<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q/A
AMENDED QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
Commission File Number 1-7062
REALTY REFUND TRUST
(Exact name of registrant as specified in its charter)
--------------
<TABLE>
<S> <C>
OHIO 34-6647590
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
</TABLE>
925 EUCLID AVENUE
SUITE 1750
CLEVELAND, OHIO 44115
(Address of principal executive offices)
(216) 622-0046
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) 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 (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of outstanding Shares of Beneficial Interest, without par value, as of
June 1, 1998: 1,667,817.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.
REALTY ReFUND TRUST
-------------------
BALANCE SHEETS
--------------
APRIL 30, AND JANUARY 31, 1998
------------------------------
<TABLE>
<CAPTION>
ASSETS
------
April 30, 1998 January 31, 1998
-------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
INVESTMENT IN HOTEL PROPERTIES $52,256,717 $41,241,241
CASH AND CASH EQUIVALENTS 1,856,501 2,378,398
RENT RECEIVABLE FROM LESSEE 2,510,532 -
OTHER ASSETS 410,295 -
-------------- --------------
$57,034,045 $43,619,639
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
MORTGAGE NOTES PAYABLE $25,270,898 $17,709,589
NOTES PAYABLE TO BANKS 3,635,000 155,000
OTHER NOTES PAYABLE 2,653,252 2,864,690
ADVANCES PAYABLE TO RELATED PARTIES 1,514,238 1,699,601
DUE TO LESSEE 3,007,431 944,234
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 864,746 572,031
MINORITY INTEREST IN PARTNERSHIP 14,054,340 14,075,523
SHAREHOLDERS' EQUITY:
Shares of beneficial interest without par value; unlimited
authorization; 1,667,817 shares outstanding at April 30
and January 31, 1998 6,034,140 5,598,971
-------------- --------------
$57,034,045 $43,619,639
============== ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-2-
<PAGE> 3
REALTY ReFUND TRUST
-------------------
UNAUDITED
---------
STATEMENTS OF INCOME
--------------------
FOR THE THREE MONTHS ENDED APRIL 30, 1998 AND 1997
--------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Lease revenue $ 3,771,239 $ -
Interest income 11,345 -
Rental revenue from real estate held for sale - 558,933
----------- -----------
3,782,584 558,933
----------- -----------
EXPENSES:
Real estate depreciation 519,269 -
Real estate and personal property taxes, insurance and
ground rent 229,495 -
General and administrative 430,625 57,911
Interest on mortgage notes payable 628,512 -
Interest on note payable to related party - 47,485
Advisory fee paid to related party 144,153 -
Operating expenses of real estate held for sale - 533,649
Amortization of deferred leasing commissions - 10,861
----------- -----------
1,952,054 649,906
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST 1,830,530 (90,973)
----------- -----------
MINORITY INTEREST 1,395,361 -
----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 435,169 $ (90,973)
=========== ===========
EARNINGS PER SHARE - basic and diluted $ .26 $ (.09)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,667,817 1,020,586
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE> 4
REALTY ReFUND TRUST
-------------------
UNAUDITED
---------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE THREE MONTHS ENDED APRIL 30, 1998 AND 1997
--------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $435,169 $ (90,973)
Adjustments to reconcile net income (loss) to net cash
used for operating activities-
Depreciation and amortization 519,269 -
Minority interest 1,395,361 -
Amortization of deferred leasing commissions - 10,861
Increase in rent receivable from lessee (2,510,532) -
Increase in other assets (410,295) (16,375)
Increase in amounts due to lessee 2,063,197 -
Increase in accounts payable and accrued expenses 292,715 (114,033)
----------- ---------
Net cash provided by (used for) operating activities 1,784,884 (210,520)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties (5,148,000) -
----------- ---------
Net cash used for investing activities (5,148,000) -
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank borrowings 3,430,000 -
Borrowing under mortgage notes payable 1,561,309 -
Payment of cash dividends - (102,059)
Payment of other notes payable (211,438) -
Payment to related parties (1,938,652) -
----------- ---------
Net cash provided by (used for) financing activities 2,841,219 (102,059)
----------- ---------
NET DECREASE IN CASH (521,897) (312,579)
CASH AT BEGINNING OF PERIOD 2,378,398 531,997
----------- ---------
CASH AT END OF PERIOD 1,856,501 $ 219,418
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
REALTY ReFUND TRUST
-------------------
NOTES TO UNAUDITED FINANCIAL STATEMENTS
---------------------------------------
APRIL 30, 1998 AND 1997
-----------------------
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION:
-----------------------------------------------
Prior to fiscal 1999, Realty ReFund Trust (the Trust or the Company) specialized
in mortgage financing as its investment vehicle, refinancing existing
income-producing commercial, industrial and multi-unit residential real property
by supplementing or replacing existing financing. The primary refinancing
technique which the Trust employed was wrap-around mortgage lending.
