongest quarters.
YEAR 2000 MANAGEMENT
Beginning in the fourth quarter of 1997, the Company began evaluating
the impact of the Year 2000 (Y2K) problem on its systems. The Company also began
inquiring of its Lessees regarding the operation of the Lessee's systems at
properties owned by the Company. The only software package that was not Y2K
compliant was the accounting system of the Company The Company purchased a new
accounting system in January of 1998. The Company has been converting to the new
format and plans to go live on January 1, 1999. All computers passed the Y2K
check, as well as the phone system and other hardware. The Company has been
advised that the systems at the properties (reservation, accounting, etc.) are
being upgraded where necessary by the appropriate management company.
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Testing will continue throughout 1999 on both the new and old software to verify
its operation. The Company is in the process of obtaining a statement from its
vendors about their Y2K status. The Company estimates its total cost related to
the Y2K problem to be approximately $80.
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") a widely accepted
and appropriate measure of performance for an equity REIT that provides a
relevant basis for comparison among REITs. FFO, as defined by the National
Association of Real Estate Investment Trusts (NAREIT), means income (loss)
before minority interest (determined in accordance with GAAP), excluding gains
(losses) from debt restructuring and sales of property, plus real estate
depreciation and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from the
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. The computation of FFO below is consistent with the NAREIT White
Paper Definition of FFO with the exception that deferred revenue and the
non-recurring write-off of merger costs have been added back to calculate FFO.
FFO (i) does not represent cash flows from operations as defined by GAAP, (ii)
is not indicative of cash available to fund all cash flow needs and liquidity,
including its ability to make distributions, and (iii) should not be considered
as an alternative to net income (as determined in accordance with GAAP) for
purposes of evaluating the Company's operating performance.
The Company's FFO for the periods ended September 30, 1998 and 1997 was
computed as follows:
For the Three Months Ended For the Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands, except per share amounts)
Income (loss) before allocation
to minority interest $ 18,470 $ 11,782 $ 15,078 $ 31,680
Deferred revenue (7,947) 17,877
Add depreciation 5,341 4,664 15,406 12,856
Add write-off of merger costs 1,617 1,617
Add loss on sale of hotel 1,133 610
Less preferred dividend (356) (356) (1,056) (1,056)
-------- -------- -------- --------
FFO $ 18,258 $ 16,090 $ 49,532 $ 43,480
======== ======== ======== ========
Weighted average shares and
partnership units outstanding 27,445 26,959 27,281 26,950
FFO per share $ 0.67 $ 0.60 $ 1.82 $ 1.61
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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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Financial Data Schedule (SEC Use Only)
(b) The Company filed one Current Report on Form 8-K during the period
covered by this Quarterly Report on Form 10-Q. The Form 8-K, filed on
September 11, 1998 reported the Company's execution of a Termination
Agreement by and among the Company, RHI Acquisition, Inc., Equity
Inns, Inc., RFS Partnership, L. P. and Equity Inns Partnership, L.P.
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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.
11/13/98 /s/ Michael J. Pascal
- ------------------------ --------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting Officer)
11/13/98 /s/ Robert M. Solmson
- ------------------------ --------------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
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