<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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)
<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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days.
X Yes No
The number of shares of Registrant's Common Stock, $.01 par value, outstanding
on September 30, 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 - September 30, 1997
and December 31, 1996 3
Consolidated Statements of Income - For the three months ended
September 30, 1997 and 1996 and the nine months ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows - For the nine months
ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
RFS, Inc.
Balance Sheets - December 31, 1996 and September 30, 1997 9
Income Statements - For the three months ended September 30,
1997 and 1996 and the nine months ended September 30,
1997 and 1996 10
Statements of Cash Flows - For the nine months ended September
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
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
<PAGE> 3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPT. 30, DECEMBER 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in Hotel Properties, net $ 568,587 $ 415,618
Hotels under development 10,556 7,325
Cash and cash equivalents 3,684 57,935
Accounts receivable-Lessees 14,746 7,187
Deferred expenses, net 4,249 3,598
Prepaid and other assets 3,005 1,402
Escrow deposits 100 6,064
--------- ---------
$ 604,927 $ 499,129
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,619 $ 2,258
Accrued real estate taxes 3,946 1,774
Borrowings on line of credit 115,743 50,000
Bonds 72,630 74,769
Other debt 7,661 8,295
Minority interest 36,594 4,551
--------- ---------
239,193 141,647
--------- ---------
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 4,276 3,005
Unearned directors' and officers' compensation (1,772) (2,325)
--------- ---------
Total shareholders' equity 365,734 357,482
--------- ---------
$ 604,927 $ 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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1996
-----------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Leases $ 23,853 $ 18,226 $ 63,452 $ 47,594
Interest 9 116 64 259
-------- -------- -------- --------
Total revenue 23,862 18,342 63,516 47,853
-------- -------- -------- --------
Expenses:
Real estate taxes and property and
casualty insurance 2,318 1,550 6,250 4,459
Depreciation 4,664 2,804 12,856 7,944
Amortization of franchise fees and
unearned compensation 219 212 662 543
Compensation 585 572 1,812 1,485
Franchise taxes 75 65 225 195
General and administrative 499 548 1,415 1,475
Loss on sale of a hotel property 244
Amortization of loan costs 254 87 664 264
Interest expense, net 3,466 951 7,952 2,360
-------- -------- -------- --------
Total expenses 12,080 6,789 31,836 18,969
-------- -------- -------- --------
Income before minority interest 11,782 11,553 31,680 28,884
Minority interest (1,115) (161) (3,011) (406)
-------- -------- -------- --------
Net income 10,667 11,392 28,669 28,478
Preferred stock dividends (356) (356) (1,056) (839)
-------- -------- -------- --------
Net income applicable to common shareholders $ 10,311 $ 11,036 $ 27,613 $ 27,639
======== ======== ======== ========
Net income per common and
common equivalent share $ 0.42 $ 0.45 $ 1.14 $ 1.14
Weighted average shares and
partnership units outstanding 26,959 24,700 26,950 24,667
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS MONTHS
ENDED ENDED
SEPT. 30, SEPT. 30,
1997 1996
------------ -------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 28,669 $ 28,478
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,182 8,751
Income allocated to minority interest 3,011 406
Loss on sale and write-down of hotel properties 244
Changes in assets and liabilities:
Accounts receivable-Lessees (7,559) (5,721)
Prepaids and other assets (1,603) (3)
Accounts payable and other liabilities 2,533 1,212
--------- --------
Net cash provided by operating activities 39,233 33,367
--------- --------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (124,839) (56,620)
Proceeds from sale of hotel property 3,891
Escrow deposits and prepayments under
purchase agreements 90 (1,034)
Cash paid for franchise agreements (32)
--------- --------
Net cash used by investing activites (124,781) (53,763)
--------- --------
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 (27,398) (25,562)
Distributions to limited partners (2,775) (334)
Borrowings on revolving credit agreement 65,743 38,750
Payments on revolving credit agreement (12,000)
Payments on debt and bonds (2,773) (31)
Loan fees paid (1,392) (126)
--------- --------
Net cash provided by financing activities 31,477 18,840
--------- --------
Net decrease in cash and cash equivalents (54,071) (1,556)
Cash and cash equivalents at beginning of period 57,935 2,680
--------- --------
Cash and cash equivalents at end of period $ 3,864 $ 1,124
========= ========
</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 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 $6,054 towards the
purchase of hotels.