On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited Partnership
(the Partnership), a Delaware limited partnership, in exchange for a 13.6%
general partnership interest therein. The Trust is the sole general partner of
the Partnership. The Partnership issued limited partnership interests
representing 86.4% of the Partnership to acquire six hotel properties from
various entities. In addition, in order to acquire a seventh hotel property
through a wholly owned subsidiary, the Trust issued 647,231 shares of beneficial
interest in exchange for all of the outstanding shares of Buenaventura
Properties, Inc. (BPI), which owned a hotel located in Scottsdale, Arizona. The
Scottsdale, Arizona hotel together with the six hotel properties acquired by the
Partnership, are the Initial Hotels. The Initial Hotels are leased to Realty
Hotel Lessee Corp. (the Lessee) pursuant to leases which contain provisions for
rent based on revenues of the Initial Hotels (the Percentage Leases). Each
Percentage Lease obligates the Lessee to pay rent equal to the greater of the
minimum rent or a percentage rent based on the gross revenues of each hotel. The
Lessee holds the franchise agreement for each hotel. The Lessee is owned 9.8% by
InnSuites Innternational Hotels, Inc. an entity owned by James F. Wirth,
Chairman, President and Chief Executive Officer of the Trust (Wirth), and his
spouse.
Partnership Agreement
- ---------------------
Pursuant to the Partnership Agreement, the partners in five partnerships (the
Exchanging Partners) exchanged their respective partnership interests for
limited partnership interests in the Partnership. A corporation which owned a
hotel property in Flagstaff, Arizona (one of the Initial Hotels), contributed
the hotel to the Partnership in exchange for limited partnership interests
therein. The Partnership Agreement provides for the issuance of two classes of
limited partnership units, Class A and Class B. Such Classes are identical in
all respects, except that each Class A limited partnership unit in the
Partnership shall be convertible into a like number of shares of beneficial
interest of the Trust, at any time at the option of the particular limited
partner, if the Trust determines that such conversion would not cause the Trust
to fail to qualify as a REIT. At January 31, 1998, a total of 2,174,931 Class A
limited partnership units were issued to the Exchanging Partners. Additionally,
299,622 Class A limited partnership units were reserved for issuance to those
partners who did not accept the formation exchange offer. A total of 4,017,361
Class B limited partnership units were issued to Wirth and his affiliates, in
lieu of the issuance of Class A limited partnership units. If all of the Class A
limited partnership units were to be converted, the limited partners in the
-5-
<PAGE> 6
Partnership would hold 2,174,931 shares of beneficial interest of the Trust. The
Class B limited partnership units may only become convertible with the approval
of the Board of Trustees, in its sole discretion.
Basis of Presentation
- ---------------------
As general partner, the Trust exercises unilateral control over the Partnership.
Therefore, the financial statements of the Trust, its wholly owned subsidiaries
and the Partnership are consolidated. All significant intercompany transactions
and balances have been eliminated.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended April 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended January 31,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the period ended January 31, 1998.
2. NET INCOME PER SHARE AND PARTNERSHIP UNITS:
-------------------------------------------
Pursuant to FAS No. 128 "Earnings Per Share", the concept of common stock
equivalents was eliminated, and "primary" and "fully diluted" earnings per share
were replaced by "basic" and "diluted" earnings per share. For the periods
presented there were no dilutive securities.
Basic earnings per share has been computed based on the weighted average number
of shares outstanding during the periods presented. The calculation of basic
earnings per share for three month period ended April 30, 1998 and 1997 was
based upon 1,667,817 and 1,020,586 shares, respectively.
3. ACQUISITIONS:
- -------------
On February 1, 1998, the Partnership acquired 100% of the ownership interests in
the Tucson St. Mary's Hotel and Resort for $10,820,000. The Partnership issued
699,933 Class B limited partnership units to Wirth and his spouse, who each held
a 50% equity ownership interest in the Tucson St. Mary's hotel. This property
was leased to the Lessee, which will operate the property under a long-term
Percentage Lease.
On April 29, 1998, the Trust acquired a hotel property located in San Diego,
California for an aggregate consideration of $5,148,000, which was funded with
cash, proceeds from the Trust's credit facility and two promissory notes secured
by mortgage trust deeds on the property. This property was leased to the Lessee,
which will operate the property under a long-term Percentage Lease.
-6-
<PAGE> 7
4. CREDIT FACILITY:
----------------
In the first quarter of fiscal 1999, the Trust established a $12,000,000 secured
revolving line of credit with Pacific Century Bank. The credit facility
requires, among other things, the Trust to maintain a minimum net worth, a
specified coverage ratio of EBITDA to debt service, and a specified coverage
ratio of EBITDA to debt service and fixed charges. Further, the Trust is
required to maintain its franchise agreement at each of the hotel properties and
to maintain its REIT status.
5. PERCENTAGE LEASE AGREEMENTS:
----------------------------
The Percentage Leases have noncancellable terms, which expire at various dates
through May 31, 2007, subject to earlier termination on the occurrence of
certain contingencies, as defined. The rent due under each Percentage Lease is
the greater of minimum rent, as defined, or percentage rent. Percentage rent
applicable to room and other hotel revenue varies by lease and is calculated by
multiplying fixed percentages by the total amounts of such gross revenues in
excess of specified threshold amounts. Both the minimum rent and the revenue
thresholds used in computing percentage rents are subject to annual adjustments
beginning January 1, 1999, based on increases in the United States Consumer
Price Index. Percentage rent applicable to food and beverage revenues is
calculated as 5% of such revenues over a minimum threshold.
