<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 March 31, 1997
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.)
850 Ridge Lake Boulevard, Suite 220, Memphis, TN 38120 (901) 767-7005
(Address of Principal Executive Offices) (Registrant's Telephone Number
(Zip Code) Including Area Code)
</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 March 31, 1997 was 24,389,000.
<PAGE> 2
RFS HOTEL INVESTORS, INC.
INDEX
<TABLE>
<CAPTION>
Form 10-Q
Report
Page
---------
<S> <C>
PART I.FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RFS Hotel Investors, Inc.
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income - For the three months ended
March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows - For the three months ended
March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
RFS, Inc.
Balance Sheets - December 31, 1996 and March 31, 1997 9
Income Statements - For the three months ended March 31, 1997
and 1996 10
Statements of Cash Flows - For the three months ended March 31,
1997 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 21
</TABLE>
2
<PAGE> 3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Investment in Hotel Properties, net $514,751 $415,618
Hotels under development 13,220 7,325
Cash and cash equivalents 3,581 57,935
Accounts receivable-Lessees 10,601 7,187
Deferred expenses, net 3,479 3,598
Prepaid and other assets 1,230 1,402
Escrow deposits 10 6,064
-------- --------
$546,872 $499,129
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,051 $ 2,258
Accrued real estate taxes 2,151 1,774
Borrowings on line of credit 63,000 50,000
Bonds 74,068 74,769
Other debt 7,684 8,295
Minority interest 36,268 4,551
-------- --------
184,222 141,647
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 973,684 shares outstanding 10 10
Common Stock, $.01 par value, 100,000,000 shares
authorized, 24,389,000 and 24,384,000 shares outstanding 244 244
Paid-in capital 362,976 356,548
Undistributed income 1,561 3,005
Unearned directors' and officers' compensation (2,141) (2,325)
-------- --------
Total shareholders' equity 362,650 357,482
-------- --------
$546,872 $499,129
======== ========
</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, 1997 MARCH 31, 1996
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue:
Leases $17,863 $13,268
Interest 44 69
------- -------
Total revenue 17,907 13,337
------- -------
Expenses:
Real estate taxes and property and
casualty insurance 1,947 1,461
Depreciation 3,908 2,513
Amortization of franchise fees and
unearned compensation 221 137
Compensation 621 469
Franchise taxes 75 65
General and administrative 524 308
Loss on sale of a hotel property 244
Amortization of loan costs 144 88
Interest expense, net 1,938 708
------- -------
Total expenses 9,378 5,993
------- -------
Income before minority interest 8,529 7,344
Minority interest 835 108
------- -------
Net income 7,694 7,236
Preferred stock dividends 348 132
------- -------
Net income applicable to common shareholders $ 7,346 $ 7,104
======= =======
Net income per common and
common equivalent share $ 0.30 $ 0.29
Weighted average shares and
partnership units outstanding 26,930 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 THREE FOR THE THREE
MONTHS MONTHS
MARCH 31, MARCH 31,
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,694 $ 7,236
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,273 2,738
Income allocated to minority interest 835 108
Loss on sale and write-down of hotel properties 244
Changes in assets and liabilities:
Accounts receivable-Lessees (3,414) (1,067)
Prepaids and other assets 172 51
Accounts payable and other liabilities (830) (152)
-------- --------
Net cash provided by operating activities 8,730 9,158
-------- --------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (64,637) (20,027)
Proceeds from sale of hotel property 3,891
Escrow deposits and prepayments under
purchase agreements (10) (10)
Refund on franchise agreements 8
-------- --------
Net cash used by investing activites (64,639) (16,146)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferrred stock 18,143
Distributions to common and preferred shareholders (9,138) (8,017)
Distributions to limited partners (925) (107)
Borrowings on revolving credit agreement 13,000 16,250
Payments on revolving credit agreement (12,000)
Payments on debt and bonds (1,312) (11)
Loan fees paid (70) (4)
-------- --------
Net cash provided by financing activities 1,555 14,254
-------- --------
Net increase (decrease) in cash and cash equivalents (54,354) 7,266
Cash and cash equivalents at beginning of period 57,935 2,680
-------- --------
Cash and cash equivalents at end of period $ 3,581 $ 9,946
======== ========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
In 1997, the Company recorded a $6,356 allocation to paid-in capital from
minority interest.