In 1996, the Partnership applied deposits of $1,190 towards the purchase of
hotels and land. In 1996, the Company issued 75,000 shares of Common Stock
to an officer, which at date of issuance, were valued at $17 5/8 per share.
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 the 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 September 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 October 20, 1997, the Company declared a $0.375
dividend on each share of Common Stock outstanding to shareholders of record on
November 7, 1997. A similar distribution was declared with respect to the units
of the Partnership. The dividend and the distribution will be paid on November
17, 1997.
3. Acquisitions and Dispositions of Real Estate. In September 1997, the
Partnership completed addition of 42 rooms to the Residence Inn in Ann Arbor,
Michigan. The cost of the addition of $3.7 million was paid for with cash.
In September 1997, the Partnership entered into two contracts to sell
two hotels in Tupelo, Mississippi for an aggregate of approximately $4.7
million. The sales are expected to occur by the end of 1997.
6
<PAGE> 7
4. Implementation of Statements of Financial Accounting Standards. The Financial
Accounting Standards Board has issued Stantement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information ("SFAS 131"), No. 130, Reporting Comprehensive Income ("SFAS 130"),
No. 129, Disclosure of Information About Capital Structure ("SFAS 129"), and No.
128, Earnings Per Share ("SFAS 128"). SFAS 131 specifies revised guidelines for
determining an entity's operating segments and the type of financial information
to be disclosed. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS 129 consolidates the
existing requirements to disclose certain information about an entity's capital
structure, and SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share. These Standards are effective for periods
ending after December 31, 1997.
The Company believes that the impact of these Standards, when adopted,
will not have a material impact on the Company's financial statements and
financial statement presentation when presented on a comparable basis.
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 nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Income before minority interest $11,782 $11,553 $31,680 $28,884
Less preferred stock dividend (356) (355) (1,056) (839)
------- ------- ------- -------
$11,426 $11,198 $30,624 $28,045
======= ======= ======= =======
Weighted average common shares
and common stock equivalents
outstanding 26,959 24,700 26,950 24,667
Net income per common and
common equivalent share $ 0.42 $ 0.45 $ 1.14 $ 1.14
</TABLE>
7
<PAGE> 8
6. Subsequent Events. In October 1997, the Partnership sold a Homewood Suites in
Salt Lake City, Utah and a Homewood Suites in Plano, Texas for cash of
approximately $15.4 million.
In October 1997, the Company, through a non-qualified subsidiary,
purchased a 205-room Sheraton in Birmingham, Alabama for a purchase price of
approximately $18 million. The purchase price was paid with cash, the assumption
of $5.5 million of bonds and includes $3.1 million for land in which the Company
has entered into a contract to purchase. The land purchase is expected to occur
in the first quarter of 1998.
7. Pro Forma Condensed Consolidated Statements of Income. The unaudited pro
forma condensed statements of income for the nine months ended September 30,
1997 and 1996 of the Company are presented as if the hotel properties owned at
September 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 forecast the
results of operations for future periods.
