<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 June 30, 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)
Tennessee 62-1534743
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
850 Ridge Lake Boulevard, Suite 220, (901) 767-7005
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 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 June 30, 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 - June 30, 1997
and December 31, 1996 3
Consolidated Statements of Income - For the three months ended
June 30, 1997 and 1996 and the six months ended June 30,
1997 and 1996 4
Consolidated Statements of Cash Flows - For the six months ended
June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
RFS, Inc.
Balance Sheets - December 31, 1996 and June 30, 1997 9
Income Statements - For the three months ended June 30, 1997
and 1996 and the six months ended June 30, 1997 10
Statements of Cash Flows - For the six months ended June 30,
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
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
2
<PAGE> 3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in Hotel Properties, net $ 562,230 $ 415,618
Hotels under development 8,714 7,325
Cash and cash equivalents 4,368 57,935
Accounts receivable-Lessees 13,788 7,187
Deferred expenses, net 3,416 3,598
Prepaid and other assets 2,009 1,402
Escrow deposits 10 6,064
--------- ---------
$ 594,535 $ 499,129
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,939 $ 2,258
Accrued real estate taxes 3,150 1,774
Borrowings on line of credit 108,000 50,000
Bonds 73,355 74,769
Other debt 7,672 8,295
Minority interest 36,404 4,551
--------- ---------
230,520 141,647
--------- ---------
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 2,741 3,005
Unearned directors' and officers' compensation (1,956) (2,325)
--------- ---------
Total shareholders' equity 364,015 357,482
--------- ---------
$ 594,535 $ 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 FOR THE FOR THE
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
-------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Leases $ 21,736 $ 16,100 $ 39,599 $ 29,368
Interest 11 74 55 143
-------- -------- -------- --------
Total revenue 21,747 16,174 39,654 29,511
-------- -------- -------- --------
Expenses:
Real estate taxes and property and
casualty insurance 1,985 1,448 3,932 2,909
Depreciation 4,284 2,627 8,192 5,140
Amortization of franchise fees and
unearned compensation 222 194 443 331
Compensation 606 444 1,227 913
Franchise taxes 75 65 150 130
General and administrative 392 619 916 927
Loss on sale of a hotel property 244
Amortization of loan costs 266 89 410 177
Interest expense, net 2,548 701 4,486 1,409
-------- -------- -------- --------
Total expenses 10,378 6,187 19,756 12,180
-------- -------- -------- --------
Income before minority interest 11,369 9,987 19,898 17,331
Minority interest (1,061) (137) (1,896) (245)
-------- -------- -------- --------
Net income 10,308 9,850 18,002 17,086
Preferred stock dividends (352) (352) (700) (484)
-------- -------- -------- --------
Net income applicable to common shareholders $ 9,956 $ 9,498 $ 17,302 $ 16,602
======== ======== ======== ========
Net income per common and
common equivalent share $ 0.41 $ 0.39 $ 0.71 $ 0.68
Weighted average shares and
partnership units outstanding 26,959 24,716 26,946 24,716
</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 SIX FOR THE SIX
MONTHS MONTHS
JUNE 30, JUNE 30,
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,002 $ 17,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,045 5,648
Income allocated to minority interest 1,896 245
Loss on sale and write-down of hotel properties 244
Changes in assets and liabilities:
Accounts receivable-Lessees (6,601) (4,012)
Prepaids and other assets (607) (1)
Accounts payable and other liabilities 1,057 249
--------- ---------
Net cash provided by operating activities 22,792 19,459
--------- ---------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (111,976) (44,080)
Proceeds from sale of hotel property 3,891
Escrow deposits and prepayments under
purchase agreements (1,421)
Refund on franchise agreements 8
--------- ---------
Net cash used by investing activites (111,968) (41,610)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of preferrred stock 18,143
Net proceeds from issuance of common stock 72
Distributions to common and preferred shareholders (18,266) (16,434)
Distributions to limited partners (1,850) (218)
Borrowings on revolving credit agreement 58,000 32,750
Payments on revolving credit agreement (12,000)
Payments on debt and bonds (2,037) (20)
Loan fees paid (310) (59)
--------- ---------
Net cash provided by financing activities 35,609 22,162
--------- ---------
Net increase (decrease) in cash and cash equivalents (53,567) 11
Cash and cash equivalents at beginning of period 57,935 2,680
--------- ---------
Cash and cash equivalents at end of period $ 4,368 $ 2,691
========= =========
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 issued 2,244,934 limited partnership units valued at $38.2 million in
connection with the purchase of four hotels.
