<PAGE> 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 September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND 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)
<TABLE>
<S> <C>
Tennessee 62-1534743
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
889 Ridge Lake Boulevard, Suite 100, Memphis, TN 38120 (901) 767-5154
(Address of Principal Executive Offices) (Registrant's Telephone Number
(Zip Code) Including Area Code)
</TABLE>
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 and 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, 1996 was 24,384,000.
<PAGE> 2
RFS HOTEL INVESTORS, INC.
INDEX
<TABLE>
<CAPTION>
Form 10-Q
Report
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RFS Hotel Investors, Inc.
Consolidated Balance Sheets - December 31, 1995 and
September 30, 1996 3
Consolidated Statements of Income - For the three months ended
September 30, 1995 and 1996 and the nine months ended
September 30, 1995 and 1996 4
Consolidated Statements of Cash Flows - For the nine months ended
September 30, 1995 and 1996 5
Notes to Consolidated Financial Statements 6
RFS, Inc.
Balance Sheets - December 31, 1995 and September 30, 1996 9
Income Statements - For the three months ended September 30,
1995 and 1996 and the nine months ended September 30,
1995 and 1996 10
Statements of Cash Flows - For the nine months ended September 30,
1995 and 1996 11
Notes to Financial Statements 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations of RFS Hotel Investors, Inc.
and RFS, Inc. 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(unaudited)
<S> <C>
ASSETS
Investment in hotel properties, net $363,014 $401,883
Hotels under development 1,083 7,967
Cash and cash equivalents 2,680 1,124
Accounts receivable-Lessees 5,795 11,494
Deferred expenses, net 1,579 1,345
Prepaid and other assets 574 577
Escrow deposits on hotels under development 2,201 2,045
-------- --------
$376,926 $426,435
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,758 $ 1,989
Accrued real estate taxes 1,660 2,641
Borrowings on line of credit 21,850 48,600
Long-term debt 8,336 8,305
Minority interest 4,509 4,581
-------- --------
38,113 66,116
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 973,684 outstanding 10
Common Stock, $.01 par value, 100,000,000 shares
authorized, 24,294,000 and 24,384,000 shares outstand 243 244
Paid-in capital 336,857 356,548
Undistributed income 3,111 6,027
Unearned directors' and officers' compensation (1,398) (2,510)
-------- --------
Total shareholders' equity 338,813 360,319
-------- --------
$376,926 $426,435
======== ========
</TABLE>
The accompanying notes are integral
part of these consolidated financial statements.
3
<PAGE> 4
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1995 1996 1995 1996
-------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Lease revenue $13,609 $18,226 $35,494 $47,594
Interest income 154 116 1,004 259
------- ------- ------- -------
Total revenue 13,763 18,342 36,498 47,853
------- ------- ------- -------
Expenses:
Real estate taxes and property
and casualty insurance 1,216 1,550 3,819 4,459
Depreciation 2,106 2,804 6,144 7,944
Amortization of franchise fees
and unearned compensation 136 212 400 543
Compensation 240 572 695 1,485
Franchise taxes 50 65 150 195
General and administrative 267 548 565 1,475
Loss on sale of hotel property 0 0 0 244
Amortization of loan costs 87 87 222 264
Interest expense 21 951 69 2,360
------- ------- ------- -------
Total expenses 4,123 6,789 12,064 18,969
------- ------- ------- -------
Income before allocation to
minority interest 9,640 11,553 24,434 28,884
Income allocation to minority interest 127 161 330 406
------- ------- ------- -------
Net income $9,513 $11,392 $24,104 $28,478
======= ======= ======= =======
Net income per common and
common equivalent share $0.39 $0.45 $0.99 $1.14
Weighted average shares and
partnership units outstanding 24,623 24,700 24,626 24,667
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
4
<PAGE> 5
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months ended Months ended
September 30, September 30,
1995 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $24,104 $28,478
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,766 8,751
Income allocated to minority interest 330 406
Loss on sale of hotel property 244
Changes in assets and liabilities:
Accounts receivable-Lessee (4,101) (5,721)
Prepaid and other assets (471) (3)
Accounts payable and accrued expense 304 1,212
----------- ----------
Net cash provided by operating activities 26,932 33,367
----------- ----------
Cash flows from investing activities:
Investment in hotel properties and hotels under
development (36,936) (56,620)
Proceeds from sale of hotel property 3,891
Escrow deposits on hotels under development (2,767) (1,034)
Cash paid for franchise agreements (502) 0
----------- ----------
Net cash used by investing activites (40,205) (53,763)
----------- ----------
Cash flows from financing activities:
Borrowings on Credit Line 38,750
Payments on Credit Line (12,000)
Payments on long-term debt (31)
Net proceeds from sale of preferred stock 18,143
Redemption of units (100)
Distributions to shareholders (21,135) (25,562)
Distributions to limited partners (410) (334)
Loan fees paid (137) (126)
----------- ----------
Net cash provided (used) by financing activities (21,782) 18,840
----------- ----------
Net increase (decrease) in cash and cash equivalents (35,055) (1,556)
Cash and cash equivalents at beginning of period 45,650 2,680
----------- ----------
Cash and cash equivalents at end of period $10,595 $1,124
=========== ==========
</TABLE>
Supplemental disclosures of non-cash activities:
In 1996, the Company applied deposits of $1,190 towards the purchase of
acquired hotels and land respectively.