In 1997, the Partnership applied deposits of $6,064 towards the purchase
of hotels.
In 1996, the Partnership applied deposits 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, and is a self-administered real
estate investment trust ("REIT"). The Company contributed substantially all of
the net proceeds of its public offerings to RFS Partnership, L.P. (the
"Partnership") in exchange for the sole general partnership interest in the
Partnership. The Partnership began operations in August 1993. At March 31,
1997, the Company owned approximately 90.5% of the Partnership. RFS Managers,
Inc. ("Managers") a wholly-owned subsidiary of the Company, was formed
effective January 1, 1995 to provide management services to the Company. During
1996, RFS Financing Partnership, L.P., (the "Financing Partnership"), a
bankruptcy remote, single purpose Tennessee limited partnership, which is
wholly owned by the Company, was formed to issue commercial mortgage bonds (the
"Bonds").
The Company, through its subsidiary partnerships, acquires or develops and owns
hotel properties.
These unaudited consolidated financial statements include the accounts of
the Company, and its subsidiaries, and have been prepared pursuant to the
Securities and Exchange Commission ("SEC") rules and regulations and should be
read in conjunction with the financial statements and notes thereto of the
Company included in the Company's 1996 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 24, 1997, the Company declared a $0.36
dividend on each share of Common Stock outstanding to shareholders of record on
May 5,1997. The dividend will be paid on May 15, 1997.
3. ACQUISITIONS OF REAL ESTATE. In January 1997, the Partnership completed
the acquisition of 4 Sheraton Hotels in California for an aggregate purchase
price of $91 million. The purchase price was paid with $50 million of
borrowings under the Credit Line and the issuance of 2,244,934 limited
partnership units in the Partnership.
4. IMPLEMENTATION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS. In March
1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings Per Share" ("FAS 128"). FAS 128 establishes standards for computing
and presenting earnings per share ("EPS") and replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the statement of
operations and requires a reconciliation of the numerator and the denominator
of the basic EPS computation to the
6
<PAGE> 7
numerator and denominator of the diluted EPS computation. The Company will adopt
the disclosure of the requirements of FAS 128 beginning December 31, 1997. The
Company does not expect the adoption of FAS to have a material impact on their
financial position, results of consolidated operations, and cash flows.
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, 1997 and 1996:
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended Ended
March 31, 1997 March 31, 1996
-------------------- --------------------
<S> <C> <C>
Income before
minority interest $ 8,529 $ 7,344
Less preferred stock dividend (348) (132)
------- -------
$ 8,181 $ 7,212
======= =======
Weighted average common shares
and common stock equivalents
outstanding 26,930 26,930
Net income per common share $ 0.30 $ 0.29
======= =======
</TABLE>
7
<PAGE> 8
6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro
forma condensed statements of income for the three months ended March 31, 1997
and 1996 of the Company are presented as if the hotel properties owned at March
31, 1997 were owned since January 1, 1996. 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, 1996, 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>
1997 1996
------- -------
<S> <C> <C>
Operating Data:
Total revenue $17,907 $16,083
Real estate taxes and casualty
insurance 1,947 1,947
Depreciation and amortization 4,273 4,273
Compensation 621 469
Franchise taxes 75 65
General and administrative 524 308
Loss on sale of a hotel property 244
Interest expense 1,938 1,938
------- -------
Income before allocation to minority
interest 8,529 6,839
Less minority interest 835 650
------- -------
Net income $ 7,694 $ 6,189
