<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 34-0-22164
RFS HOTEL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1534743
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization identification No.)
889 Ridge Lake Boulevard, Suite 100, (901) 767-5154
Memphis, TN 38120 (Registrant's Telephone Number
(Address of Principal Executive Offices) Including Area Code)
(Zip Code)
n/a
(Former address, if changed since last report)
Indicate by check mark whether the Registrant (i) has filed all repor 13 or
15(d) of the Securities Exchange Act of 1934 during the precedi period that the
Registrant was required to file such reports), and (i requirements for the past
90 days.
X Yes No
The number of shares of the Registrant's Common Stock, $.01 par value was
24,294,000.
<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 March 31, 1996 3
Consolidated Statements of Income - For the three months ended 4
March 31, 1995 and 1996
Consolidated Statements of Cash Flows - For the three months ended
March 31, 1995 and 1996 5
Notes to Consolidated Financial Statements 6
RFS, Inc.
Balance Sheets - December 31, 1995 and March 31, 1996 8
Statements of Income - For the three months ended March 31, 1995 and 1996 9
Statements of Cash Flows - For the three months ended March 31, 1995 and 1996
Notes to Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial Condition and 12
Results of Operations of RFS Hotel Investors, Inc. and RFS, Inc.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K 18
</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, MARCH 31,
1995 1996
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $364,097 $377,638
Cash and cash equivalents 2,680 9,946
Accounts receivable-Lessee 5,795 6,840
Deferred expenses, net 1,579 1,464
Other assets 2,775 2,594
-------- --------
$376,926 $398,482
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,758 $ 1,513
Accrued real estate taxes 1,660 1,753
Borrowings on line of credit 21,850 26,100
Long-term debt 8,336 8,325
Minority interest 4,509 4,510
-------- --------
38,113 42,201
-------- --------
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 outstanding 243 243
Paid-in capital 336,857 354,990
Undistributed income 3,111 2,330
Unearned directors' and officers' compensation (1,398) (1,292)
-------- --------
Total shareholders' equity 338,813 356,281
-------- --------
$376,926 $398,482
======== ========
</TABLE>
The accompanying notes are an 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 FOR THE
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1995 MARCH 31, 1996
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue:
Lease revenue $ 9,819 $13,268
Interest income 547 69
------- -------
Total revenue 10,366 13,337
------- -------
Expenses:
Real estate taxes and property and casualty insurance 1,561 1,461
Depreciation and amortization 2,089 2,650
Compensation 231 469
Franchise taxes 50 65
General and administrative 276 308
Amortization of loan costs 63 88
Loss on sale of hotel property 244
Interest expense 15 708
------- -------
Total expenses 4,285 5,993
------- -------
Income before allocation to minority interest 6,081 7,344
Income allocation to minority interest (92) (108)
------- -------
Net income $ 5,989 $ 7,236
======= =======
Net income per common and common equivalent share $ 0.25 $ 0.29
Weighted average shares and
partnership units outstanding 24,627 24,653
</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 For the
Three Months Three Months
March 31, March 31,
1995 1996
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,989 $ 7,236
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,152 2,738
Income allocated to minority interest 92 108
Loss on sale of hotel property 244
Changes in assets and liabilities:
Accounts receivable-Lessee (93) (1,067)
Other assets (66) 51
Accounts payable and accrued expenses (13) (152)
------- -------
Net cash provided by operating activities 8,061 9,158
------- -------
Cash flows from investing activities:
Investment in hotel properties (16,729) (20,027)
Proceeds from sale of hotel property 3,891
Deposits and prepayments under
purchase agreements (264) (10)
Cash paid for franchise agreements (169)
------- -------
Net cash used by investing activites (17,162) (16,146)
------- -------
Cash flows from financing activities:
Borrowings on Credit Line 16,250
Payments on Credit Line (12,000)
Loan fees paid (4)
Net proceeds from issuance of preferred stock 18,143
Payments on long-term debt (11)
Distributions to common shareholders (6,802) (8,017)
Distributions to limited partners (213) (107)
------- -------
Net cash provided (used) by financing activities (7,015) 14,254
------- -------
Net increase (decrease) in cash and cash equivalents (16,116) 7,266
Cash and cash equivalents at beginning of period 45,650 2,680
------- -------
Cash and cash equivalents at end of period $29,534 $ 9,946
======= =======
</TABLE>
Supplemental disclosures of non-cash investing and financing activities: In
1996, the Partnership applied a deposit of $140 towards the purchase of a 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
March 31, 1996 owned an approximately 98.7% interest in the Partnership. The
Company was formed to acquire equity interests in hotel properties and at March
31, 1996 owned, through the Partnership, 48 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 April 17, 1996, the Company declared a
$0.34 dividend on each share of Common Stock outstanding on April, 29 1996.