In 1996, the Company issued 75,000 shares of Common Stock to an officer,
which at date of issuance, were valued at $17 5/8 per share.
In July 1995, the Partnership applied a deposit of $1,002 towards the
purchase of an acquired hotel.
The accompanying notes are an integral
part of these consolidated financial statements.
5
<PAGE> 6
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. The Company has elected to be
taxed as a real estate investment trust ("REIT"). The Company is the sole
general partner in RFS Partnership, L.P. (the "Partnership") and at September
30, 1996 owned an approximately 98.7% interest in the Partnership. The Company
was formed to acquire equity interests in hotel properties and at September 30,
1996 owned, through the Partnership, 50 hotels (the "Hotels"). RFS Managers,
Inc. ("Managers"), a wholly-owned subsidiary of the Company, was formed,
effective January 1, 1995, to provide management services to the Company.
These unaudited consolidated financial statements include the accounts of
the Company, the Partnership and Managers 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 1995 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. DECLARATION OF DIVIDEND. On October 23, 1996, the Company declared a
$0.36 dividend on each share of Common Stock outstanding to shareholders of
record on November 5, 1996. The dividend will be paid on November 15, 1996.
3. ACQUISITIONS OF REAL ESTATE. In July 1996, the Partnership acquired a
newly-constructed 132-room Hampton Inn in Plano, TX, for $6.8 million from an
unaffiliated party. The purchase price was paid with borrowings under the
Company's $75 million line of credit (the "Credit Line").
4. SUBSEQUENT EVENTS. In November 1996, the Partnership acquired a
parcel of land in Jacksonville, Florida from an unaffiliated party for $1.3
million on which the Partnership plans to develop 120-suite Residence Inn.
Estimated development costs, including the land purchase, are approximately
$8.4 million. The hotel is expected to be completed in the third quarter of
1997.
5. IMPLEMENTATION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS. In
October 1995, the Financial Accounting Statements Board ("FASB") issued
statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), which is effective for transactions
entered into after December 15, 1995. FAS 123 establishes fair value-based
financial and reporting standards for entities with stock-based compensation
arrangements. FAS 123 provides for the election of either certain recognition
provisions or certain disclosure-only provisions. The Company expects to elect
the disclosure-only provision of FAS 123.
6
<PAGE> 7
6. COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE. Net
income per common and common equivalent share is computed as follows for the
three and the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
Sept. 30, 1996 Sept. 30, 1996
-------------- --------------
<S> <C> <C>
Net income before allocation
to minority interest $11,553 $28,884
Less preferred stock dividend 356 839
------- -------
$11,197 $28,045
======= =======
Weighted average common shares
and common stock equivalents
outstanding 24,700 24,667
Net income per common share $ 0.45 $ 1.14
======= =======
</TABLE>
7
<PAGE> 8
7. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro
forma condensed statements of income for the nine months ended September 30,
1995 and 1996 of the Company are presented as if the 50 hotel properties owned
at September 30, 1996 were owned since January 1, 1995. 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, 1995, nor does it purport to
represent the results of operations for future periods. The pro forma effects
related to the issuance of preferred stock are not reflected in the following.