======= =======
Net income per common share $ 0.30 $ 0.25
Weighted average shares and
partnership units outstanding 26,959 26,959
</TABLE>
8
<PAGE> 9
RFS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 7,108 $14,592
Accounts receivable, net 3,287 4,959
Due from (to) parent 1,749 (947)
Other 522 488
------- -------
Total current assets 12,666 19,092
------- -------
Notes and other receivables, net of current portion 3,000 3,000
Investment in RFS Hotel Investors, Inc. 20,032 19,954
Leasehold improvements and office equipment, net 300 318
Capitalized franchise costs 2,563 2,517
Deferred costs and other assets, net 656 1,471
------- -------
Total assets $39,217 $46,352
======= =======
Liabilities and Stockholder's Equity
Accounts payable and accrued expenses $ 6,350 $ 8,501
Note payable 324 131
Lease payable 6,775 10,135
------- -------
Total current liabilities 13,449 18,767
Net deficit in partnerships and ventures 314 314
Deferred income taxes 61 0
------- -------
Total Liabilities 13,824 19,081
------- -------
Common stock, no par value; 1,000 shares authorized,
100 shares issued and outstanding 282 282
Additional paid-in capital 18,500 18,500
Unearned employee compensation (141) (123)
Unrealized gain on marketable securities 114 96
Retained earnings 6,638 8,516
------- -------
Total Stockholder's Equity 25,393 27,271
------- -------
Total Liabilities and Stockholder's Equity $39,217 $46,352
======= =======
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
9
<PAGE> 10
RFS, INC.
INCOME STATEMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1997 1996
------------------
(unaudited)
<S> <C> <C>
Revenues:
Management and consulting fees $ 382 $ 36
Hotel revenues 44,771 34,292
Other fees and income 391 195
------- -------
Total revenues 45,544 34,523
------- -------
Operating Expenses:
General and administrative 990 969
Hotel expenses 41,510 31,809
Depreciation and amortization 73 31
------- -------
Total operating expenses 42,573 32,809
------- -------
Operating income 2,971 1,714
Interest expense (3) (11)
Interest income 75 79
------- -------
Income before taxes 3,043 1,782
Income tax (expense) benefit (1,165) (621)
------- -------
Net income $ 1,878 $ 1,161
======= =======
</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>
Three months ended
March 31,
------------------
1997 1996
------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,878 $ 1,161
Adjustments to reconcile net income to net cash
provided by operations:
Provision for bad debts
Depreciation and amortization 73 49
Other non-cash expenses 96 -
Deferred income taxes (61) -
(Increase) decrease in accounts receivables (1,672) 995
(Increase) decrease in other assets 34 (79)
Increase in current liabilities 5,387 1,597
------- --------
Net cash provided by operations 5,735 3,723
------- --------
Cash flows from investing activities:
Purchases of furniture and equipment (44) (17)
Investment in RFS Hotel Investors, Inc. - (18,500)
Increase in deferred costs and other assets (710) -
Short-term investments - (3)
Payment of franchise costs - 2,626
------- --------
Net cash used by investing activities (754) (21,146)
------- --------
Cash flows from financing activities:
Contributed capital - 18,500
Advances from (repayments to) Parent 2,696 -
Principal repayments (193) (672)
------- --------
Net cash provided by financing activities 2,503 17,828
------- --------
Net increase in cash and cash equivalents 7,484 405
Cash and cash equivalents at beginning of period 7,108 8,413
------- --------
Cash and cash equivalents at end of period $14,592 $ 8,818
======= ========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
11
<PAGE> 12
RFS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. ORGANIZATION AND PRESENTATION. Effective February 27, 1996, RFS, Inc.
became a wholly owned subsidiary of Doubletree Corporation ("Doubletree") in a
transaction accounted for as a pooling of interests. RFS, Inc. generates
substantially all of its revenue from operating and managing leased hotels
owned by the Partnership. The Partnership is 90.5% owned by the Company.