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Operating Data:
Total revenue $65,626 $58,794
Real estate taxes and property and casualty insurance 6,404 4,689
Depreciation and amortization 15,483 14,964
Compensation 1,812 1,485
Franchise taxes 225 195
General and administrative 1,415 1,475
Loss on sale of a hotel property 244
Interest expense, net 9,153 8,638
------- -------
Income before minority interest 31,134 27,104
Less minority interest (2,967) (2,583)
------- -------
Net income $28,167 $24,521
======= =======
Net income per common and common
equivalent share $ 1.12 $ 0.97
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, September 30,
1996 1997
---- ----
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 7,108 $ 9,429
Accounts receivable, net 3,287 5,134
Due from Parent 1,749 13,081
Other 522 1,308
------- -------
Total current assets 12,666 28,952
Notes and other receivables, net of current portion 3,000 1,795
Investment in RFS Hotel Investors, Inc. 20,032 20,023
Leasehold improvements and office equipment, net 300 303
Capitalized franchise costs 2,563 2,425
Deferred costs and other assets, net 656 1,776
------- -------
$39,217 $55,274
======= =======
Liabilities and Stockholder's Equity
Accounts payable and accrued expenses $ 6,350 $ 9,165
Note payable 324 0
Lease payable 6,775 13,250
------- -------
Total current liabilities 13,449 22,415
Net deficit in partnerships and ventures 314 314
Deferred income taxes 61 0
------- -------
Total liabilities 13,824 22,729
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) (88)
Unrealized gain on marketable securities 114 166
Retained earnings 6,638 13,685
------- -------
Total stockholder's equity 25,393 32,545
------- -------
$39,217 $55,274
======= =======
</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 Nine months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Management and consulting fees $ 419 $ 356 $ 1,247 $ 471
Hotel revenues 52,388 41,069 148,112 113,792
Other fees and income 420 498 1,229 1,272
------- ------- -------- --------
Total revenues 53,227 41,923 150,588 115,535
------- ------- -------- --------
Operating Expenses:
General and administrative 1,031 895 3,041 2,741
Hotel expenses 47,865 37,735 136,076 104,848
Depreciation and amortization 94 73 239 189
------- ------- -------- --------
Total operating expenses 48,990 38,703 139,356 107,778
------- ------- -------- --------
Operating Income 4,237 3,220 11,232 7,757
Interest expense (1) (3) (5) (14)
Interest income 45 71 195 75
------- ------- -------- --------
Income before income taxes 4,281 3,288 11,422 7,818
Provision for income taxes (1,640) (1,151) (4,375) (2,736)
------- ------- -------- --------
Net Income $ 2,641 $ 2,137 $ 7,047 $ 5,082
======= ======= ======== ========
</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>
Nine Months Ended September 30,
1997 1996
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,047 $ 5,082
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 239 189
Other non-cash expenses 114 53
Deferred income taxes (61) -
(Increase) decrease in accounts receivable (1,847) (1,392)
(Increase) decrease in other assets (786) (406)
Increase in current liabilities 9,290 7,883
-------- --------
Net cash provided by operations 13,996 11,409
-------- --------
Cash flows from investing activities:
Purchases of furniture and equipment (77) (37)
Investment in RFS Hotel Investors, Inc. - (18,500)
Distributions from partnerships and joint ventures - 2
Increase in deferred costs and other assets (1,147) (2,626)
Loans to owners of managed hotels, net 1,205 (3,000)
-------- --------
Net cash used by investing activities (19) (24,161)
-------- --------
Cash flows from financing activities:
Advances from (repayments to) Parent (11,332) 18,500
Principal repayments (324) (672)
-------- --------
Net cash provided by (used in) financing
activities (11,656) 17,828
-------- --------
Net increase in cash and cash equivalents 2,321 5,076
Cash and cash equivalents at beginning of year 7,108 9,238
-------- --------
Cash and cash equivalents at end of year $ 9,429 $ 14,314
-------- --------
</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
by 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 and RFS, Inc. 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. SIGNIFICANT ACCOUNTING POLICIES.
Investments
Investments in partnerships and joint ventures are accounted for using
the equity method when the Company has a general partnership interest or its
limited partnership interest exceeds 5% and the Company does not exercise
control over the venture. Profits and losses of these joint ventures are
allocated in accordance with the joint venture agreements. All other investments
are accounted for using the cost method with the exception of the marketable
equity securities which are classified as available-for-sale and recorded at
fair value with unrealized gains or losses reflected in stockholder's equity
pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." If a joint venture
experiences operating losses which reduce the other joint venture partner's
equity to a zero balance, the loss which would otherwise be attributable to the
other joint venturer is absorbed within the Company's operating results.
