<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 34-0-22164
RFS HOTEL INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1534743
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
850 Ridge Lake Boulevard, (901) 767-7005
Suite 220, 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 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, 1998 was 24,876,946.
<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, 1998 and
December 31, 1997 3
Consolidated Statements of Income - For the three months ended
March 31, 1998 and March 31, 1997 4
Consolidated Statements of Cash Flows - For the three months ended
March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
This Form 10Q-A is being filed as a result of a change in accounting principle.
See Note 2 to the consolidated financial statements.
2
<PAGE> 3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Investment in Hotel Properties, net $ 581,278 $ 573,826
Hotels under development 13,831 15,739
Cash and cash equivalents 14,220 4,131
Restricted cash 3,150 2,514
Accounts receivable-Lessees 12,166 9,887
Deferred expenses, net 3,775 4,061
Prepaid and other assets 8,597 6,765
Escrow deposits 185 205
--------- ---------
$ 637,202 $ 617,128
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 4,185 $ 6,423
Accrued real estate taxes 3,601 3,491
Borrowings on line of credit 138,843 123,843
Bonds 71,141 71,892
Other debt 12,637 13,174
Deferred revenue 12,145
Minority interest 36,170 36,235
--------- ---------
278,722 255,058
--------- ---------
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, 24,986,946 and 24,389,000 shares outstanding 250 244
Paid-in capital 373,307 363,066
Treasury stock, 110,000 shares (2,012) 0
Undistributed income (12,477) 337
Unearned directors' and officers' compensation (598) (1,587)
--------- ---------
Total shareholders' equity 358,480 362,070
--------- ---------
$ 637,202 $ 617,128
========= =========
</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
3 Months 3 Months
Ended Ended
03/31/98 03/31/97
--------- ---------
(unaudited) (unaudited)
<S> <C> <C>
Revenue:
Leases $ 9,878 $ 17,863
Other 86 44
--------- ---------
Total revenue 9,964 17,907
--------- ---------
Expenses:
Real estate taxes and property and
casualty insurance 2,488 1,947
Depreciation 4,918 3,908
Amortization of franchise fees and
unearned compensation 229 221
Compensation 594 621
Franchise taxes 45 75
General and administrative 806 524
Gain on sale of a hotel property (523)
Amortization of loan costs 243 144
Interest expense, net 3,548 1,938
--------- ---------
Total expenses 12,348 9,378
--------- ---------
Income (loss) before minority interest (2,384) 8,529
Minority interest 223 (835)
--------- ---------
Net income (loss) (2,161) 7,694
Preferred stock dividends (348) (348)
--------- ---------
Net income (loss) applicable to common shareholders $ (2,509) $ 7,346
========= =========
Basic earnings (loss) per share (0.10) 0.30
Diluted earnings (loss) per share (0.10) 0.30
Weighted average common shares outstanding 24,380 24,385
</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,
1998 1997
--------- ---------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,161) $ 7,694
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,390 4,273
Income allocated to minority interest (223) 835
Gain on sale of a hotel property (523)
Write-off of old loan costs 129
Changes in assets and liabilities:
Accounts receivable-Lessees (2,279) (3,414)
Prepaids and other assets (968) 172
Accounts payable and other liabilities (2,128) (830)
Deferred revenue 12,145
--------- ---------
Net cash provided by operating activities 9,382 8,730
--------- ---------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (14,359) (64,637)
Proceeds from sale of hotel property 2,940
Escrow deposits and prepayments under
purchase agreements (10)
Refund on franchise agreements 8
--------- ---------
Net cash used by investing activities (11,419) (64,639)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 11,040
Purchase of treasury stock (2,012)
Distributions to common and preferred shareholders (9,494) (9,138)
Distributions to limited partners (964) (925)
Borrowings on revolving credit agreement 15,000 13,000
Redemption of limited partnership units (37)
Payments on debt and bonds (1,288) (1,312)
Loan fees paid (119) (70)
--------- ---------
Net cash provided by financing activities 12,126 1,555
--------- ---------
Net increase (decrease) in cash and cash equivalents 10,089 (54,354)
Cash and cash equivalents at beginning of period 4,131 57,935
--------- ---------
Cash and cash equivalents at end of period $ 14,220 $ 3,581
========= =========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
In 1998, the Company applied a deposit of $20 towards the purchase of land.