Substantially all of the hotels owned by the Partnership (the "Hotels")
are separately leased by the Partnership to RFS, Inc. or other wholly-owned
subsidiaries of Doubletree (the "Lessees") under individual lease agreements
(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. In connection with the February 27, 1996 merger
with Doubletree, RFS, Inc. and the Partnership amended each of the individual
Percentage Leases. The significant amendments include extending the terms of
the leases, clarifying the Company's and the Partnership's responsibilities
with respect to repairs and maintenance at the hotels and clarifying certain
other provisions of the Percentage Leases. These provisions include the
Partnership granting RFS, Inc. a 10-year right of first refusal to manage and
lease future hotels acquired or developed by the Partnership subject to certain
exceptions.
These unaudited financial statements of RFS, Inc. 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 RFS, Inc. included in the Company's 1996
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. 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. RFS, Inc. purchased 973,684 shares
of the Company's convertible preferred stock for $19 per share or $18,500. This
investment is recorded at cost as there is no ready market for these
securities. The convertible preferred stock pays a fixed annual dividend of
$1.45 per share and is convertible on a one-for-one basis for shares of common
stock of the Company at the end of seven years.
12
<PAGE> 13
3. NOTES AND OTHER RECEIVABLES. In June 1996, RFS, Inc. obtained management
agreements for eight hotel properties owned by entities unrelated to the
Company. In connection with obtaining these contracts, RFS, Inc. loaned $3,000
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
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RFS HOTEL INVESTORS, INC.
BACKGROUND
The Company commenced operations in August 1993 upon completion of its initial
public offering and the simultaneous acquisition of seven hotels with 1,118
rooms. The following chart summarizes information regarding the 57 hotels
owned at March 31, 1997.
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Limited Service Hotels:
Hampton Inn.............................17 ............. 2,203
Comfort Inn............................. 6 ............. 787
Holiday Inn Express..................... 7 ............. 861
-- -----
Sub-total.........................30 ............. 3,851
-- -----
Full Service Hotels:
Holiday Inn............................. 6 ............. 1,206
Sheraton................................ 4 ............. 814
DoubleTree.............................. 1 ............. 220
Courtyard by Marriott................... 1 ............. 102
Independent............................. 1 ............. 115
-- -----
Sub-total.........................13 ............. 2,457
-- -----
Extended Stay Hotels:
Residence Inn...........................12 ............. 1,575
Homewood................................ 1 ............. 98
Hawthorn Suites......................... 1 ............. 220
-- -----
Sub-total.........................14 ............. 1,893
-- -----
Total.............................57 ............. 8,201
== =====
</TABLE>
The Hotels are located in 23 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 wholly-owned subsidiaries 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 payable monthly.
Percentage rent is payable quarterly. The Lessees operate 53 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 March 31, 1997 to 1996.
Increases in lease revenue for the three months ended March 31, 1997 over 1996
are due to (i) an increased number of hotels being owned by the Partnership and
leased to the Lessees during the 1997 period, and (ii) increases in revenue per
available room ("REVPAR") at the hotels owned throughout both periods.
At December 31, 1995, the Partnership owned 48 hotels. The Partnership
acquired or opened six hotels during 1996 on the following dates (the number of
hotels is indicated in parenthesis following the date): January (1), May (1),
July (1), November (2), and, December (1). One hotel was sold in March of
1996.
The following table shows statistical data regarding the Hotels on an
actual and a pro forma basis. The pro forma assumes 51 of the 57 hotels owned
at March 31, 1997 were owned by the Partnership throughout both periods; it
excludes four new hotels and two expanded hotels where the room additions were
not open for all of both periods presented.