Future minimum rentals (ignoring CPI increases) to be received by the Trust from
the Lessee pursuant to the Percentage Leases for nine hotels, including San
Diego, for each of the next five years and in total thereafter are as follows:
<TABLE>
<S> <C>
Fiscal 1999 $ 4,888,000
2000 6,350,000
2001 6,350,000
2002 6,350,000
2003 6,350,000
Thereafter 27,514,000
-------------
$57,802,000
=============
</TABLE>
6. RELATED PARTY TRANSACTIONS:
---------------------------
Wirth beneficially owns 9.8% of the common stock of the Lessee. The Lessee was
the sole source of the Trust's Percentage Lease revenue during the quarter
ended April 30, 1998. At April 30, 1998, the Trust had rent receivable of
$2,511,000 due from the Lessee.
At January 31, 1998 and April 30, 1998, the Trust had a payable to the Lessee of
$944,000 and 3,007,000, respectively, primarily for the reimbursement of costs
incurred on behalf of the Trust.
7. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:
--------------------------------------------------
-7-
<PAGE> 8
In connection with the acquisition of the Tucson St. Mary's hotel, approximately
$6,387,000 of historical net book value in hotel properties was contributed to
the Partnership in exchange for Partnership units and the Partnership assumed
approximately $7,803,000 of debt.
8. SUBSEQUENT EVENT
----------------
On June 9, 1998, a majority of the Company's independent Trustees voted to
exercise, as of June 1, 1998, an option held by the Company to acquire all of
the ownership interests in an 185-suite InnSuites Hotel located in Buena Park,
California. The total consideration for the ownership interests that will be
contributed to the Partnership will be the greater of (i) $6,900,000 or (ii)
fair market value as determined by an independent appraisal. Mr. Wirth owns a
50% interest in the Buena Park hotel.
9. PRO FORMA FINANCIAL INFORMATION:
--------------------------------
The pro forma financial information set forth below is presented as if (i) the
formation transactions discussed in Note 1 and (ii) the acquisition of the
membership interests in the Tucson St. Mary's hotel had been consummated as of
February 1, 1997. The acquisition of the San Diego hotel on April 29, 1998 has
been excluded based on its lack of materiality to the Partnership for the
periods presented. The pro forma financial information is not necessarily
indicative of what actual results of operations of the Trust would have been
assuming the formation transactions and the acquisitions had been consummated as
of February 1, 1997 nor does it purport to represent the results of operations
for future periods.
<TABLE>
<CAPTION>
Three Months Ended
April 30,
----------------------------
1998 1997
-------------- ------------
<S> <C> <C>
LEASE REVENUE $3,771 $3,563
INTEREST INCOME 11 -
------ ------
Total revenue 3,782 3,563
------ ------
DEPRECIATION AND AMORTIZATION 519 518
REAL ESTATE AND PERSONAL PROPERTY TAXES,
INSURANCE AND GROUND RENT 229 263
GENERAL AND ADMINISTRATIVE 431 162
INTEREST EXPENSE ON MORTGAGE AND OTHER
NOTES PAYABLE 629 560
ADVISORY FEE TO RELATED PARTY ADVISOR 144 172
MINORITY INTEREST 1,395 1,681
------ ------
TOTAL EXPENSES AND MINORITY INTEREST 3,347 3,356
------ ------
NET INCOME APPLICABLE TO COMMON SHARES $ 435 $ 207
====== ======
NET INCOME PER SHARE - basic and diluted $ .26 $ .12
====== ======
</TABLE>
-8-
<PAGE> 9
REALTY HOTEL LESSEE CORP.
Combined Balance Sheets
<TABLE>
<CAPTION>
Predecessor
------------------------------
December 31, March 31, March 31,
1997 1997 1998
------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
INVESTMENT IN HOTEL PROPERTIES, at cost:
Land $ 3,439,738 $ 3,439,738 $ -
Buildings and improvements 24,831,670 24,831,670 -
Furniture and equipment 10,845,586 9,175,834 -
----------- ----------- -----------
39,116,994 37,447,242 -
Less- Accumulated depreciation 12,184,479 11,259,483 -
----------- ----------- -----------
Net investment in hotel properties 26,932,515 26,187,759 -
Cash and cash equivalents 129,871 1,459,483 516,301
Accounts receivable 571,301 592,167 896,559
Payments on behalf of RRF - - 320,668
Inventories 415,575 366,242 560,132
Other assets 295,440 854,125 152,454
Cash held in escrow 296,099 259,684 -
Deferred expenses, net 252,430 502,508 -
----------- ----------- -----------
$28,893,231 $30,221,968 $ 2,446,114
=========== =========== ===========
LIABILITIES AND COMBINED EQUITY
Mortgage notes payable $17,776,627 $16,281,613 $ -
Accounts payable
Trade 678,637 367,988 790,108
Affiliates 1,260,601 784,144 -
Bank overdrafts 121,052 - 347,005
Partners' capital purchases payable 275,366 - -
Lines of credit 131,000 - -
Percentage rent payable - - 2,373,108
Capital lease obligation 22,437 68,502 -
Land lease payable 80,441 25,681 -
Accrued expenses and other liabilities 867,267 598,039 1,332,650
Participation investors contingent liability 2,646,627 2,646,627 -
----------- ----------- -----------
23,860,055 20,772,594 4,842,871
COMBINED EQUITY: 5,033,176 9,449,374 (2,396,757)
----------- ----------- -----------
$28,893,231 $30,221,968 $ 2,446,114
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-9-
<PAGE> 10
REALTY HOTEL LESSEE CORP.