12
<PAGE> 13
3. 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 beginning in February, 2003.
4. 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, subject to mandatory reductions in the event
certain of the hotels are sold or refinanced:
$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
In July 1997, the note receivable was reduced by approximately $1.4 million due
to the refinancing of certain of the hotels by the owner.
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 September 30, 1997:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Full Service Hotels:
Holiday Inn............................. 6 .................. 1,208
Sheraton................................ 4 .................... 814
Doubletree.............................. 1 .................... 219
Independent............................. 2 .................... 311
-- -----
Sub-total.......................... 13 .................. 2,552
-- -----
Extended Stay Hotels:
Residence Inn.......................... 12 .................. 1,606
Homewood................................ 2 .................... 197
Hawthorn Suites......................... 1 .................... 280
-- -----
Sub-total.......................... 15 .................. 2,083
-- -----
Limited Service Hotels:
Hampton Inn............................ 19 .................. 2,358
Courtyard by Marriott................... 1 .................... 102
Comfort Inn............................. 6 .................... 787
Holiday Inn Express..................... 7 .................... 861
-- -----
Sub-total.......................... 33 .................. 4,108
-- -----
Total.............................. 61 .................. 8,743
== =====
</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 September 30, 1997 to 1996
Increases in lease revenue for the three months ended September 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 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 (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 nine 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 51 of the 61 hotels owned at
September 30, 1997 were owned by the Partnership throughout both periods; it
excludes seven newly opened hotels and three expanded hotels where the room
additions were not open for all of both periods presented.
<TABLE>
<CAPTION>
for the three months ended September 30, 1997
------------------------------------------------------------
Actual Pro Forma
------------------------------ ----------------------------
% Increase % Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 78.2% 81.1% (3.5) 78.9% 80.8% (1.3)
ADR $77.66 $72.45 7.2 $78.14 $74.17 5.4
Revpar $60.76 $58.74 3.4 $62.33 $59.96 4.0
</TABLE>
Decreases in interest income are a result of funds from the sale of
preferred stock in February 1996 being invested during 1996. These funds were
used to purchase properties in 1997.
Increases in real estate taxes and property and casualty insurance and
increases in 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.
Decreases in general and administrative expense in 1997 over 1996 are
primarily due to stock exchange listing fees incurred in 1996 and not in 1997
offset by increased home office expenses and the write-off of costs related to
potential acquisitions in the third quarter of 1997.
Increases in amortization of loan costs in 1997 over 1996 are due to
amortization in 1997 of costs related to the Bonds and amortization of
commitment fees related to the Line of Credit.
Interest expense increased in 1997 over 1996 due to Bonds being
outstanding during 1997 and increased borrowings on the Line of Credit.
15
<PAGE> 16
Comparison of the Nine Months Ended September 30, 1997 to 1996
Increases in lease revenue for the nine months ended September 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 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 (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 nine 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 51 of the 61 hotels owned at
September 30, 1997 were owned by the Partnership throughout both periods; it
excludes seven newly opened hotels and three expanded hotels where room
additions were not open for all of both periods presented.
<TABLE>
<CAPTION>
for the nine months ended September 30, 1997
-------------------------------------------------------------
Actual Pro Forma
---------------------------- -----------------------------
% Increase % Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 76.2% 78.7% (3.1) 77.5% 78.3% (1.0)
ADR $75.67 $69.44 9.0 $76.93 $71.85 7.1
Revpar $57.67 $54.63 5.6 $59.65 $56.25 6.0
</TABLE>
Increases in real estate 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.
Increases in compensation expense in 1997 over 1996 is due to the
addition of several employees in the 1997 period.
Decreases in general and administrative expense in 1997 over 1996 are
due to stock exchange listing fees incurred in 1996 and not in 1997 and
decreased write-offs of costs related to potential acquisitions in 1997, offset
by increased home office expenses.