<TABLE>
<CAPTION>
for the three months ended March 31, 1997
---------------------------------------------------------
Actual % Increase Pro Forma % Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 71.9% 73.2% (1.8) 73.0% 73.7% (0.7)
ADR $73.86 $66.59 10.9 $74.07 $66.35 7.2
RevPAR $53.08 $48.74 8.9 $54.08 $48.93 6.6
</TABLE>
Increases in real estate taxes and property taxes and casualty insurance
and depreciation in 1997 over 1996 are due to the increased number of hotels
owned by the Partnership during 1997 over 1996 and increased real estate tax
assessments.
Increased compensation expense in 1997 over 1996 is primarily due to
additional employees in the 1997 period.
Increased general and administrative expenses in 1997 over 1996 is due to
increased professional fees, office and moving expenses and travel.
Interest expense increased in 1997 over 1996 due to the Bonds being
outstanding during the 1997 period and increased borrowings on the Credit Line.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $75 million line of credit (the "Credit Line") which
expires on 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 (5.8125 at March
31, 1997) plus 1.75%. The Credit Line is secured by a first mortgage on 27
hotels (the "Collateral Pool") with a net book value of approximately $180.6
million at March 31, 1997. 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 $63.0 million on the Credit
Line at March 31, 1997. The Company is in the process of negotiating to
increase the Credit Line to approximately $175 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.
The Company, through a subsidiary, issued $75 million of commercial
mortgage bonds, (the "Bonds") series 1996-1 as follows:
<TABLE>
<CAPTION>
Class Initial Principal Amount Interest Rate Stated Maturity
----- ------------------------ ------------- ---------------
<S> <C> <C> <C>
Class A $50 million 6.83% August 20, 2008
Class B $25 million 7.30% November 21, 2011
</TABLE>
Principal payments on the Class A Bonds are payable based on a 141-month
amortization schedule beginning in December 1996; principal payments on the
Class B Bonds are payable based on a 39-month amortization schedule beginning
in September 2008. The total monthly principal and interest payments
approximate $.7 million.
In connection with the purchase of a hotel in Fishkill, NY, the
Partnership assumed approximately $2.4 million of indebtedness pursuant to
industrial development bonds issued in 1988 and which are due December 1, 2002.
The industrial development bonds bear interest at a variable rate which, as of
December 31, 1995, was approximately three percent (3%) per annum. Principal is
payable in installments of $0.6 million every three years with the next
installment due in 2000.
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
16
<PAGE> 17
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 to RFS, Inc. for an aggregate purchase price of
$18.5 million.
The Company has budgeted $13.8 million for capital expenditures in 1997 at
52 of the hotels owned at December 31, 1996. At March 31, 1997, the
Partnership had spent approximately $3.5 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 1997.
The Partnership is developing the following hotels:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED
FRANCHISE LOCATION ROOMS/SUITES DEVELOPMENT COSTS
--------- --------- ------------ -----------------
<S> <C> <C> <C>
Hampton Inn Sedona, AZ 56 $5.7 million
Homewood Suites Chandler, AZ 83 $6.6 million
Marriott Courtyard Crystal Lake, MI 90 $6.0 million
Residence Inn Jacksonville, FL 120 $8.3 million
</TABLE>
Completion of the above hotels is expected by the first quarter of 1998.
Additionally, the Partnership is constructing a 42-suite addition to the
Residence Inn in Ann Arbor, MI. Construction costs are estimated at $3.7
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
equity securities, borrowings under the Credit Line or other 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
17
<PAGE> 18
fixed or variable interest rate and may be subject to such other terms
as the Board of Directors of the Company in its discretion, may approve.
The Company has filed a Shelf Registration Statement on Form S-3 (the
"Shelf") with the Securities and Exchange Commission for the issuance from time
to time of preferred stock, common stock and depositary shares representing
entitlement to all rights and preferences of a fraction of a share of preferred
stock of a specified series ("Depositary Shares") in the aggregate amount of up
to $250 million. The Shelf became effective July 30, 1996.