The dividend will be paid on May 15, 1996.
3. ACQUISITIONS AND SALES OF REAL ESTATE. On January 12, 1996, the
Partnership acquired a 176-Suite Residence Inn in Sacramento, CA from an
unaffiliated party for $14,250. The purchase price was paid with borrowings
under the Credit Line.
On March 15, 1996, the Partnership sold a 178-room Ramada Inn in Lexington, KY
to an unaffiliated party for $3,891. The purchase price was received in cash.
In March 1996, the Partnership completed the construction of a 30-room addition
to the Hampton Inn in Hattiesburg, MS. Construction costs, which approximated
$1.6 million, were paid from cash.
4. SUBSEQUENT EVENTS. On April 26, 1996, the Partnership acquired a
parcel of land in Sedona, AZ for $1,277. The purchase price was paid with
cash.
In April 1996, the Partnership contracted to acquire a 220 room full-service
hotel for $16,600. It is anticipated that funds from the Credit Line will be
utilized to purchase this hotel.
6
<PAGE> 7
5. 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 months ended March 31, 1996:
<TABLE>
<S> <C>
Net income before allocation
to minority interests $ 7,344
Less preferred stock dividend 132
--------
$ 7,212
========
Weighted average common shares
and common stock equivalents
outstanding 24,653
Net income per common share $ 0.29
========
</TABLE>
6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited
pro forma condensed statements of income for the three months ended March 31,
1995 and 1996 of the Company are presented as if the 48 hotel properties which
are owned at March 31, 1996 were owned since on 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
---- ----
<S> <C> <C>
Operating Data:
Total revenue $11,945 $13,343
Real estate taxes and casualty insurance 1,455 1,455
Depreciation and amortization 2,726 2,726
Compensation 231 469
General and administrative 276 308
Franchise taxes 50 65
Loss on sale of a hotel property 244
Interest expense 740 740
------- -------
Income before allocation to minority interest 6,467 7,336
Less minority interest 85 108
------- -------
Net income applicable to common shareholders $ 6,382 $ 7,228
======= =======
Net income per common share $ 0.26 $ 0.29
Weighted average shares and partnership units outstanding 24,653 24,653
</TABLE>
7
<PAGE> 8
RFS. INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,413 $ 8,818
Short-term investments 825 828
Marketable equity securities 538 19,108
Cash held in escrow
Receivables:
Trade (net of an allowance for doubtful
accounts of $40 and $113, respectively) 2,313 1,304
RFS Partnership, L.P.
Other 194 226
Inventories 188 180
Prepaid expenses 176 172
Deferred income taxes 16 16
------- -------
Total current assets 12,663 30,652
------- -------
Furniture and equipment, net 334 305
Investment in partnerships and joint ventures 858 858
Related party receivables 197 322
Franchise costs, net 2,623
Other assets 114 80
------- -------
$14,166 $34,840
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 53
Accounts payable:
Trade 925 $ 826
Percentage rent 5,795 6,840
Accrued interest payable 4
Accrued sales tax payable 1,102 1,431
Accrued business combination expenses 925
Other accrued expenses 4,148 4,950
Income taxes payable 151 600
------- -------
Total current liabilities 13,103 14,647
------- -------
Long-term debt, less current maturities 619
Deferred income taxes 52 52
Net deficit in partnerships and joint ventures 329 329
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value; 1,000 shares
authorized, 896 shares issued and outstanding 282 282
Paid-in capital 18,500
Unearned employee compensation (211) (193)
Unrealized gain of marketable equity securities 22 92
Retained earnings (deficit) (30) 1,131
------- -------
63 19,812
------- -------
$14,166 $34,840
======= =======
</TABLE>
The accompanying notes are an integral
part of these financial statements.