Combined Statements of Operations
<TABLE>
<CAPTION>
Predecessor
------------------------------
December 31, March 31, March 31,
1997 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES FROM HOTEL OPERATIONS:
Room revenue $18,800,566 $ 6,432,009 $ 7,513,400
Food and beverage revenue 519,440 178,183 396,270
Other revenue 591,135 29,021 221,708
----------- ----------- -----------
Total revenues 19,911,141 6,639,213 8,131,378
EXPENSES:
Departmental expenses:
Rooms 4,915,019 1,057,092 1,764,755
Food and beverage 921,514 178,383 461,468
General and administrative 4,470,820 1,027,876 2,109,610
Advertising and promotion 870,732 199,679 284,948
Utilities 933,994 216,943 350,585
Repairs and maintenance 2,473,074 629,782 878,276
Real estate, personal property taxes,
and insurance 911,870 209,864 -
Percentage rent - - 2,779,004
Interest expense 1,853,800 425,330 -
Depreciation 1,225,898 309,294 -
----------- ----------- -----------
Total expenses 18,576,721 4,254,243 8,628,646
----------- ----------- -----------
NET INCOME (LOSS) $ 1,334,420 $ 2,384,970 $ (497,268)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-10-
<PAGE> 11
REALTY HOTEL LESSEE CORP.
Combined Statements of Cash Flows
Three months ended March 31, 1998
<TABLE>
<CAPTION>
Predecessor
-------------------------------
December 31, March 31, March 31,
1997 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 1,334,420 $ 2,384,970 $ (497,268)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,264,424 300,901 -
(Increase) decrease in:
Accounts receivable (226,419) (247,285) (325,258)
Inventories (68,323) (18,990) (144,557)
Cash held in escrow (30,039) -
Other assets 581,474 (211,385) 142,986
Payments on behalf of RRF (320,668)
Increase (decrease) in:
Accounts payable 321,975 63,526 111,471
Bank overdraft - - 225,953
Accrued expenses 737,618 26,077 465,383
Percentage rent payable 2,373,108
----------- ----------- -----------
Net cash provided by operating activities 3,915,130 2,297,814 2,031,150
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures, and equipment (281,998) - -
Acquisition of land, building and equipment (79,707) - -
Guest room remodeling (565,471) - -
Transfer of net assets - - (1,644,720)
Capitalization of partners' capital (742,576) - -
----------- ----------- -----------
Net cash used by investing activities (1,669,752) - (1,644,720)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of mortgage notes payable (636,524) (115,896) -
Refinancing of mortgage notes payable (5,017,226) - -
Increase in loans from affiliates 678,456 - -
Increase of mortgage notes payable 7,000,000 - -
Purchases of partners' capital 157,907 - -
Distributions (4,866,351) (1,342,796) -
Lines of credit (6,728) - -
Loan fees (29,000) - -
Capital lease obligations (24,838) (8,436) -
----------- ----------- -----------
Net cash (used) by financing activities (2,744,304) (1,467,128) -
Net change in cash and cash equivalents (498,926) 830,686 386,430
Cash and cash equivalents at beginning of year 628,797 628,797 129,871
=========== =========== ===========
Cash and cash equivalents at end of year $ 129,871 $ 1,459,483 $ 516,301
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-11-
<PAGE> 12
REALTY HOTEL LESSEE CORP.
Notes to Combined Financial Statements
March 31, 1998
(unaudited)
1. Description of business:
Realty Hotel Lessee Corp. (the Lessee) manages and operates
full and limited service hotels located in Arizona and California.
2. Organization:
The Lessee commenced operations on January 31, 1998 as the exclusive
lessee of an Ohio real estate investment trust ("REIT"). The Lessor
is RRF Limited Partnership, which owns the hotel properties as of
January 31, 1998 and of which the REIT is the sole general partner.
3. Basis of Presentation:
These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The Lessee
operates on a calendar year basis, and accordingly, its financial
information is presented on that basis. The financial statements for
1997 and March 31, 1997 represent the predecessor's financial
statements and are not comparable in all respects with the financial
statements of the Lessee. Operating results for the three-month period
ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998. For further
information, refer to the predecessor's consolidated financial
statements and footnotes thereto included in the REIT's annual report
on Form 10-K for the period ended January 31, 1998.
-12-
<PAGE> 13
REALTY HOTEL LESSEE CORP.
Notes to Combined Financial Statements
March 31, 1998
(unaudited)
4. Percentage Lease Agreements:
At April 30, 1998, the Lessee leases nine hotels (the Hotels) from
RRF Limited Partnership and, in the case of one of the Hotels, RRF Sub
Corp., pursuant to long-term leases (Percentage Leases). The Hotels
are located in Phoenix, Tempe, Scottsdale, Flagstaff, Tucson (2), and
Yuma, Arizona; and San Diego and Ontario, California.