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.
</TABLE>
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 June 30, 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 July 23, 1997, the Company declared a $0.36
dividend on each share of Common Stock outstanding to shareholders of record on
August 5, 1997. The dividend will be paid on August 15, 1997.
3. ACQUISITIONS OF REAL ESTATE. In June 1997, the Partnership consummated the
acquisition of the Beverly Heritage Hotel in Milpitas, CA for a purchase price
of $33.7 million. The purchase price was paid with borrowings under the
Company's line of credit (the "Credit Line").
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 numerator and denominator of the diluted EPS computation. The
Company will adopt the
6
<PAGE> 7
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 its
financial position, results of consolidated operations, or 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 and
the six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before minority interest $11,369 $ 9,987 $19,898 $17,331
Less preferred stock dividend (352) (352) (700) (484)
------- ------- ------- -------
$11,017 $ 9,635 $19,198 $16,847
======= ======= ======= =======
Weighted average common shares
and common stock equivalents
outstanding 26,959 24,716 26,946 24,716
Net income per common share $ 0.41 $ 0.39 $ 0.71 $ 0.68
</TABLE>
7
<PAGE> 8
6. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro
forma condensed statements of income for the six months ended June 30, 1997 and
1996 of the Company are presented as if the hotel properties owned at June 30,
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 $41,774 $36,960
Real estate taxes and casualty insurance 4,317 3,502
Depreciation and amortization 10,579 10,204
Compensation 1,227 913
Franchise taxes 150 130
General and administrative 916 927
Loss on sale of a hotel property 244
Interest expense 5,681 4,559
------- -------
Income before allocation to minority interest 18,904 16,481
Less minority interest (1,801) (1,571)
------- -------
Net income $17,103 $14,910
======= =======
Net income per common share $ 0.68 $ 0.59
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, June 30,
1996 1997
---- ----
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 7,108 $ 14,505
Accounts receivable, net 3,287 4,864
Due from Parent 1,749 4,274
Other 522 455
-------- --------
Total current assets 12,666 24,098
Notes and other receivables, net of current portion 3,000 3,000
Investment in RFS Hotel Investors, Inc. 20,032 19,993
Leasehold improvements and office equipment, net 300 298
Capitalized franchise costs 2,563 2,471
Deferred costs and other assets, net 656 1,754
-------- --------
$ 39,217 $ 51,614
======== ========
Liabilities and Stockholder's Equity
- ------------------------------------
Accounts payable and accrued expenses $ 6,350 $ 9,085
Note payable 324 0
Lease payable 6,775 12,358
-------- --------
Total current liabilities 13,449 21,443
Net deficit in partnerships and ventures 314 314
Deferred income taxes 61 0
-------- --------
Total liabilities 13,824 21,757
-------- --------
Common stock, no par value; 5,000 shares authorized,
100 shares issued and outstanding 282 282
Additional paid-in capital 18,500 18,500
Unearned employee compensation (141) (105)
Unrealized gain on marketable securities 114 136
Retained earnings 6,638 11,044
-------- --------
Total stockholder's equity 25,393 29,857
-------- --------
$ 39,217 $ 51,614
======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
9
<PAGE> 10
RFS, INC.
INCOME STATEMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
--------------------------- ---------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Management and consulting fees $ 446 $ 79 $ 828 $ 115
Hotel revenues 50,953 38,431 95,724 72,723
Other fees and income 418 437 809 632
Total revenues 51,817 38,947 97,361 73,470
-------- -------- -------- --------
Operating Expenses:
General and administrative 1,020 877 2,010 1,846
Hotel expenses 46,701 35,304 88,211 67,113
Depreciation and amortization 72 85 145 116
Total operating expenses 47,793 36,266 90,366 69,075
-------- -------- -------- --------
Operating Income 4,024 2,681 6,995 4,395
Interest expense (1) -- (4) (11)
Interest income 75 67 150 146
------- -------- -------- ---------
Income before taxes 4,098 2,748 7,141 4,530
Provision for income taxes (1,570) (965) (2,735) (1,586)
-------- -------- -------- --------
Net Income $ 2,528 $ 1,783 $ 4,406 $ 2,944
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
10
<PAGE> 11
RFS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,406 $ 2,944
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 145 116
Other non-cash expenses 58 177
Deferred income taxes (61) --
(Increase) decrease in accounts receivable (1,577) 905
(Increase) decrease in other assets 67 (57)
Increase in current liabilities 8,318 5,147
-------- --------
NET CASH PROVIDED BY OPERATIONS 11,356 9,232
-------- --------
Cash flows from investing activities:
Purchases of furniture and equipment (51) (16)
Investment in RFS Hotel Investors, Inc. 39 (18,500)
Increase in deferred costs and other assets (1,098) (2,626)
Loans to owners of managed hotels, net -- (3,000)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (1,110) (24,142)
-------- --------
Cash flows from financing activities:
Advances from (repayments to) Parent (2,525) 18,500
Principal repayments (324) (672)
-------- --------
NET CASH provided BY FINANCING ACTIVITIES (2,849) 17,828
-------- --------
Net increase in cash and cash equivalents 7,397 2,918
Cash and cash equivalents at beginning of year 7,108 9,238
-------- --------
Cash and cash equivalents at end of year $ 14,505 $ 12,156
======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
11
<PAGE> 12
RFS, INC.