In 1998, due to the resignation of an officer, the Company cancelled 45,000
shares of restricted common stock which had not vested.
In 1998, the Company sold a hotel for which the purchaser paid $2,940 in cash
and signed a note to the Company for $1,500.
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.
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, 1998,
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. RFS Financing
Partnership, L.P., (the "Financing Partnership"), a bankruptcy remote, single
purpose Tennessee limited partnership, was formed to issue commercial mortgage
bonds (the "Bonds"). During 1997, Ridge Lake General Partner, Inc. ("RLGP") was
formed to purchase a hotel. The Company owns 95% of RLGP.
The Company, through its subsidiary partnerships, acquires or develops and owns
hotel properties which are leased to third parties.
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 1997 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. CHANGE IN ACCOUNTING PRINCIPLE. In May 1998, the Financial Accounting
Standards Board's Emerging Issues Task Force issued EITF number 98-9,
"Accounting for Contingent Rent in Interim Financial Periods" (EITF 98-9). EITF
98-9 provides that a lessor shall defer recognition of contingent rental income
in interim periods until specified targets that trigger the contingent income
are met. In July 1998 the Task Force issued transition guidance stating that the
consensus could be applied on a prospective basis or in a manner similar to a
change in accounting principle effective April 1, 1998. The Company has reviewed
the terms of its percentage leases and has determined that the provisions of
EITF 98-9 will impact the Company's current revenue recognition on an interim
basis, but will have no impact on the Company's annual percentage lease revenue
or interim cash flow from its third party Lessees. The Company adopted the
provisions of EITF 98-9 and has applied the change as a change in accounting
principle and thereby has restated the first quarter results of 1998 and has
recorded the results of the second quarter in accordance with the new
pronouncement. The effect of the change on the three months ended March 31, 1998
was to decrease lease revenues by $12,145, and therefore net income applicable
to common shareholders by $10,986 or $0.45 per share-basic
6
<PAGE> 7
and diluted to $(0.10) per share-basic and diluted. The pro forma per share
amounts below reflect the effect on prior periods had the new method been in
effect. The 1998 amounts are presented for comparative purposes only. The 1997
periods have not been restated.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Pro forma amounts:
Net income (loss) applicable to common
shareholders $ (2,509) $ (1,045)
Net income (loss) per common
share-basic and diluted (0.10) (0.04)
Amounts actually reported:
Net income (loss) applicable to common
shareholders (2,509) 7,346
Net income (loss) per common
share-basic (0.10) 0.30
-diluted (0.10) 0.30
</TABLE>
3. DECLARATION OF DIVIDEND. On April 30, 1998, the Company declared a $0.375
dividend on each share of Common Stock outstanding to shareholders of record on
May 11, 1998. The dividend will be paid on May 21, 1998.
4. ACQUISITIONS OF REAL ESTATE. In February 1998, the Partnership completed
development of a 78-suite Residence Inn in West Palm Beach, FL. Development
costs were approximately $6.3 million and were paid with cash and borrowings
from the $175 million line of credit (the "Line of Credit").
In March 1998, the Partnership completed development of a 118-suite
Hampton Inn in Jacksonville, FL. Development costs were approximately $6.2
million and were paid with cash and borrowings from the Line of Credit.
5. SUBSEQUENT EVENTS. In April 1998, the Partnership completed the acquisition
of a hotel in San Francisco, CA for a purchase price of approximately $15
million. The purchase price was paid with funds from the sale of 547,946 shares
of Common Stock in March 1998 and borrowings under the Line of Credit.