The Percentage Leases end on May 31, 2007, subject to earlier
termination on the occurrence of certain contingencies, as defined. The
Percentage Leases do not contain renewal terms. The Lessee is required
to pay the greater of minimum rent, as defined, or a percentage rent.
Percentage rent applicable to room and other hotel revenue varies by
lease and is calculated by multiplying fixed percentages by the total
amounts of such revenues over specified threshold amounts. Percentage
rent related to food and beverage revenues is at 5% of such revenues in
excess of $200,000 in all of the Percentage Leases. Both the threshold
amounts used in computing percentage rent and minimum rent are subject
to annual adjustments beginning January 1, 1999 based on increases in
the United States Consumer Price Index.
Other than real estate and personal property taxes, casualty insurance
and capital improvements, which are obligations of the Partnership, the
Percentage Leases require the Lessee to pay all costs and expenses
incurred in the operation of the Hotels.
The Percentage Leases require the Lessee to indemnify each lessor
against all liabilities, costs and expenses incurred by, imposed on or
asserted against each lessor in the normal course of operating the
Hotels.
Future minimum rent (ignoring CPI increases) to be paid by the Lessee
under the Percentage Leases for nine hotels, including San Diego, at
March 31, 1998 for each of the years in the period 1998 to 2002 and
in total thereafter is as follows:
<TABLE>
<S> <C>
Calendar 1998 $ 4,888,000
1999 6,350,000
2000 6,350,000
2001 6,350,000
2002 6,350,000
Thereafter 27,514,000
-----------
$57,802,000
===========
</TABLE>
Rent expense for the two months ended March 31, 1998 was $2,779,004 of
which approximately $923,044 was in excess of minimum rent.
-13-
<PAGE> 14
REALTY HOTEL LESSEE CORP.
Notes to Combined Financial Statements
March 31, 1998
(unaudited)
5. Pro Forma Financial Information:
The following unaudited pro forma condensed statements of operations
for the three-month periods ended March 31, 1998 and 1997 are presented
as if the Lessee leased and operated from January 1, 1997 all of the
Hotels owned by the Partnership as of March 31, 1998 (in thousands).
The pro forma condensed statements of operations do not purport to
present what actual results of operations would have been if the Hotels
were operated by the Lessee pursuant to the Percentage Leases from
January 1, 1997 or to project results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----- -----
<S> <C> <C>
Room revenue $ 7,513 7,457
Food and beverage revenue 396 503
Other revenue 222 95
------- -------
Total revenues 8,131 8,055
------- -------
Departmental expenses of hotels 2,226 1,844
Percentage lease expense 3,933 3,932
Other expenses 3,610 2,657
------- -------
Net loss $(1,638) (378)
======= =======
</TABLE>
6. Subsequent Event:
In April 1998, the Partnership purchased a hotel located in San Diego,
California which was leased to the Lessee pursuant to a long-term
percentage lease.
-14-
<PAGE> 15
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
On February 1, 1998, RRF Limited Partnership (the
"Partnership") acquired 100% of the ownership interests in the Tucson St. Mary's
InnSuites Hotel and Resort for $10,820,000. The Partnership assumed $7,803,000
in mortgage debt and other obligations and issued 669,933 limited partnership
units to James F. Wirth, Trustee, Chairman, President and Chief Executive
Officer of the Company, and his wife (of which 28,800 units were subsequently
paid to third parties as advisory fees), who collectively held all of the equity
ownership interests in the Tucson St. Mary's hotel. On April 29, 1998, the
Partnership acquired the InnSuites Hotel San Diego for $5,148,000. The
Partnership invested $1,448,000 in cash (of which $1,348,000 was drawn under the
Company's secured revolving line of credit with Pacific Century Bank) and became
obligated for $3,700,000 in seller financing in the form of two promissory notes
secured by mortgage trust deeds on the property.
On June 9, 1998, a majority of the Company's independent
Trustees voted to exercise, as of June 1, 1998, an option held by the Company to
acquire all of the ownership interests in an 185-suite InnSuites Hotel located
in Buena Park, California. The total consideration for the ownership interests
that will be contributed to the Partnership will be the greater of (i)
$6,900,000 or (ii) fair market value as determined by an independent appraisal.
Mr. Wirth owns a 50% interest in the Buena Park hotel.
At April 30, 1998, the Company owned a 12.4% interest in eight
hotels through its sole general partner interest in the Partnership and 100% of
a ninth hotel through RRF Sub Corp., a wholly-owned subsidiary of the Company.
(Unless the context indicates otherwise, all references to the Partnership shall
include RRF Sub Corp.) In order for the Company to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (a "REIT"),
neither the Company nor the Partnership can operate the hotels. Therefore, each
of the hotels is leased to, and operated by, Realty Hotel Lessee Corp. (the
"Lessee") pursuant to a Percentage Lease. Each Percentage Lease obligates the
Lessee to pay rent equal to the greater of a minimum rent or a percentage rent
based on the gross revenues of each hotel. The Lessee also holds the franchise
agreement for each hotel. The Lessee is owned 9.8% by InnSuites Innternational
Hotels, Inc., an entity owned by Mr. Wirth and his wife. The Company's principal
source of revenue is distributions from the Partnership, which are dependent
upon lease payments from the Lessee pursuant to the Percentage Leases. The
Lessee's ability to make payments to the Partnership pursuant to the Percentage
Leases is dependent primarily upon the operations of the hotels. Therefore,
management believes that a discussion of the pro forma operating results of the
Lessee is important to an understanding of the business of the Company. The
following discusses (i) the Company's pro forma results of operations for the
year ended January 31, 1998 and for the quarters ended April 30, 1998 and April
30, 1997; and (ii) the Lessee's pro forma results of operations for the year
ended December 31, 1997 and for the quarters ended March 31, 1998 and March 31,
1997.