Increases in amortization of loan costs in 1997 over 1996 are
due to amortization in 1997 of costs related to the Bonds and amortization of
commitment fees related to the Line of Credit.
Increases in interest expense in 1997 over 1996 are due to the Bonds
being outstanding during 1997 and increased borrowings on the Line of Credit.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company has a 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 1.45%. The Line of Credit is secured by first
priority mortgages on 29 hotels and agreements restricting the transfer, pledge
or other hypothecation of 9 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 had borrowed $115.7 million on the Line of Credit at September 30, 1997.
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 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 September 30, 1997, was
approximately three and one half percent (3.5%) 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 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 $25.9 million for capital expenditures in 1997
at the 61 hotels owned at September 30, 1997. At September 30, 1997, the
Partnership had spent approximately $11.6 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.
17
<PAGE> 18
In October 1997, the Partnership sold two Homewood Suites hotels for
cash of approximately $15.4 million. Also, in October 1997, the Company, through
a non-qualified subsidiary, purchased a Sheraton Hotel in Birmingham, AL for a
purchase price of approximately $18 million. Cash from the sale of the two
Homewood Suites hotels of $9.4 million and the assumption of $5.5 million of
Industrial Development Bonds were used to purchase the hotel. The purchase price
for land associated with the hotel is approximately $3.1 million. The Company
has entered into a contract to purchase the land; the land purchase is expected
to occur in the first quarter of 1998. The bonds were issued in 1988, are due in
January 1, 2004 and bear interest at a variable rate that will result in the
market value of the bonds being 100% of the principal amount, not to exceed
10.4%. The bonds currently bear interest at approximately 3.75%.
The Partnership is developing the following hotels:
<TABLE>
<CAPTION>
Estimated Estimated
Number of Development Opening
Franchise Location Rms/Suites Costs Quarter(Q)
--------- -------- --------- ----- ----------
<S> <C> <C> <C> <C>
Residence Inn West Palm Beach, FL 78 $6.4 million 4Q97
Hampton Inn Jacksonville, FL 118 $6.2 million 1Q98
Homewood Suites Chandler, AZ (Phoenix) 83 $6.7 million 2Q98
Marriott Courtyard Crystal Lake, IL 90 $6.6 million 4Q98
TownePlace Suites Fort Worth, TX 95 $6.2 million 3Q98
by Marriott
</TABLE>
The Partnership is constructing a 36-suite addition to the Residence Inn
in Charlotte, North Carolina. Construction costs are estimated at $3.6 million.
Completion of the addition is expected in the second quarter of 1998. The
Partnership is also constructing a 39-room addition to the Beverly Heritage
hotel in Milpitas, California. Construction costs are estimated at $3.0 million.
Completion of the addition is expected in the third quarter of 1998. There can
be no assurance that any or all of such hotels or additions 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 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
18
<PAGE> 19
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 September 30, 1997, made cash distributions to its
partners, including the Company, of $30.2 million or $1.08 per Partnership unit,
from which the Company made cash distributions to common shareholders of $27.4
million, or $1.08 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.
19
<PAGE> 20
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts has adopted a
new definition of funds from operations ("FFO"). Under the definition, which
many not be comparable to similar entitled items reported by other real estate
investment trusts as all entities may not define FFO exactly the same, FFO
represents net income excluding gains (or losses) from debt restructuring or
sales of properties, plus depreciation of real property and after adjustments
for unconsolidated partnerships and joint ventures. Under this definition, the
Company's FFO is computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30 September 30
--------------------------- -------------------------
1997 1996 1997 1996
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income before allocation to
minority interest $11,782 $11,553 $31,680 $28,884
Add depreciation 4,664 2,804 12,856 7,944
Add loss on sale of hotel 244
Less preferred dividend (356) (356) (1,056) (839)
------- ------- ------- -------
FFO $16,090 $14,001 $43,480 $36,233
======= ======= ======= =======
Weighted average shares and
partnership units outstanding 26,959 24,700 26,950 24,667
FFO per share $ 0.60 $ 0.57 $ 1.61 $ 1.47
</TABLE>
20
<PAGE> 21
RFS, INC.