<TABLE>
<CAPTION>
1995 1996
---- ----
Operating Data:
<S> <C> <C>
Total revenue $42,344 $48,595
Real estate taxes and casualty
insurance 4,364 4,499
Depreciation and amortization 8,766 8,939
Compensation 695 1,485
Franchise taxes 150 195
General and administrative 565 1,475
Loss on sale of a hotel property 244
Interest expense 2,871 2,871
------- -------
Income before allocation to minority
interest 24,933 28,887
Less minority interest 329 406
-------- --------
Net income $ 24,604 $ 28,481
======== ========
Net income per common share $ 1.01 1.14
Weighted average shares and
partnership units outstanding 24,619 24,667
</TABLE>
8
<PAGE> 9
RFS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---- ----
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 9,238 $ 14,314
Accounts receivable, net 2,507 3,899
Current portion of notes and other receivables - -
Other 364 601
--------- ---------
Total current assets 12,109 18,814
--------- ---------
Notes and other receiveables, net of current portion - 3,000
Investments in partnerships and ventures (312) (314)
Investment in RFS Hotel Investors, Inc. 1,379 19,901
Hotel properties furniture and equipment, net - -
Leasehold improvements and office equipment, net 334 287
Deferred costs and other assets, net 311 3,001
--------- ---------
Total assets $ 13,821 $ 44,689
========= =========
Liabilities and Stockholder's Equity
Accounts payable and accrued expenses $ 7,100 $ 6,968
Accrued interest payable 4 -
Lease payable 5,795 11,011
Due to Parent - 522
Income taxes payable 151 2,432
--------- ---------
Total current liabilities 13,050 20,933
--------- ---------
Notes payable 672 -
Deferred income taxes 36 36
--------- ---------
Total Liabilities 13,758 20,969
--------- ---------
Common stock, no par value; 1,000 shares authorized,
100 shares issued and outstanding 282 18,782
Unearned employee compensation (211) (158)
Unrealized gain on marketable securities 22 44
Retained earnings (accumulated deficit) (30) 5,052
---------- ---------
Total Stockholder's Equity 63 23,720
--------- ---------
Total Liabilities and Stockholder's Equity $ 13,821 $ 44,689
========= =========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
<PAGE> 10
RFS, INC.
INCOME STATEMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------- -----------------------------
1995 1996 1995 1996
-------------------------------- -----------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Management and franchise fees 118 356 332 471
Hotel revenues 33,016 41,069 90,390 113,792
Other fees and income (143) 569 205 1,347
---------- -------- ---------- ---------
TOTAL REVENUES 32,991 41,994 90,927 115,610
Operating Expenses:
General and administrative 1,026 895 3,020 2,741
Hotel expenses 17,192 20,245 48,723 58,201
Lease expenses 13,609 17,490 35,494 46,647
Depreciation and amortization 26 73 74 189
Interest expense 15 3 79 14
---------- -------- ----------- ----------
TOTAL OPERATING EXPENSES 31,868 38,706 87,390 107,792
---------- -------- ----------- ----------
INCOME BEFORE TAXES 1,123 3,288 3,537 7,818
Income tax (expense) benefit (42) (1,151) 132 (2,736)
---------- -------- ----------- ----------
NET INCOME $ 1,081 $ 2,137 $ 3,669 $ 5,082
========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
10
<PAGE> 11
RFS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------
1995 1996
-----------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,669 $ 5,082
Adjustments to reconcile net income to net cash
provided by operations:
Provision for bad debts - 209
Depreciation and amortization 74 189
Other non-cash expenses - 53
Deferred income taxes (174) -
(Increase) decrease in accounts receivable (1,125) (1,601)
(Increase) decrease in other assets 435 (406)
Increase in current liabilities 4,196 7,883
-------- --------
NET CASH PROVIDED BY OPERATIONS 7,075 11,409
-------- --------
Cash flows from investing activities:
Purchases of furniture and equipment (185) (37)
Investment in RFS Hotel Investors, Inc. (442) (18,500)
Investments in partnerships and ventures (206) -
Distributions from partnerships and ventures 1 2
Increase in deferred costs and other assets - (2,626)
Loans to owners of managed hotels, net - (3,000)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (832) (24,161)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock to Parent - 18,500
Payment of dividends and distributions to shareholders (1,305) -
Principal repayments (826) (672)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (2,131) 17,828
-------- --------
Net increase in cash and cash equivalents 4,112 5,076
Cash and cash equivalents at beginning of year 6,994 9,238
-------- --------
Cash and cash equivalents at end of year $ 11,106 $ 14,314
======== ========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
11
<PAGE> 12
RFS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION. Effective February 27, 1996, RFS, Inc.