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PRO FORMA RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY.
For the year ended January 31, 1998, the Company had pro forma revenues
of $7.9 million from the Percentage Leases that would have been in place at the
hotels. The Company had only $.55 million in interest income compared to $1.6
million in interest income from mortgage investments in 1997 due to loan
repayments during fiscal 1997. Other rental revenue of $1.4 million and
operating expenses
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of $1.4 million and amortization of $.02 million related to the Carbon & Carbide
Building (the sale of which closed on September 4, 1997), have been eliminated.
Net income to stockholders (after minority interest) declined to $.29 million
from $1.3 million due to the elimination of the positive spread on the mortgage
investments and presentation of $2.3 million in cash realized from sale of the
Carbon & Carbide Building without reflecting any pro forma income or return from
investment of that cash.
For the quarter ended April 30, 1998, the Company had pro forma revenues of $3.8
million compared to $3.6 million for the quarter ended April 30, 1997, an
increase of 0.2 million (5.6%). This was due primarily to a $0.2 million
increase in Percentage Lease revenues in 1998 caused by an 1% increase in
occupancy at the hotels and an $1.96 increase in the average daily rate (ADR) at
the hotels. Total expenses increased $0.27 million from $1.68 million in the
quarter ended April 30, 1997 to $1.95 million in the quarter ended April 30,
1998. An increase of $0.27 million in general and administrative expenses was
due to increased legal and accounting and advisory expenses. Overall, the
Company improved net income applicable to common shares to $0.44 million for the
period ended April 30, 1998, an increase of $0.23 million (110%), from $0.21
million for the period ended April 30, 1997 and grew earnings per common share
(basic and diluted) to $0.26 from $0.12 for the same respective periods.
PRO FORMA RESULTS OF OPERATIONS OF LESSEE.
For the year ended December 31, 1997, the Lessee had pro forma revenues
of $19.9 million compared to $18.3 million for the year ended December 31, 1996,
an increase of $1.6 million (8.7%). This was due to increases in occupancy from
71.9% in 1996 to 74.3% in 1997 and ADR from $69.17 in 1996 to $71.80 in 1997.
Total expenses increased $2.3 million from $20.2 million in the year ended
December 31, 1996 to $22.5 million in the year ended December 31, 1997.
Increases of $1.0 million in general and administrative expenses, and $.53
million in Percentage Lease payments were consistent with increased occupancy
and revenues and, in the case of general and administrative expenses, due to
increased legal and accounting expenses. Repairs and maintenance of $2.5 million
in 1997 ($.1 million less than in 1996) remained high due to costs of the
ongoing refurbishing program which was substantially completed by the end of
calendar 1997. The larger increase in expenses ($2.3 million) as compared to the
$1.6 million increase in revenues resulted in a $.74 million increased loss to
$2.58 million in the year ended December 31, 1997 as compared to the $1.84
million loss for the year ended December 31, 1996.
For the quarter ended March 31, 1998, the Lessee had pro forma revenues
of $8.1 million compared to $8.1 million for the quarter ended March 31, 1997.
This was due to consistent occupancy of 77.5% in 1998 and 1997 and an increase
in ADR from $74.81 in 1997 to $77.89 in 1998. Total expenses increased $1.4
million from $8.4 million in the quarter ended March 31, 1997 to $9.8 million in
the quarter ended March 31, 1998. The increase of $1.1 million in general and
administrative expenses was due to increased legal and accounting expenses.
Repairs and maintenance of $.55 million in 1998 ($.2 million more than in 1997)
remained high due to costs of the ongoing refurbishment program. The larger
increase in expenses ($1.4 million) as compared to constant revenues resulted in
a $1.2 million decrease in profitability to a $1.6 million loss in the quarter
ended March 31, 1998 as compared to the $.4 million loss for the quarter ended
March 31, 1997 on a pro forma basis.
Room revenues increased $.6 million, or 1.0%, from the quarter ended
March 31, 1997 to the quarter ended March 31, 1998. This was driven by an
increase in ADR of $3.08, along with constant occupancy of 77.5% from quarter to
quarter. This was attributable to the general improvement in the business travel
and tourism industries, some new competition in the markets where the hotels
operate and the InnSuites' refurbishment program. Food and beverage revenue
declined $.1 million or 21% from the quarter ended March 31, 1997 to the quarter
ended March 31, 1998 relating to the addition of a full service food and
beverage operation at the Tucson St. Mary's hotel and expansion of food service,
including room service at two of the other hotels. The composition of revenue
remained consistent between the periods, with only a slight decrease in food and
beverage revenues, from 6.0% of the total to 5.0%, which reflects that most of
the gains in revenue occurred in room rates during this period.