NOTES TO FINANCIAL STATEMENTS
(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
the Partnership.
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, the Partnership amended each of the individual Percentage
Leases. RFS, Inc. was granted 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 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 RFS, Inc. included in the Company's 1996 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. RFS, Inc. purchased 973,684 shares
of the Company's convertible preferred stock for $19 per share or $18,500,000.
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
$3,000,000 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 61 hotels (the
"Hotels") owned at June 30, 1997:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Full Service Hotels:
Holiday Inn .....................6............................1,206
Sheraton.........................4..............................814
Doubletree.......................1..............................220
Independent......................2..............................311
-- -----
Sub-total..............13............................2,551
-- -----
Extended Stay Hotels:
Residence Inn...................12............................1,575
Homewood Suites..................2..............................197
Hawthorn Suites..................1..............................280
-- -----
Sub-total..............15............................2,052
Limited Service Hotels:
Hampton Inn.....................19............................2,360
Courytard by Marriott............1..............................102
Comfort Inn......................6..............................787
Holiday Inn Express..............7..............................861
-- -----
Sub-total..............33............................4,110
-- -----
Total..................61............................8,713
== =====
</TABLE>
The Hotels are located in 24 states.
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 57 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 first refusal, subject to certain
exceptions, to lease hotels acquired by the Partnership, through February 27,
2006.
14
<PAGE> 15
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 1997 to 1996 and the Six Months
Ended June 30, 1997 to 1996
Increases in lease revenue for the three and the six months ended June
30, 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 periods, 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 (the number of hotels is indicated in
parenthesis following the date): January (1), May (1), July (1), November (2),
and December (1). These hotels were owned the entire six months in 1997. 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 52 of the 61 hotels owned at
June 30, 1997 were owned by the Partnership throughout both periods; it excludes
seven newly opened 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 June 30, 1997
---------------------------------------------------------------------------------
Actual Pro Forma
------ % Increase --------- % Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 78.3% 81.0% (3.3) 80.0% 80.7% (0.9)
ADR $75.18 $68.58 9.6 $77.15 $71.51 7.9
RevPAR $58.87 $55.58 5.9 $61.69 $57.68 7.0
<CAPTION>
for the six months ended June 30, 1997
---------------------------------------------------------------------------------
Actual Pro Forma % Increase
------ % Increase ---------
1997 1996 (Decrease) 1997 1996 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 75.1% 77.1% (2.6) 76.5% 77.1% (0.8)
ADR $74.56 $67.63 10.2 $76.39 $70.77 7.9
RevPAR $56.02 $52.16 7.4 $58.46 $54.57 7.1
</TABLE>
Increases in real estate taxes and property 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.
15
<PAGE> 16
Decreases in general and administrative expense for the three months
ended June 30, 1997 over 1996 are primarily due to decreased costs related to
potential acquisitions in the 1997 period. General and administrative expense
remained flat for the six months ended June 30, 1997 over 1996 due to increased
office and moving expenses, including rent, which were offset by decreased costs
related to potential acquisitions.
Increases in amortization of loan costs in the three and the six months
ended June 30, 1997 are due to amortization in the 1997 periods of costs related
to the Bonds and amortization of increased costs related to the Credit Line.
Interest expense increased in 1997 over 1996 due to Bonds being
outstanding during the 1997 periods and increased borrowings on the Credit Line.
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company entered into a new bank line of credit (the
"Line of Credit"), for $175 million, of which $100 million is unsecured.