(the "Lessee") became a wholly owned subsidiary of Doubletree Corporation. It
generates substantially all of its revenue from operating and managing leased
hotels owned by RFS Partnership, L.P. (the "Partnership"). The Partnership is
98.7% owned by RFS Hotel Investors, Inc. (the "Company").
Substantially all of the hotels owned by the Partnership (the "Hotels") are
separately leased by the Partnership to the Lessee under a lease agreement
(collectively, the "Percentage Leases"). The Percentage Leases provide for the
payment of annual rent equal to the greater of (i) fixed base rent or (ii)
percentage rent based on a percentage of gross room revenue, food revenue and
beverage revenue at the Hotels. At September 30, 1996, the Lessee
leased 49 hotels from the Partnership. It is anticipated that future hotels
acquired by the Partnership will be leased by the Partnership to the Lessee
pursuant to Percentage Leases. At September 30, 1996, the Lessee operated 45
of the Hotels. Three Hotels are operated by Alpha Inn Management Company and
one by TMH, Inc. pursuant to management agreements between the Lessee and Alpha
Inn Management Company and TMH, Inc. Additionally, the Lessee manages 10
hotels for unrelated entities of the Company.
These unaudited financial statements of the Lessee 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 and the Lessee included in the Company's 1995 Annual
Report on Form 10-K. The following notes to the consolidated financial
statements highlight changes to notes included in the Form 10-K and present
interim disclosures required by the SEC. The accompanying 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. Certain financial statement items from prior years
have been reclassified to be consistent with the current year financial
statement presentation.
2. INVESTMENT IN RFS HOTEL INVESTORS, INC. The Lessee purchased 973,684 shares
of the Company's convertible preferred stock for $19 per share or $18.5
million. This investment is recorded at cost as there is no ready market for
these securities. The convertible preferred stock will pay a fixed annual
dividend of $1.45 per share and is convertible on a one-for-one share basis at
the end of seven years.
12
<PAGE> 13
3. NOTES AND OTHER RECEIVABLES. In June 1996, the Lessee obtained management
agreements for eight hotel properties owned by entities unrelated to the
Company. In connection with obtaining these contracts, the Lessee loaned $3.0
million to the owners, principally for renovations. The loan bears interest at
10% and is repayable as follows:
$300,000 on December 31, 1998
$600,000 on December 31, 1999
$300,000 on December 31, 2000
$1,800,000 on December 31, 2001
4. DEFERRED COSTS AND OTHER ASSETS. At June 30, 1996, deferred costs and other
assets primarily consist of franchise application fees paid to the franchisors
in connection with the acquisition of the Lessee by Doubletree Corporation.
These costs are being amortized over the lives of the franchise agreements.
Accumulated amortization at June 30, 1996 is $104.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RFS HOTEL INVESTORS, INC.
BACKGROUND
The Company is the sole general partner of RFS Partnership, L.P. (the
"Partnership") and owns an approximately 98.7% interest in the Partnership.
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 50 hotels (the
"Hotels") owned at September 30, 1996:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Limited Service Hotels:
Hampton Inn . . . . . . . . . . . 16 . . . . . . . . . . 2,085
Comfort Inn . . . . . . . . . . . 6 . . . . . . . . . . 787
Holiday Inn Express . . . . . . . 7 . . . . . . . . . . 861
-- -----
Sub-total . . . . . . . . . 29 . . . . . . . . . . 3,733
-- -----
Full Service Hotels:
Holiday Inn . . . . . . . . . . . 6 . . . . . . . . . . 1,206
DoubleTree . . . . . . . . . . . . 1 . . . . . . . . . . 220
Independent . . . . . . . . . . . 1 . . . . . . . . . . 115
-- -----
Sub-total . . . . . . . . 8 . . . . . . . . . . 1,541
-- -----
Extended Stay Hotels:
Residence Inn . . . . . . . . . . 12 . . . . . . . . . . 1,575
Hawthorn Suites . . . . . . . . . 1 . . . . . . . . . . 220
-- -----
Sub-total . . . . . . . . . 13 . . . . . . . . . . 1,795
-- -----
Total . . . . . . . . . . . 50 . . . . . . . . . . 7,069
== =====
</TABLE>
The Hotels are located in 22 states. Management believes it is prudent
to diversify geographically and among franchise brands.
To maintain the Company's federal income tax status as a REIT, neither
the Company nor the Partnership can operate hotels. The Partnership leases 49
Hotels to RFS, Inc., a wholly-owned subsidiary of Doubletree Corporation, and
one hotel to another wholly-owned subsidiary of Doubletree Corporation
(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. Base rent is paid
monthly. Percentage rent is paid quarterly. The Lessees operate 46 Hotels.