8
<PAGE> 9
RFS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1995 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue:
Hotel operations $26,542 $34,294
Other 251 263
------- -------
26,793 34,557
------- -------
Expenses:
Hotel operating costs and expenses 7,114 8,824
General and administrative 2,700 3,019
Franchise costs 1,794 2,317
Advertising and promotion 988 1,231
Utilities 1,509 1,883
Repairs and maintenance 1,332 1,713
Management fees 203 184
Leases, insurance and taxes 376 353
Lease expense 9,819 13,268
------- -------
25,835 32,792
------- -------
958 1,765
Other income (expense):
Interest expense (41) (11)
Interest income 76 77
Depreciation and amortization (22) (49)
------- -------
Income before (provision) benefit
for income taxes 971 1,782
(Provision) benefit for income taxes 174 (621)
------- -------
Net income $ 1,145 $ 1,161
======= =======
</TABLE>
The accompanying notes are an integral
part of these financial statements.
9
<PAGE> 10
RFS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1995 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $1,145 $1,161
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 22 49
Deferred income tax provision (174)
Loss on disposal of assets
Changes in assets and liabilities:
Cash held in escrow 10
Accounts receivable (911) 995
Inventories 16 8
Prepaid expenses 257 4
Other assets 18 (91)
Accounts payable and accrued expenses (400) 1,148
Income taxes payable (131) 449
------ ------
Net cash provided by operating activities (148) 3,723
------ ------
Cash flows from investing activities:
Purchase of preferred stock (18,500)
Payment of franchise costs (2,626)
Cash contributions to partnerships (63)
Cash distributions from partnerships
Short-term investments (3)
Capital expenditures (96) (17)
Repayments from related parties 14
Purchase of marketable equity securities (139)
------ ------
Net cash used by investing activities (284) (21,146)
------ ------
Cash flows from financing activities:
Contributed capital 18,500
Payments on notes payable (19) (672)
Payment of dividends and distributions to shareholders (2)
------ ------
Net cash used by financing activities (21) 17,828
------ ------
Net increase in cash and cash equivalents (453) 405
Cash and cash equivalents at beginning of period 6,994 8,413
------ ------
Cash and cash equivalents at end of period $6,541 $8,818
====== ======
</TABLE>
Supplemental disclosures of non-cash activity:
In 1996, an unrealized gain on marketable equity securities of $70 was
recorded.
The accompanying notes are an integral
part of these financial statements.
10
<PAGE> 11
RFS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION. Effective February 27, 1996, RFS,
Inc., (the "Lessee") becoame 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").
Each hotel owned by the Partnership (the "Hotels") is 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 March 31, 1996, the Lessee leased 48 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 March 31,
1996, the Lessee operated 44 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.
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 significant 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.
11
<PAGE> 12
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. Since the initial public offering, the Company has actively implemented
its acquisition strategy. The following chart summarizes information regarding
the 48 hotels (the "Hotels") owned at March 31, 1996:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Limited Service Hotels:
Hampton Inn . . . . . . . . . . . . . . . . . . . . 15 . . . . . . . . . 1,912
Comfort Inn . . . . . . . . . . . . . . . . . . . . 6 . . . . . . . . . 788
Holiday Inn Express . . . . . . . . . . . . . . . . 7 . . . . . . . . . 861
-- -----
Sub-total . . . . . . . . . . . . . . . . . . 28 . . . . . . . . . 3,561
-- -----
Full Service Hotels:
Holiday Inn . . . . . . . . . . . . . . . . . . . . 6 . . . . . . . . . 1,209
Independent . . . . . . . . . . . . . . . . . . . . 1 . . . . . . . . . 119
-- -----
Sub-total . . . . . . . . . . . . . . . . . . . . . 7 . . . . . . . . . 1,328
-- -----
Extended Stay Hotels:
Residence Inn . . . . . . . . . . . . . . . . . . . 12 . . . . . . . . . 1,576
Hawthorn Suites . . . . . . . . . . . . . . . . . . 1 . . . . . . . . . 220
-- -----
Sub-total . . . . . . . . . . . . . . . . . . 13 . . . . . . . . . 1,796
-- -----
Total . . . . . . . . . . . . . . . . . . . . 48 . . . . . . . . . 6,685
== =====
</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 the
Hotels to RFS, Inc. (the "Lessee") 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 Lessee operates 44
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. The Lessee is a wholly owned subsidiary of
Doubletree Corporation. The Lessee has a right of first refusal, subject to
certain exceptions, to lease hotels acquired by the Partnership, through
February 27, 2006.