7
<PAGE> 8
On April 21, 1998, the Company announced that it has signed a
definitive agreement to merge with Equity Inns, Inc. Under the terms of the
agreement, which was approved unanimously by the Board of Directors of both
companies, each share of the Company will be exchanged for 1.5 shares of Equity
Inns, Inc.
6. CALCULATION OF EARNINGS (LOSS) PER SHARE. Calculations of basic and diluted
earnings per share are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Basic EPS:
Net income (Loss) $ (2,161) $ 7,694
Less dividends declared on preferred stock (348) (348)
-------- --------
$ (2,509) 7,346
======== ========
Weighted average common shares outstanding 24,380 24,385
$ (0.10) $ 0.30
======== ========
Diluted EPS:
Net income (loss) $ (2,161) $ 7,694
Less dividends declared on preferred stock (348) (348)
-------- --------
$ (2,509) $ 7,346
======== ========
Weighted average common shares outstanding 24,380 24,385
Preferred shares outstanding
Common stock equivalents 118
-------- --------
Weighted average common shares and
dilutive common stock equivalents
outstanding 24,501 24,503
======== ========
$ (0.10) $ 0.30
======== ========
</TABLE>
The preferred shares and common stock equivalents are anti-dilutive in 1998 and
thus are not considered in the calculation of diluted earnings per share.
7. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME. The unaudited pro
forma condensed statements of income for the three months ended March 31, 1998
and 1997 of the Company are presented as if the 61 hotel properties owned at
March 31, 1998, and the consummation of the Company's equity offerings and the
application of the net proceeds thereform had occurred on or prior to January 1,
1997, and the hotels had been leased to the Lessees pursuant to our percentage
leases. As discussed in Note 2, the Company adopted the provisions of EITF 98-9
which significantly impacted the Company's revenue recognition on an interim
basis. The pro forma information below reflects the effect of EITF 98-9 as if
the method had been in effect on January 1, 1997 excluding properties under
development which are included on the date opened. These unaudited pro forma
condensed statements of income are not
8
<PAGE> 9
necessarily indicative of what actual results of operations of the Company would
have been assuming such transactions had been completed as of January 1, 1997,
nor does it purpose to represents the results of operations for future periods.
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Operating Data:
Total revenue $ 9,914 $ 9,990
Real estate taxes and casualty
insurance 2,203 1,967
Depreciation and amortization 5,355 5,355
Compensation 594 621
Franchise taxes 45 75
General and administrative 806 524
Gain on sale of a hotel property (523) --
Interest expense 3,548 3,759
-------- ------
Income (loss) before allocation to
minority interest (2,144) (2,311)
Less minority interest 198 216
-------- ------
Net income (loss) $ (1,916) (2,095)
======== ======
Diluted earnings (loss) per share $ (0.08) $ (0.09)
Weighted average common shares
and common stock equivalents 24,501 24,503
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import. Such forward-looking statements relate to future events and
the future financial performance of the Company, and involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from the
results or achievements expressed or implied by such forward-looking statements.
The Company is not obligated to update any such factors or to reflect the impact
of actual future events or developments on such forward-looking statements.