Three Hotels are operated by Alpha Inn Management Company and one by TMH, Inc.
pursuant to management agreements between RFS, Inc. and Alpha Inn Management
Company and TMH, Inc. RFS, Inc. has a right of
14
<PAGE> 15
first refusal, subject to certain exceptions, to lease hotels acquired by the
Partnership, through February 27, 2006.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 1996 to 1995 and Nine Months
Ended September 30, 1996 to 1995
Increases in lease revenue for the three months ended September 30, 1996 over
1995 and the nine months ended September 30, 1996 over 1995 are due to (i) an
increased number of hotels being owned by the Partnership and leased to the
Lessees during the 1996 period, and (ii) increases in revenue per available
room ("REVPAR") at the hotels owned throughout both periods.
At December 31, 1994, the Partnership owned 41 hotels. The Partnership
acquired seven hotels during 1995 on the following dates (the number of hotels
is indicated in parenthesis following the date): January 4, 1995 (1), March 15,
1995 (1), April 20, 1995 (1), August 8, 1995 (1), October 2, 1995 (1), October
5, 1995 (1), October 18, 1995 (1). These hotels were owned the entire nine
months ended September 30, 1996. Additionally, the Partnership acquired a hotel
on January 12, 1996, a hotel on May 30, 1996, and a hotel on July 16, 1996.
The following table shows statistical data regarding the Hotels on an
actual and a pro forma basis, assuming all 50 Hotels owned at September 30, 1996
were owned by the Partnership throughout both periods:
<TABLE>
<CAPTION>
for the three months ended September 30, 1996
----------------------------------------------------------------------------------
Actual % Increase Pro Forma % Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 81.1% 82.3% (1.5) 81.1% 82.7% (1.9)
ADR $72.45 $63.32 14.4 $72.45 $65.65 10.4
RevPAR $58.74 $52.13 12.7 $58.74 $54.29 8.2
for the nine months ended September 30, 1996
-------------------------------------------------------------------------------------
Actual Pro Forma % (Decrease)
------ --------- -----------
1996 1995 % Increase 1996 1995
---- ---- ---------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Occupancy 78.5% 78.4% 0.1 78.6% 78.9% (.4)
ADR $69.34 $61.29 13.1 $69.51 $64.32 8.1
RevPar $54.42 $48.16 13.0 $54.65 $50.76 7.7
</TABLE>
Interest income results, in large part, from the temporary investment
of the Company's cash. As cash was used to acquire hotels, interest income has
decreased in 1996 over 1995.
Increases in real estate taxes and property taxes and casualty
insurance and depreciation in 1996 over 1995 are due to the increased number of
hotels owned by the Partnership during 1996 over 1995 and increased real estate
tax assessments.
15
<PAGE> 16
Increases in amortization of franchise fees and unearned compensation are due
to increased amortization of unearned compensation as a result of a grant of
restricted stock to the newly appointed president of the Company in the second
quarter of 1996.
Increased general and administrative expenses in 1996 over 1995 is due to
increased professional fees and travel expenses incurred in the three months
ended June 30, 1996, as well as the reversal of accruals which management
believed were needed at December 31, 1994, in the three months ended June 30,
1995. The increased costs in 1996 were primarily related to potential
acquisitions.
Increases in compensation expense in 1996 over the same period in 1995 are
primarily due to an increased number of employees in 1996 over 1995.
Interest expense increased in 1996 over 1995 as a result of increased
borrowings under the Credit Line to fund the purchase of hotels and the
assumption of a promissory note payable in connection with the purchase of a
hotel during the fourth quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $75 million line of credit (the "Credit Line") which
expireson September 8, 1998. The Credit Line may be used to fund working
capital requirements and to fund investments in hotel properties. Borrowings
under the Credit Line will bear interest at the 90-day LIBOR (5.6563% at
September 30, 1996) plus 1.75%. The Credit Line is secured by a first mortgage
on 31 hotels (the "Collateral Pool") with a net book value of approximately
$214.5 million at September 30, 1996. The Credit Line contains various
covenants, including maintenance of debt coverage ratios, as defined, on all
debt and all hotels of 3.0:1 and on the Credit Line and Collateral Pool of
2.25:1. The Company must also maintain a minimum net worth in an amount equal
to the net worth in its most recent year-end audited financial statements and
a minimum operating income, as defined, from the Collateral Pool of
approximately $26.3 million. The Company had outstanding borrowings of $48.6
million on the Credit Line at September 30, 1996. The Company is in the
process of negotiating to increase the Credit Line to approximately $150
million.