Borrowings under the Line of Credit bear interest at LIBOR plus 1.75%. The Line
of Credit is secured by first priority mortgages on 29 hotels and agreements
restricting the transfer, pledge or other hypothecation of 10 hotels
(collectively, the "Collateral Pool"). The Line of Credit contains various
covenants including maintenance of a minimum net worth, minimum debt coverage
and interest coverage ratios, total indebtedness and total liabilities
limitations and borrowing base to value limitations. The Company borrowed $111.8
million on the Line of Credit in July 1997, which was used to repay the Credit
Line and other borrowings.
The Company had a $75 million line of credit which was terminated and
paid-off at the closing of the new Line of Credit in July 1997. Borrowings under
the Credit Line bore interest at the 90-day LIBOR plus 1.75%. The Company had
outstanding borrowings of $73.0 million on the Credit Line at June 30, 1997.
In June 1997, the Company borrowed $35 million from a bank to purchase
a property. This loan was unsecured and bore interest at LIBOR plus 1.75%. This
loan was paid off with borrowings under the new Line of Credit.
In November 1996, the Company, through a subsidiary, issued $75 million
of commercial 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
$0.7 million.
In connection with the purchase of a hotel in Fishkill, NY, the
Partnership assumed indebtedness pursuant to industrial development bonds issued
in 1988 and which are due
16
<PAGE> 17
December 1, 2002. The current outstanding balance due on the bonds is
approximately $1.8 million. 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 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 of Series A
convertible preferred stock to RFS, Inc. for an aggregate purchase price of
$18.5 million.
The Company has budgeted $23.0 million for capital expenditures in 1997
at the 53 hotels owned at December 31, 1996. At June 30, 1997, the Partnership
had spent approximately $7.5 million of the budgeted amounts. The Company will
use cash generated from operations and borrowings under the Line of Credit 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>
ESTIMATED ESTIMATED
NUMBER OF DEVELOMENT OPENING
FRANCHISE LOCATION ROOMS/SUITES COSTS QUARTER(Q)
--------- -------- ------------ ----- ----------
<S> <C> <C> <C> <C>
Residence Inn Jacksonville, FL 120 $8.3 million 3Q97
Residence Inn West Palm Beach, FL 78 $6.5 million 4Q97
Homewood Suites Chandler, AZ 83 $6.6 million 1Q98
Hampton Inn Jacksonville, FL 118 $6.5 million 1Q98
Marriott Courtyard Crystal Lake, IL 90 $6.1 million 2Q98
</TABLE>
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 third 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
17
<PAGE> 18
operations, short-term investments, proceeds from additional issuances of equity
securities, borrowings under the Line of Credit 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 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 has also
filed a shelf registration statement registering the issuance and/or re-sale of
up to 2,569,609 shares of common stock which may be issued upon redemption of
partnership interests in the Partnership.
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 June 30, 1997, made cash distributions to its partners,
including the Company, of $20.1 million or $0.72 per Partnership unit, from
which the Company made cash distributions to common shareholders of $17.6
million, or $0.72 per share. The Company also made cash distributions to the
preferred shareholder of $.7 million, or $.725 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
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 Six Months Ended
June 30 June 30
------------------ ---------------
1997 1996 1997 1996
---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income before allocation
to minority interest $11,369 $ 9,987 $19,898 $17,331
Add depreciation 4,284 2,627 8,192 5,140
Add loss on sale of hotel 244
Less preferred dividend (352) (352) (700) (484)
------- ------- ------- -------
FFO $15,301 $12,262 $27,390 $22,231
======= ======= ======= =======
Weighted average shares and
partnership units outstanding 26,959 24,716 26,946 24,716
FFO per share $ 0.57 $ 0.50 $ 1.02 $ 0.90
</TABLE>
19
<PAGE> 20
RFS, INC.
BACKGROUND
RFS, Inc. leases 60 and operates 56 of the Hotels owned by Partnership.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared with Three Months Ended June 30, 1996
Total revenues increased $12.9 million or 33% to $51.8 million for the
three months ended June 30, 1997 compared to $38.9 million for the three months
ended June 30, 1996. The increase in hotel revenues of $12.5 million was
attributable, in part, to the net addition of eleven leased properties as
compared to the comparable period of 1996. Hotel revenues also increased due to
same-store growth; on a same-store basis, the average daily rate increased
approximately $2.85 to $70.79, while occupancy declined slightly to 79.7%. The
margin on hotel results (hotel revenues less hotel expenses) increased $1.1
million or 36% from $3.1 million to $4.3 million reflecting the addition of the
eleven properties and an improvement in the operating margins of the hotels from
8.1% in the three months ended June 30, 1996 to 8.3% in the three months ended
June 30, 1997.