12
<PAGE> 13
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1996 to 1995
Increases in lease revenue for the three months ended March 31, 1996 over 1995
are due to (i) an increased number of hotels being owned by the Partnership and
leased to the Lessee during 1996 and, (ii) increases in average daily rate
("ADR") 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 three months ended March 31, 1996. Additionally, the
Partnership acquired a hotel on January 12, 1996.
The following table shows statistical data regarding the Hotels on an
actual and a pro forma basis assuming all 48 Hotels owned at March 31, 1996
were owned by the Partnership throughout both periods:
<TABLE>
<CAPTION>
Actual Pro Forma
------ ---------
1996 1995 % Increase 1996 1995 % Increase
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 73.2% 73.3% (0.1) 73.7% 74.3% (0.8)
ADR $66.59 $60.57 9.9 $66.93 $62.54 7.0
RevPar $48.74 $44.40 9.8 $49.33 $46.48 6.1
</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.
Decreases in real estate taxes and insurance in 1996 over 1995 are due
primarily to the fact that an accrual was made in the first three months of
1995 to provide for potential increases in real estate taxes as a result of
revaluations by local authorities. No such accrual was made in the first three
months of 1996. Management believes that, as of March 31, 1996, adequate
provisions for such potential increases have been made.
Increases in depreciation and amortization in 1996 over 1995 are due
to the increased number of hotels owned by the Partnership during 1996 over
1995.
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.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $50 million line of credit (the "Credit Line") which
expires on September 8, 1996. 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 plus 1.75%. The
Credit Line is secured by a first mortgage on 18 hotels (the "Collateral Pool")
with a net book value of $125.3 million at March 31, 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 $17.5 million. The Company had outstanding borrowings of
$26.1 million on the Credit Line at March 31, 1996. The Company is in the
process of increasing the Credit Line to $100 million
The Credit Line contains a term loan option which allows the Company
to convert the principal balance outstanding on September 8, 1996, not to
exceed $50 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 interest, given a 10 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. Principal
is payable in installments of $600 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. 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 $11.9 million for capital expenditures in
1996 at the 48 hotels owned at March 31, 1996. At March 31, 1996, the
Partnership had spent approzimately $4.1 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
14
<PAGE> 15
required to fund capital improvements at the Hotels as wall 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 $6,300
Hampton Inn Plano, TX 132 6,900
Hampton Inn Houston, TX 119 5,900
</TABLE>
Completion of the above hotels is expected in the latter half of 1996.
The Partnership is developing the following hotels:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED
FRANCHISE LOCATION ROOMS/SUITES DEVELPMENT COSTS
--------- -------- ------------ ----------------
<S> <C> <C> <C>
Homewood Suites Chandler, AZ 83 $6,400
Hampton Inn Chandler, AZ 101 5,200
Homewood Suites Salt Lake City, UT 98 7,800
Homewood Suites Plano, TX 99 7,700
Hampton Inn Sedona, AZ 117 7,000
</TABLE>
Completion of the above hotels is expected by the first 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 $2.8
million. Completion of the addition is expected in the third quarter of 1996.
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
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, all in compliance with its Charter restrictions.
The Company's Charter currently limits aggregate indebtedness to 30% of the
Company's investment in hotel properties, at cost, after giving effect to the
Company's use of proceeds from any indebtedness. The Company has scheduled a
special meeting of shareholders in June 1996 to consider and vote upon an
amendment to the Company's charter to delete this
15
<PAGE> 16
aggregate indebtedness limitation. 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 it's discretion, may approve.