The Credit Line contains a term loan option which allows the Company
to convert the principal balance outstanding on September 8, 1998, not to
exceed $75 million, to a term loan (the "Term Loan"). The Term Loan would bear
interest at a fixed rate equal to the 5-year U.S. Treasury Bond yield plus
2-1/2% or a variable rate equal to the lender's floating corporate base rate
plus 1%. The Term Loan would be payable over five years in 59 equal monthly
installments of principal plus interest, given a ten-year amortization, plus a
sixtieth payment of remaining principal plus interest.
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
December 31, 1995, was approximately three percent (3%) per annum.
16
<PAGE> 17
Principal is payable in installments of $0.6 million every three years with the
next installment due in 1997.
In connection with the purchase of a hotel in Atlanta, GA, the
Partnership assumed a promissory note payable with a principal balance of
approximately $5.9 million. The promissory note bears interest at 10.15% and
is due in monthly principal and interest installments of $53,000. The note is
due July 1, 1998 and contains a severe prepayment premium.
On February 27, 1996, the Company issued 973,684 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $18.5 million.
The Company has budgeted $12.1 million for capital expenditures in
1996 at the 50 hotels owned at September 30, 1996. At September 30, 1996, the
Partnership had spent approximately $9.0 million of the budgeted amounts. The
Company will use cash generated from operations and borrowings under the Credit
Line to fund these expenditures. The Company intends to substantially complete
these improvements by the end of 1996. The renovations and improvements
include replacing such items as carpets and drapes, renovating common areas and
hotel exteriors. Pursuant to the Percentage Leases, the Partnership, and
therefore the Company is required to fund capital improvements at the Hotels as
well as the ongoing replacement or refurbishment of furniture, fixtures and
equipment at the Hotels.
The Partnership has contracted to acquire from third parties the
following hotels upon completion of construction and opening of the hotel and
subject to certain terms and conditions:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED
FRANCHISE LOCATION ROOMS/SUITES PURCHASE PRICE
--------- -------- ------------ --------------
<S> <C> <C> <C>
Marriott Courtyard Flint, MI 102 $6.3 million
Hampton Inn Houston, TX 119 $5.9 million
</TABLE>
Completion of the above hotels is expected in the fourth quarter of 1996.
However, there can be no assurance that any or all of such hotels will be
completed as scheduled.
The Partnership is developing the following hotels:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED
FRANCHISE LOCATION ROOMS/SUITES DEVELOPMENT COSTS
--------- -------- ------------ -----------------
<S> <C> <C> <C>
Homewood Suites Salt Lake City, UT 98 $7.8 million
Homewood Suites Plano, TX 99 $8.0 million
Hampton Inn Sedona, AZ 56 $5.5 million
Hampton Inn Chandler, AZ 101 $5.2 million
Homewood Suites Chandler, AZ 83 $6.4 million
Marriott Courtyard Crystal Lake, MI 90 $6.0 million
Residence Inn Jacksonville, FL 120 $8.4 million
</TABLE>
17
<PAGE> 18
Completion of the above hotels is expected by the end of the third quarter of
1997. Additionally, the Partnership plans to construct a 42-suite addition to
the Residence Inn in Ann Arbor, MI. Construction costs are estimated at $3.3
million. Completion of the addition is expected in the second quarter of 1997.
There can be no assurance that any or all of such hotels will be completed as
scheduled.
In addition to purchasing existing hotel properties at targeted rates
of return, 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
Common Stock, borrowings under the Credit Line 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. In June 1996, the Company's shareholders approved
an amendment to the Company's charter to delete the charter limitation on
indebtedness. Although the Company no longer has any 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 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.
On October 24, 1996, the Company announced that it will serve as the
exclusive advisor to Lodging Trust USA ("Lodging Trust"), a newly formed REIT
which intends to develop and own mid-price, extended stay hotel properties. On
such date, Lodging Trust also announced the filing of a Registration Statement
on Form S-11 pertaining to its initial public offering and concurrent offering
of its common shares of beneficial interest, $0.01 par value per share ("Common
Shares"). Lodging Trust will focus its initial hotel development and ownership
on TownePlace Suites by Marriottr hotels, a new brand of mid-price extended
stay hotels which is being developed by Marriott International, Inc.