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 March 31, 1998:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Full Service Hotels:
Holiday Inn ......................... 6 ...........................1,208
Sheraton .............................5............................1,018
DoubleTree............................1..............................220
Independent......................... 1........................... 196
--- ------
Sub-total............... 13............................2,642
--- ------
Extended Stay Hotels:
Residence Inn........................14............................1,815
Hawthorn Suites..................... 1........................... 280
--- ------
Sub-total...................15............................2,095
--- ------
Limited Service Hotels:
Hampton Inn..........................20............................2,476
Courtyard by Marriott.................1..............................102
Comfort Inn...........................6..............................786
Holiday Inn Express................. 6........................... 737
--- ------
Sub-total...................33............................4,101
--- ------
Total.......................61............................8,838
==== ======
</TABLE>
10
<PAGE> 11
The following chart summarizes ownership history for the periods presented:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Hotels owned at beginning of year 60 53
Acquisitions and developed Hotels placed into service 2 4
Sales (1) --
---- ----
Hotels owned at March 31, 1998 and 1997 61 57
==== ====
</TABLE>
The Hotels are located in 24 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 third parties (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 56 Hotels. Four Hotels are operated by other third parties,
(the "Operators"), pursuant to management agreements between the Lessees and the
Operators. One hotel is operated by a subsidiary. One of the Lessees has a right
of first refusal, subject to certain exceptions, to lease hotels acquired by the
Partnership, through February 27, 2006.
CHANGE IN ACCOUNTING PRINCIPLE
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF number 98-9, "Accounting for Contingent Rent in Interim
Financial Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer
recognition of contingent rental income in interim periods until specified
targets that trigger the contingent income are met. In July 1998 the Task Force
issued transitional guidance stating that the consensus could be applied on a
prospective basis or in a manner similar to a change in accounting principle
effective April 1, 1998. The Company has reviewed the terms of its percentage
leases and has determined that the provisions of EITF 98-9 will impact the
Company's current revenue recognition on an interim basis, but will have no
impact on the Company's annual percentage lease revenue or interim cash flow
from its third party Lessees. The Company has adopted the provisions of EITF
98-9 and has elected to restate the first quarter results of 1998 and recorded
the results of the second quarter in accordance with the new pronouncement. The
effect of the change on the three months ended March 31, 1998 was to decrease
lease revenues and therefore net income applicable to common shareholders by
$0.45 per share-basic and diluted to $(0.10) per share-basic and diluted.
The Company's percentage leases provide for a greater of (i) annual fixed base
rent or (ii) Percentage rent to be remitted to the Company annually. The leases
contain annual room revenue thresholds used to calculate two tiers of percentage
rent which are applied to annualized room revenues on a quarterly basis to
determine quarterly Lessee Percentage Rent payments. The provisions of EITF 98-9
call for straight-line recognition of the annual base rent throughout
11
<PAGE> 12
the year and for the deferral of any additional lease amounts collected or due
from the Lessees until such amounts exceed the annual fixed base rent. This will
generally result in base rent being recognized in the first and second quarters
and percentage rents already collected or due from the Lessee being deferred and
then recognized in the third and fourth quarters due to the structure of the
Company's percentage leases and the seasonality of the hotel operations.
Historically, the Company has recorded lease revenue in interim periods on a
basis similar to that used to determine quarterly Lessee Percentage Rent
payments, resulting in the second and third quarters being the strongest
quarters.
At March 31, 1998 deferred revenue of $12,145 represents Percentage Rent
collected or due from the Lessees under the leases which the Company expects to
recognize as lease revenue in the third and fourth quarters of 1998. The
Company's quarterly distributions are based on Quarterly Percentage rent
calculations collected as opposed to percentage lease revenue recognized.
Management expects its hotel portfolio to yield "Percentage Rent" annually,
based on its cash flow analyses of the hotels prior to their acquisition and
based on the negotiation of the related leases.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1998 to 1997.
The decrease in Lease revenue for the three months ended March 31, 1998 from the
comparable period in 1997 is attributable to the change in the Company's revenue
recognition as discussed above. Included in deferred revenue at March 31, 1998
is $12.1 million of first quarter Percentage Rents collected or due from the
Lessee which Management expects the Company to recognize as revenue in the third
and fourth quarters of 1998. After considering such amounts included in deferred
revenue in March 31, 1998, Percentage Rents collected or due from the Lessee
under the terms of the leases during the three months ended March 31, 1998 were
approximately $22.0 million compared to $17.9 million for the three months ended
March 31, 1997. The increases are the result of (i) an increased number of
hotels being owned by the Partnership during the 1998 periods and (ii) increases
in revenue per available room ("REVPAR") at the hotels owned throughout both
periods.