The Company has filed a Shelf Registration Statement on Form S-3
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 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 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 made
cash distributions to its partners, including the Company, of $8,124 or $0.33
per Partnership unit, from which the Company made cash distributions to common
shareholders of $8,017, or $0.33 per share. The Company and the Partnership
utilized available cash to fund such distributions.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Partnership's
quarterly lease revenue to the extent that it receives Percentage Rent.
16
<PAGE> 17
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts has
adopted a new definition of funds from operations ("FFO"). Under the new
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 new definition, the Company's FFO is computed as follows:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Income before allocation
to minority interest $ 6,081 $ 7,344
Add depreciation 1,958 2,513
Add loss on sale of hotel 244
Less preferred dividend 132
------- -------
FFO $ 8,039 $ 9,969
======= =======
Weighted average shares and
partnership units outstanding 24,627 24,627
FFO per share $ 0.33 $ 0.40
======= =======
</TABLE>
RFS, INC.
BACKGROUND
RFS, Inc. (the "Lessee") leases 48 and operates 44 of the Hotels owned
by RFS Partnership, L. P. (the "Partnership").
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1996 to 1995
Increased revenue from hotel operations in 1996 is due to: (i) an
increased number of hotels under leases in 1996 and (ii) increased ADR from the
hotels leased during both periods.
At December 31, 1994, the Lessee leased 41 hotels from the
Partenrship. The Partnership acquired and leased to the Lessee 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 leased to the Lessee the entire
three months ended March 31, 1996. Additionally, the Partnership acquired and
leased to the Lessee a hotel on January 12, 1996. On a pro forma basis,
assuming all 48 hotels leased by the Lessee at March 31, 1996 had been leased
by the Lessee since January 1, 1995, ADR increased from $62.54 in 1995 to
$66.93 in 1996.
Hotel operating costs, general and administrative expenses,
franchise costs, advertising and promotion, utilities and repairs and
maintenance expenses increased in 1996 over 1995 as a
17
<PAGE> 18
result of the increased number of hotels leased by the Lessee under Percentage
Leases. Hotel operating costs decreased as a percentage of revenue from hotel
operations in 1996 over 1995 principally because certain operating expenses are
relatvely fixed in nature and do not increase in proportion to increases in
revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Lessee's principal source of liquidity is cash generated by
operations. The Lessee and the management companies with which it has
contracted must generate sufficient cash flow from the operation of the hotels
to meet rent obligations under the Percentage Leases to the Partnership and to
provide working capital. Since inception, the Lessee has met rent obligations
under the Percentage Leases. Under the Percentage Leases, the Lessee has
agreed to maintain a minimum net woth of $15 million and a ratio of debt to net
worth of not more than 50%, excluding capitalized leases.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupany rates during the second and third quarters. This
seasonality could result in fluctuations in percentage lease obligations to the
extent the Lessee pays percentage rent.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - A Form 8-K dated February 27, 1996
describing the issuance of series A preferred stock by the
Company, the merger of the Lessee with a wholly owned
subsidiary of Doubletree Corporation and related matter,
including certian amendments to the Percentage Leases, was
filed on March 14, 1996.
18
<PAGE> 19
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.
5-10-96 /s/ Michael J. Pascal
- ------------------------- ----------------------------------------
Date Michael J. Pascal,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
5-10-96 /s/ Robert M. Solmson
- ------------------------- ----------------------------------------
Date Robert M. Solmson,
Chairman and Chief Executive
Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,946
<SECURITIES> 0
<RECEIVABLES> 6,840
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 392,503
<DEPRECIATION> 14,865
<TOTAL-ASSETS> 398,482
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
10
<COMMON> 243
<OTHER-SE> 356,028
<TOTAL-LIABILITY-AND-EQUITY> 398,482
<SALES> 13,268
<TOTAL-REVENUES> 13,337
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,197
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 796
<INCOME-PRETAX> 7,344
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,236
<EPS-PRIMARY> .29
<EPS-DILUTED> 0
</TABLE>