("Marriott"). The Company, through the Partnership, will enter into an
advisory agreement with Lodging Trust (the "Advisory Agreement") through which
the Partnership will identify suitable development sites for Lodging Trust and
will provide certain development services, including negotiation of site
acquisition contracts, selecting and negotiating with franchisors, architects
and contractors, and obtaining various government permits and approvals.
Lodging Trust will pay the Partnership a fee of $.2
18
<PAGE> 19
million for each hotel developed on sites identified and presented to Lodging
Trust by the Partnership. As a part of its advisory services under the
Advisory Agreement, the Partnership will provide oversight of developments
originated for Lodging Trust by other entities; however, the Partnership will
not be paid a development fee for hotels developed on sites sourced through
such other entities.
Additionally, in an offering being concurrently conducted with Lodging
Trust's initial public offering, Lodging Trust is offering to the Partnership
and Marriott 2.5 million and 3.0 million Common Shares, respectively, at the
initial public offering price.
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 1996, the
Partnership has, through September 30, 1996, made cash distributions to its
partners, including the Company, of $25.4 million or $1.03 per Partnership
unit, from which the Company made cash distributions to common shareholders of
$25.1 million, or $1.03 per share. The Company also made cash distributions to
the preferred shareholder of $0.5 million, or $0.3625 per share which
represents the pro rata quarterly distribution from February 27, 1996 (date of
issuance) through June 30, 1996. 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. This
seasonality can be expected to cause fluctuations in the Partnership's
quarterly lease revenue to the extent that it receives Percentage Rent.
19
<PAGE> 20
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts has
adopted a new definition of funds from operations ("FFO"). Under the
definition, FFO represents net income excluding gains (or losses) from debt
restructuring or sales of properties, plus depreciation of real property and
after adjustments for unconsolidated partnerships and joint ventures. Under
this definition, the Company's FFO is computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30 September
1995 1996 1995 1996
---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income before allocation
to minority interest $ 9,640 $11,553 $24,434 $28,884
Add depreciation 2,106 2,804 6,144 7,944
Add loss on sale of hotel 244
Less preferred dividend (356) (839)
------- ------- ------- -------
FFO $11,746 $14,001 $30,578 $36,233
======= ======= ======= =======
Weighted average shares and
partnership units outstanding 24,623 24,700 24,626 24,667
FFO per share $ 0.48 $ 0.57 $ 1.24 $ 1.47
</TABLE>
IMPLEMENTATION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Statements Board ("FASB") issued
statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), which is effective for transactions
entered into after December 15, 1995. FAS 123 establishes fair value-based
financial and reporting standards for entities with stock-based compensation
arrangements. FAS 123 provides for the election of either certain recognition
provisions or certain disclosure-only provisions. The Company expects to elect
the disclosure-only provision of FAS 123.
20
<PAGE> 21
RFS, INC.
BACKGROUND
RFS, Inc. (the "Lessee") leases 49 and operates 45 of the Hotels owned by RFS
Partnership, L.P. (the "Partnership").
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared with Three Months Ended
September 30, 1995
Total revenues increased $9.0 million or 27% to $42.0 million for the
three months ended September 30, 1996 compared to $33.0 million for the three
months ended September 30, 1995. The increase in hotel revenues of $8.1 million
was attributable to an increase in the number of leased properties as compared
to the 1995 period and an increase of over $6 in average daily rate to $71
offset by a 1.8 percentage point decrease in occupancy to 80.9%. The margin on
hotel results (hotel revenues less hotel expenses and lease expenses) increased
$1.1 million or 51% from $2.2 million to $3.3 million reflecting the improved
operating performance of the hotels offset by increased lease payments to the
lessor attributable to increased revenues.
Other fees and income increased $0.7 million principally attributable to
interest income on invested cash balances, dividend income generated from the
investment in the convertible preferred stock of the Company and interest earned
on the loan made in connection with obtaining the management agreements for
eight hotel properties in June 1996. Included in other fees and income for the
comparable period of 1995 is a loss of $229 related to the disposal of certain
partnership interests.
General and administrative expenses decreased 13% or $0.1 million
primarily due to a reduction in headcount attributable to the acquisition of
RFS, Inc. by Doubletree Corporation in February 1996. The increase in
depreciation and amortization reflects the amortization of the franchise
application fees paid in connection with the acquisition.