Departmental expenses grew by $.4 million, or 21%, between the years
because of the addition of the Tucson St. Mary's hotel, expansion of food
service, increased payroll costs, general inflationary pressures and increased
occupancy. These costs increased as a percentage of revenues from 23% in 1997 to
27% in 1998, as expenses grew faster than revenues, primarily through increased
payroll.
ACTUAL RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY
Comparison of the quarter ended April 30, 1998 with 1997
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For the quarter ended April 30, 1998, the Company has revenues
of $3.8 million compared to $.6 million for the quarter ended April 30, 1997, an
increase of $3.2 million, reflecting the inclusion of lease revenues of $3.8
million in the quarter ending April 30, 1998 following the formation
transactions and the absence of $.6 million of revenue from rental of real
estate held for sale (the Carbon & Carbide Building) which was sold in
September 1997. Total expenses of $1.9 million included a $1.3 million increase
over expenses of $.6 million in the quarter ended April 30, 1998 due to
inclusion of $.5 million in depreciation, $.6 million in mortgage interest paid,
$.2 million in property taxes, insurance and ground rent paid and $.2 million in
advisory fees paid to Mid-America ReaFund Advisors, Inc., a related party, which
were all associated with the ownership of the hotels in the quarter ending April
30, 1998 compared to no similar expenses in the quarter ended April 30, 1997
when the Company owned no hotels. General and administrative expense increased
$.28 million from $.06 million in the quarter ended April 30, 1997 to $.34
million in the quarter ended April 30, 1998 due to increased expenses related to
administering and increasing the number of hotels from seven to nine at April
30, 1998. Expenses related to the operation of the Carbon & Carbide Building of
$.5 million incurred in the quarter ending April 30, 1997 were not incurred in
the quarter ending April 30, 1998 due to the sale of that building in September
1997. Net income of $1.8 million in the quarter ended April 30, 1998 represented
a $1.9 million improvement over the $.09 million loss incurred in the quarter
ended April 30, 1997. After deducting minority interest of $1.3 million, net
income applicable to common shares of $.44 million and earnings per share of
$.26 for the quarter ended April 30, 1998 represented an increase of $.5 million
over the $.09 million loss ($.09 per share) incurred in the quarter ended April
30, 1997. Funds from Operations (FFO), which represents net income plus non-cash
charges, including depreciation and amortization, increased from ($.08) million
or ($.08) per share in the quarter ended April 30, 1997 to $.6 million or $.35
per share in the quarter ended April 30, 1998. Cash available for distribution
(CAD) which is FFO plus amortization of debt and reserves for repairs and
replacements (4% of gross revenue) was $.4 million or $.26 per share for the
quarter ended April 30, 1998 compared to ($.8) million and ($.08) per share for
the quarter ended April 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Outstanding mortgage debt increased from $17.7 million at
January 31, 1998 to $25.3 million at April 30, 1998 due to mortgage debt assumed
or borrowed related to the acquisitions of the Tucson St. Mary's and San Diego
hotels.
Beyond the 4% reserve for refurbishment and replacements set
aside annually, the Company has no present commitments for extraordinary capital
expenditures other than $450,000 in anticipated refurbishing costs at the
recently acquired InnSuites Hotel San Diego.
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SEASONALITY
The hotels' operations historically have been seasonal. The
six southern Arizona hotels and the Ontario, California hotel experience their
highest occupancy rates in the first fiscal quarter. The Flagstaff, Arizona and
San Diego, California hotels experience their highest occupancy rates in the
second and third fiscal quarters. This seasonality pattern can be expected to
cause fluctuations in the Company's quarterly lease revenues under the
Percentage Leases. The Company anticipates that its cash flow from the
Lessee's operation of the hotels will be sufficient to enable the Company to
make quarterly distributions at the estimated initial rate of $.05 per share
for at least the next twelve months. To the extent that cash flow from
operations is insufficient during any quarter, because of temporary or
seasonal fluctuations in lease revenue, the Company expects to utilize other
cash on hand or borrowings to make those distributions. No assurance can be
given that the Company will make distributions in the future at the initially
estimated rate, or at all.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs
having been written using two digits instead of four digits to define the
applicable year. Any of the Company's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could potentially result in a system failure or miscalculations,
causing disruptions of operations and normal business activity.
The Company is currently in the process of identifying and
evaluating its computer programs that could be affected by the Year 2000 problem
and, if necessary, will develop a plan to make its computer programs Year 2000
compliant. If the Company determines that modifications and conversions are
necessary, the failure to complete such modifications and conversions in a
timely manner may have a material impact on the operations of the Company. The
Company has not determined with certainty the total cost which will be incurred
by the Company in connection with Year 2000 compliance. However, the Company
believes that such costs will not result in a material adverse effect on its
financial condition or results of operations. Costs related to the Year 2000
problem are being expensed as incurred.
The Company cannot predict the effect of the Year 2000 problem
on vendors, customers and other entities with which the Company transacts
business, and there can be no assurance that the effect of the Year 2000 problem
on such entities will not adversely affect the Company's operations.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company
intends that such forward-looking statements be subject to the safe harbors
created by such Acts. Those forward-looking statements include statements
regarding the intent, belief or current expectations of the Company, its
Trustees or its officers in respect of (i) the declaration or payment of
dividends; (ii) the leasing, management or operation of the hotels; (iii) the
adequacy of reserves for renovation and refurbishment; (iv) the Company's
financing plans; (v) the Company's position regarding investments, acquisitions,
financings, conflicts of interest and other matters; (vi) the Company's
continued qualification as a REIT; and (vii) trends affecting the Company's or
any hotel's financial condition or results of operations. The words and phrases
"looking ahead", "we are confident", "should be", "will be", "predicted",
"believe", "expect", "anticipate" and similar expressions identify
forward-looking statements.