Management and franchise fees increased to $0.4 million reflecting the
net addition of eight management contracts that commenced in the second quarter
of 1996. Other fees and income remained flat at $0.4 million for the three
months ended June 30, 1997 and 1996, respectively.
General and administrative expenses increased slightly to $1.0 million
for the three months ended June 30, 1997 compared to $0.9 million for the three
months ended June 30, 1996, reflecting increased costs associated with the
addition of the properties discussed above. Depreciation and amortization
decreased nominally. Interest income represents interest earned on the loan made
to the owner of certain hotels managed by RFS. The provision for income taxes
reflects an effective tax rate of 35.0% in 1996 and 38.3% in 1997, respectively
(the consolidated effective tax rates for Doubletree Corporation in those
years).
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
Total revenues increased $23.9 million or 33% to $97.4 million for six
months ended June 30, 1997 compared to $73.5 million for the six months ended
June 30, 1996. The increase in hotel revenues of $23.0 million was attributable,
in part, to the net addition of eleven leased properties as compared to the
comparable period of 1996. On a same-store basis, hotel revenues increased due
to an increase of approximately $2.83 in the average daily rate to $70.01;
occupancy declined slightly to 76.0%. The margin on hotel results (hotel
revenues less hotel expenses) increased $1.9 million or 34% from $5.6 million to
$7.5 million reflecting the addition
20
<PAGE> 21
of the eleven properties in comparison to the prior and an improvement in the
margins of the hotels from 7.7% in the first half of 1996 to 7.8% in the first
half of 1997.
Management and franchise fees increased to $0.8 million reflecting the
net addition of eight management contracts that commenced late in the second
quarter of 1996. Other fees and income increased by approximately $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 increased by $0.2 million or 9% to
$2.0 million for the six months ended June 30, 1997 compared to $1.8 million for
the six months ended June 30, 1996, reflecting increased costs associated with
the addition of the properties discussed above. Depreciation and amortization
increased nominally. Interest income represents interest earned on the loan made
to the owner of certain hotels managed by RFS. The provision for income taxes
reflects an effective tax rate of 35.0% in 1996 and 38.3% in 1997, respectively
(the consolidated effective tax rates for Doubletree Corporation in those
years).
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1997, RFS, Inc. generated cash
flow from operations of $11.4 million as compared to $9.2 million for the
comparable period of 1996. The increase was principally attributable to an
increase in the lease payment due to the Company that 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 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.
21
<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 1997, the annual meeting of shareholders was held to elect
three Class I directors to serve on the Board of Directors until the annual
meeting of shareholders in 2000 and to elect one Class III director to serve
until the annual meeting of shareholders in 1999.
The shareholders voted to elect the four following directors:
<TABLE>
<CAPTION>
Votes For Votes Against
--------- -------------
<S> <C> <C>
Class I Directors:
Michael S. Starnes 21,479,838 45,284
John W. Stokes, Jr. 21,076,638 448,484
Minor W. Perkins 21,478,838 46,284
Class III Director:
R. Lee Jenkins 21,077,638 447,484
</TABLE>
The following directors terms of office continued after the meeting:
Class II Directors (terms expiring in 1998) - Bruce E. Campbell, Jr.
and H. Lance Forsdick, Sr.
Class III Directors (terms expiring in 1999) - Robert M. Solmson and
Harry J. Phillips, Sr.
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 - None.
22
<PAGE> 23
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.
August 8, 1997 /s/ Michael J. Pascal
- -------------- --------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting Officer)
August 8, 1997 /s/ Robert M. Solmson
- -------------- --------------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,368
<SECURITIES> 0
<RECEIVABLES> 13,788
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 593,693
<DEPRECIATION> 31,463
<TOTAL-ASSETS> 594,535
<CURRENT-LIABILITIES> 0
<BONDS> 189,027
0
10
<COMMON> 244
<OTHER-SE> 363,761
<TOTAL-LIABILITY-AND-EQUITY> 594,535
<SALES> 21,736
<TOTAL-REVENUES> 21,747
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,548
<INCOME-PRETAX> 11,369
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,308
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0
</TABLE>