The provision for income taxes reflects a 35% effective tax rate for the
three months ended September 30, 1996 compared to a 4% effective tax rate in
1995. Prior to its acquisition by Doubletree Corporation, RFS, Inc. was a
Subchapter S Corporation, and generally was not subject to income taxes. Had
RFS, Inc. been included in the consolidated income tax returns of Doubletree
Corporation in 1995, the provision for income taxes for the three months ended
September 30, 1996 would have been $0.4 million.
Net income for the three months ended September 30, 1996 was $2.1
million compared to $1.1 million in 1995. With a normalized effective tax rate
for 1995, net income would have increased $1.4 million to $2.1 million or 193%.
21
<PAGE> 22
Nine Months Ended September 30, 1996 Compared with Nine Months Ended September
30, 1995
Total revenues increased $24.7 million or 27% to $115.6 million for the
nine months ended September 30, 1996 compared to $90.9 million for the nine
months ended September 30, 1995. The increase in hotel revenues was
attributable to the net addition of four leased properties as compared to the
1995 period and an increase of approximately $5 in average daily rate to $68 and
a nominal decrease in occupancy to 78.4%. The margin on hotel results (hotel
revenues less hotel expenses and lease expenses) increased $2.8 million or 45%
to $8.9 million reflecting the improved operating performance of the hotels
offset by increased lease payments to the lessor attributable to increased
revenues.
Other fees and income increased $1.1 million principally attributable to
interest income on invested cash balances and dividend income generated from the
investment in the convertible preferred stock of the Company and interest earned
on the loan made in connection with obtaining the management agreements for
eight hotel properties. Included in other fees and income for the comparable
period of 1995 is a loss of $229 related to the disposal of certain partnership
interests.
General and administrative expenses decreased 9% or $0.3 million
primarily due to a reduction in headcount. The increase in depreciation and
amortization reflects the amortization of the franchise application fees paid in
connection with the acquisition.
The provision for income taxes reflects a 35% effective tax rate for the
nine months ended September 30, 1996 compared to a benefit of $0.1 million in
1995 resulting from the change to Subchapter S Corporation status. Had RFS,
Inc. been included in the consolidated income tax returns of Doubletree
Corporation in 1995, the provision for income taxes for the nine months ended
September 30, 1996 would have been $1.2 million compared to a benefit of $0.1
million.
Net income for the nine months ended September 30, 1996 was $5.1 million
compared to $3.7 million in 1995. With a normalized effective tax rate for
1995, net income would have increased $2.8 million to $5.1 million or 121%
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, RFS, Inc. generated
cash flow from operations of $11.4 million as compared to $7.1 million for the
comparable period of 1995. The increase was principally attributable to
improved operating results of the leased properties, an increase in the number
of leased properties and the timing of lease payments to the Lessor which are
paid on a quarterly basis in arrears. Offsetting the cash generated from
operations was the utilization of $24.1 million for investing activities of
which $18.5 million was contributed by Doubletree Corporation. The principal
source of cash, other than capital contributions from Doubletree Corporation,
will come from operations. Since inception, RFS, Inc. has been able to meet its
rent obligations under the Percentage Leases. To the extent that future
operations are not sufficient to meet the rent obligations when due, RFS, Inc.
will seek additional capital from Doubletree Corporation which has agreed to
maintain a minimum net worth of $15.0 million in RFS, Inc.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - A Form 8-K dated September 6, 1996 regarding the
Company's listing on the New York Stock Exchange and the addition of
two directors to the Company's Board of Directors was filed on
September 16, 1996.
23
<PAGE> 24
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.
/s/ Michael J. Pascal
- ----------------- ----------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ Robert M. Solmson
- ----------------- ----------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS FOR THE PERIOD ENDED SEPTEMBER 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,124
<SECURITIES> 0
<RECEIVABLES> 11,494
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 430,145
<DEPRECIATION> 20,295
<TOTAL-ASSETS> 426,435
<CURRENT-LIABILITIES> 0
<BONDS> 56,905
0
10
<COMMON> 244
<OTHER-SE> 360,065
<TOTAL-LIABILITY-AND-EQUITY> 426,435
<SALES> 0
<TOTAL-REVENUES> 47,853
<CGS> 0
<TOTAL-COSTS> 12,403
<OTHER-EXPENSES> 4,206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,360
<INCOME-PRETAX> 28,884
<INCOME-TAX> 0
<INCOME-CONTINUING> 28,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,478
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