The following table shows statistical data regarding the Hotels on an
actual and a pro forma basis. The pro forma assumes 43 of the 60 hotels owned at
March 31, 1998 were owned by the Partnership throughout both periods; it
excludes eight hotels which were opened since July 1996 and three expanded
hotels where the room additions were not open for all of both periods presented,
one hotel which was undergoing a major renovation and six hotels which the
Company intends to sell:
12
<PAGE> 13
<TABLE>
<CAPTION>
Actual Pro Forma
--------------------------------- ---------------------------------
% Increase % Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy 71.8% 72.5% (1.0) 74.0% 74.7% (0.9)
ADR $ 81.36 $ 73.76 10.3 $ 84.81 $ 78.69 7.8
RevPAR $ 58.45 $ 53.50 9.2 $ 62.72 $ 58.75 6.8
</TABLE>
Increases in real estate taxes and property and casualty insurance in
1998 over 1997 are due to the increased number of hotels owned during 1998,
increased real estate tax assessments, as well as an estimate for increased real
estate tax assessments at certain hotels.
Increases in depreciation in 1998 over 1997 are due to the increased
number of hotels owned during 1998 and capitalized renovation costs at certain
of the Hotels.
Increases in general and administrative expenses in 1998 over 1997 are
due to the write-off of costs incurred in considering formation of a new REIT,
Lodging Trust USA, which transaction was not completed and increased accruals
for 1998 year-end reporting, tax and audit fees over the 1997 amounts.
The gain on the sale of a hotel property relates to the sale of the
Executive Inn in Tupelo, MS which was sold in February 1998.
Increases in amortization of loan costs in 1998 over 1997 are due to
costs associated with the assumption of the industrial development bond
financing for the Birmingham Sheraton Hotel and the amortization of increased
commitment fees on the Line of Credit.
Increases in interest expense in 1998 over 1997 are primarily due to
increased borrowings on the Line of Credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a bank line of credit (the "Line of Credit") for $175
million. Borrowings under the Line of Credit bear interest at LIBOR plus 1.45%.
The Line of Credit is secured by first priority mortgages on 28 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 the 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 was in
compliance with these covenants at March 31, 1998. The Company had borrowed
$138.8 million on the Line of Credit at March 31, 1998. The Line of Credit is
due July 30, 2000.
13
<PAGE> 14
In November 1996, the Company, through a subsidiary, issued $75 million
of commercial mortgage bonds, (the "Bonds") series 1996-1 as follows:
<TABLE>
<CAPTION>
Initial
Class Principal Amount 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 due 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
March 31, 1998, 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 in monthly principal and interest installments of $53,000. The note is due
July 1, 1998 and contains a prepayment premium.
In connection with the purchase of a Sheraton Hotel in Birmingham, AL,
Ridge Lake General Partners, Inc. ("RLGP"), a subsidiary of the Company, assumed
industrial development bonds ("Birmingham IDB's"), which are due in 2001. The
Birmingham IDB's bear interest at a variable rate which, at March 31, 1998, was
approximately 4% per year. Interest is payable quarterly; principal is payable
annually. The outstanding balance on the Birmingham IDB's is $5.0 million. The
Birmingham hotel is collateral for the Birmingham IDB's.
The Company budgeted $26.0 million for 1997 capital improvements at the
60 hotels owned at December 31, 1997. At March 31, 1998, the Partnership had
spent approximately $20.1 million of the budgeted amounts. The Company will use
cash generated from operations and borrowings under the Line of Credit to fund
the remaining $5.9 million of expenditures. The Company intends to substantially
complete these improvements by the end of the second quarter of 1998.
Additionally, the Company has budgeted approximately $20.6 million in 1998 for
capital improvements at 56 of the Hotels owned March 31, 1998. At March 31,
1998, the Partnership had spent approximately $6.3 million of the budgeted
amounts.