BACKGROUND
RFS, Inc. leases 59 and operates 55 of the Hotels owned by the Partnership.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared with Three Months Ended September
30, 1996
Total revenues increased $11.3 million or 27% to $53.2 million for three
months ended September 30, 1997 compared to $41.9 million for the three months
ended September 30, 1996. The increase in hotel revenues of $11.3 million was
attributable primarily to the net addition of ten leased properties as compared
to the comparable period of 1996. The margin on hotel results (hotel revenues
less hotel expenses) increased $1.2 million or 36% from $3.3 million for the
quarter ended September 30, 1996 to $4.5 million for the comparable period in
1997, reflecting the addition of the eleven properties discussed above and an
improvement in the operating margins of the hotels from 8.1% in the three months
ended September 30, 1996 to 8.6% in the three months ended September 30, 1997.
Management and franchise fees increased nominally to $0.4 million
reflecting improvements in revenues principally from eight management contracts
that commenced late in the second quarter of 1996. Other fees and income
decreased to $0.4 million for the three months ended September 30, 1997 from
$0.5 million for the three months ended September 30, 1996.
General and administrative expenses increased slightly to $1.0 million
for the three months ended September 30, 1997 compared to $0.9 million for the
three months ended September 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, a portion of which
was repaid in the second quarter of 1997. 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).
Nine Months Ended September 30, 1997 Compared with Nine Months Ended September
30, 1996
Total revenues increased $35.1 million or 30% to $150.6 million for nine
months ended September 30, 1997 compared to $115.6 million for the nine months
ended September 30, 1996. The increase in hotel revenues of $34.3 million was
attributable, in part, to the net addition of twelve leased properties as
compared to the comparable period of 1996. The margin on hotel results (hotel
revenues less hotel expenses) increased $3.1 million or 35% from $8.9 million to
$12.0 million reflecting the addition of the eleven properties in comparison to
the prior period and an improvement in the margins of the hotels from 7.9% in
the nine months ended September 30, 1996 to 8.1% in the nine months ended
September 30, 1997.
21
<PAGE> 22
Management and franchise fees increased to $1.2 million reflecting the
net addition of eight management contracts that commenced late in the second
quarter of 1996. Other fees and income decreased slightly.
General and administrative expenses increased by $0.3 million or 11% to
$3.0 million for the nine months ended September 30, 1997 compared to $2.7
million for the nine months ended September 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 nine months ended September 30, 1997, RFS, Inc. generated
cash flow from operations of $13.9 million as compared to $11.4 million for the
comparable period of 1996. The increase was principally attributable to
increased earnings and an increase in the lease payment due to the Lessor that
is paid on a quarterly basis in arrears. The principal source of cash, other
than capital contributions from Doubletree Corporation, will come from
operations. Since inception, RFS, Inc. has been able to meet its rent
obligations under the Percentage Leases. To the extent that future operations
are not sufficient to meet the rent obligations when due, RFS, Inc. will seek
additional capital from Doubletree Corporation which has agreed to maintain a
minimum net worth of $15.0 million in RFS, Inc.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - None.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
RFS HOTEL INVESTORS, INC.
/s/ Michael J. Pascal
- -------------------- -------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ Robert M. Solmson
- --------------------- -------------------------------------------
Date Robert M. Solmson, Chairman and Chief
Executive Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RFS HOTEL INVESTORS, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,684
<SECURITIES> 0
<RECEIVABLES> 14,746
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 615,271
<DEPRECIATION> 36,128
<TOTAL-ASSETS> 604,927
<CURRENT-LIABILITIES> 0
<BONDS> 196,034
0
10
<COMMON> 244
<OTHER-SE> 365,480
<TOTAL-LIABILITY-AND-EQUITY> 604,927
<SALES> 0
<TOTAL-REVENUES> 63,516
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,952
<INCOME-PRETAX> 31,680
<INCOME-TAX> 0
<INCOME-CONTINUING> 31,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,669
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