The Company intends to fund cash distributions to shareholders principally
out of cash generated from operations. The Company may incur, or cause the
Partnership to incur, indebtedness to meet distribution requirements imposed on
a REIT under the Internal Revenue Code (including the requirement that a REIT
distribute to its shareholders annually at least 95% of its taxable income) to
the extent that working capital and cash flow from the Company's investments
are insufficient to make such distributions. In 1997, the Partnership has,
through March 31, 1997, made cash distributions to its partners, including the
Company, of $8.8 million or $0.36 per Partnership unit, from which the Company
made cash distributions to common shareholders of $7.9 million, or $0.36 per
share. The Company also made cash distributions to the preferred shareholder
of $.4 million, or $.3625 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.
18
<PAGE> 19
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts has adopted a
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
March 31
--------------------------
1997 1996
---- ----
(in thousands, except per share amounts)
<S> <C> <C>
Income before allocation
to minority interest $ 8,529 $ 7,344
Add depreciation 3,908 2,513
Add loss on sale of hotel 244
Less preferred dividend (348) (132)
------- -------
FFO $12,089 $ 9,969
======= =======
Weighted average shares and
partnership units outstanding 26,930 24,653
FFO per share $ 0.45 $ 0.40
</TABLE>
19
<PAGE> 20
RFS, INC.
BACKGROUND
RFS, Inc. (the "Lessee") leases 56 and operates 51 of the Hotels owned by RFS
Partnership, L.P. (the "Partnership").
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996
Total revenues increased $11.0 million or 32% to $45.5 million for the
three months ended March 31, 1997 compared to $34.5 million for the three
months ended March 31, 1996. The increase in hotel revenues of $10.5 million
was attributable to the net addition of eight leased properties as compared to
the 1996 period and an increase of approximately $3 in average daily rate to
$69.14 on a same store basis while occupancy declined slightly to 72.3%. The
margin on hotel results (hotel revenues less hotel expenses) increased $0.8
million or 31% from $2.5 million to $3.3 million reflecting the addition of the
eight properties in comparison to the prior year and the improved operating
performance of the hotels partially offset by increased lease payments to the
Partnership attributable to increased revenues.
Management and consulting fees increased substantially to $0.4 million
reflecting the net addition of eight management contracts that commenced in the
first half of 1996. Other fees and income increased $0.2 million principally
attributable to dividend income generated from the investment in the
convertible preferred stock of the Company made in late February 1996.
General and administrative expenses and depreciation and amortization
increased nominally. The provision for income taxes in 1996 reflects a 35%
effective tax rate and a 38.3% effective tax rate in 1997 (the consolidated
effective tax rates for Doubletree Corporation in those years.)
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1997, RFS, Inc. generated cash
flow from operations of $5.7 million as compared to $3.7 million for the
comparable period of 1996. The increase was principally attributable to an
increase in the lease payment due to the Partnership which is paid on a
quarterly basis in arrears and increased earnings. 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 the 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.
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 27 - Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K - A Form 8-K dated January 2, 1997 and a
Form 8-K/A dated January 2, 1997, regarding the purchase of four
Sheraton Hotels in California were filed on January 17, 1997 and
February 14, 1997, respectively.
21
<PAGE> 22
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.
5-12-97 /s/ Michael J. Pascal
- ---------------- ------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting
Officer)
5-12-97 /s/ Robert M. Solmson
- ---------------- ------------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS, INC. FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,581
<SECURITIES> 0
<RECEIVABLES> 10,601
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 555,150
<DEPRECIATION> 27,179
<TOTAL-ASSETS> 546,872
<CURRENT-LIABILITIES> 3,202
<BONDS> 74,068
0
10
<COMMON> 244
<OTHER-SE> 362,396
<TOTAL-LIABILITY-AND-EQUITY> 546,872
<SALES> 0
<TOTAL-REVENUES> 17,907
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,938
<INCOME-PRETAX> 8,529
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,694
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