These forward-looking statements reflect the Company's current
views in respect of future events and financial performance, but are subject to
many uncertainties and factors relating to the operations and business
environment of the hotels which may cause the actual results of the Company to
differ materially from any future results expressed or implied by such
forward-looking statements. Examples of such uncertainties include, but are not
limited to: fluctuations in hotel occupancy rates; changes in room rental rates
which may be charged by the
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<PAGE> 20
Lessee in response to market rental rate changes or otherwise; interest rate
fluctuations; changes in federal income tax laws and regulations; competition;
any changes in the Company's financial condition or operating results due to
acquisitions or dispositions of hotel properties; real estate and hospitality
market conditions; hospitality industry factors; and local or national economic
and business conditions, including, without limitation, conditions which may
affect public securities markets generally, the hospitality industry, or the
markets in which the Company operates or will operate. The Company undertakes no
obligation to update publicly or revise any forward-looking statements whether
as a result of new information, future events or otherwise. Pursuant to Section
21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications set
forth hereinabove are inapplicable to any forward-looking statements in this
Form 10-Q relating to the operations of the Partnership.
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PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
In August 1997, a stockholder of the Company filed suit
against the Company and its former Trustees in the Court of Common Pleas for
Cuyahoga County, Ohio, seeking damages in an unspecified amount for alleged
mismanagement of the Company. This suit was voluntarily dismissed by the
plaintiff in April 1998.
Currently, the Company is not a party nor are its properties
subject to any material litigation or environmental regulatory proceedings.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Number Exhibit
-------------- -------
3.1 First Amended and Restated
Declaration of Trust (incorporated
by reference to Exhibit 3.1 of
Registration Statement No. 2-40238,
effective June 17, 1971).
10.1 Contribution Agreement dated as of
February 1, 1998, between James F.
Wirth, Gail J. Wirth and RRF Limited
Partnership (incorporated by
reference to Exhibit 2.1 of the
Registrant's Form 8-K, filed with
the Securities and Exchange
Commission on March 16, 1998).
10.2 Agreement of Purchase and Sale and
Joint Escrow Instructions dated
March 20, 1998, between Lafayette
Hotel, LLC and RRF Limited
Partnership (incorporated by
reference to Exhibit 2.1 of the
Registrant's Form 8-K/A, filed with
the Securities and Exchange
Commission on May 27, 1998).
27.1 Financial Data Schedule.(1)
(1) Filed only in electronic format pursuant to Item
601(c) of Regulation S-K.
(b) Reports on Form 8-K.
1. Current Report on Form 8-K filed February 17, 1998,
as amended by Form 8-K/A filed April 20, 1998, in
connection with the formation of an umbrella
partnership real estate investment trust and the
acquisition of interests in seven hotel properties,
and including the following financial statements:
Report of Independent Public Accountants; Combined
Balance Sheets as of December 31, 1996 and 1995 and
September 30, 1997; Combined Statements of Operations
for the three years ended December 31, 1996 and for
the nine months ended September 30, 1996 and
September 30, 1997; Combined Statements of Equity for
the three years ended December 31, 1996 and for the
six months ended June 30, 1997; Combined Statements
of Cash Flows for the three years ended December 31,
1996 and for the nine months ended September 30, 1996
and September 30, 1997; Notes to Combined Financial
Statements; Pro Forma Condensed Consolidated Balance
Sheet as of October 31, 1997; Notes to Pro Forma
Condensed Consolidated Balance Sheet; Pro Forma
Condensed Consolidated Statement of Income for the
year ended January 31,
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<PAGE> 22
1997; Pro Forma Condensed Consolidated Statement of
Income for the nine months ended October 31, 1997;
and Notes to Pro Forma Consolidated Statements of
Income.
2. Current Report on Form 8-K filed March 16, 1998, as
amended by Form 8-K/A filed May 15, 1998, in
connection with the acquisition of interests in the
Tucson St. Mary's hotel property, and including the
following financial statements: Report of Independent
Public Accountants; Balance Sheet as of December 31,
1997; Statements of Operations and Members' Deficit
for the year ended December 31, 1997; Statement of
Cash Flows for the year ended December 31, 1997;
Notes to the Financial Statements; Pro Forma
Consolidated Balance Sheet as of January 31, 1998 and
1997; Notes to the Pro Forma Consolidated Balance
Sheet as of January 31, 1998; Pro Forma Consolidated
Statement of Operations for the year ended January
31, 1998; and Notes to the Pro Forma Consolidated
Statement of Operations for the year ended January
31, 1998.
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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.
Dated: June 24, 1998 REALTY ReFUND TRUST
(Registrant)
By:/s/ Gregory D. Bruhn
---------------------------------------
Gregory D. Bruhn, Executive Vice
President, Chief Financial Officer,
Treasurer and Secretary
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