14
<PAGE> 15
The Partnership is developing the following hotels:
<TABLE>
<CAPTION>
ANTICIPATED
NUMBER OF ESTIMATED OPENING
FRANCHISE LOCATION ROOMS/SUITES DEVELOPMENT COSTS QUARTER
--------- -------- ------------ ----------------- -----------
<S> <C> <C> <C> <C>
TownePlace Suites Fort Worth, TX 95 $6.3 million 3Q98
Courtyard by Marriott Crystal Lake, IL 95 $6.5 million 4Q98
TownePlace Suites Miami, FL 95 $6.5 million 4Q98
</TABLE>
The Partnership is constructing a 40-room addition to the Beverly Heritage Hotel
in Milpitas, CA. Construction costs are estimated at $3.6 million. Completion of
the addition is expected in the third quarter of 1998. Additionally, the
Partnership is constructing a 36-suite addition to the Residence Inn in
Charlotte, NC. Construction costs are estimated at $3.6 million. Completion of
the addition is expected in the third quarter of 1998. The construction costs
are being funded with borrowings under the Line of Credit.
In addition to purchasing existing hotel properties at targeted rates
of return, management anticipates that the Company will both develop additional
hotels and enter into contracts to acquire hotels from third parties after
completion of development. It is expected that future investments in hotel
properties will be financed, in whole or in part, with cash generated from
operations, short-term investments, proceeds from additional issuances of Common
Stock, borrowings under the Line of Credit or other securities or borrowings.
The Company in the future may seek to increase further the amount of
its credit facilities, negotiate additional credit facilities, or issue
corporate debt instruments. Although the Company has no 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. In March 1998, the
Company issued 547,946 shares of common stock from the Shelf. Proceeds of $9.5
million were used to purchase a hotel property in April 1998.
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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 1998, the
Partnership has, through March 31, 1998, made cash distributions to its
partners, including the Company, of $10.1 million or $0.375 per Partnership
unit, from which the Company made cash distributions to common shareholders of
$9.1 million, or $0.375 per share. The Company also made cash distributions to
the preferred shareholder of $0.4 million, or $0.36 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. The provisions
of EITF 98-9 call for straight-line recognition of the annual base rent
throughout the year and for the deferral of any Percentage Rent amounts
collected or due from the Lessees until such amounts exceed the annual fixed
base rent. This will generally result in base rent being recognized in the first
and second quarters and Percentage Rents collected or due from the Lessee being
deferred and then recognized in the third and fourth quarters due to the
structure of the Company's percentage leases and the seasonality of the hotel
operations. Historically, the Company has recorded lease revenue in interim
periods on a basis similar to that used to determine quarterly Lessee Percentage
Rent payments, resulting in the second and third quarters being the strongest
quarters.
YEAR 2000 MANAGEMENT
In order to address the computer industry's "Year 2000" problem, the
Company is in the process of upgrading the accounting software and network
server. Management does not believe the costs for this upgrade will be
significant. The Company is in the process of determining whether the companies
that manage the Hotels are in the process of studying the "Year 2000" issue.
Upon completion, the Company will determine the extent to which it is vulnerable
to third parties' failure to remediate their own "Year 2000" issues and the
costs associated with resolving this issue.
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FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") a widely accepted
and appropriate measure of performance for an equity REIT that provides a
relevant basis for comparison among REITs. FFO, as defined by the National
Association of Real Estate Investment Trusts (NAREIT), means income (loss)
before minority interest (determined in accordance with GAAP), excluding gains
(losses) from debt restructuring and sales of property, plus real estate
depreciation and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from the
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. The formulation of FFO below is consistent with the NAREIT White
Paper Definition of FFO with the exception that deferred revenue has been
included as a component of the computation. FFO (i) does not represent cash
flows from operations as defined by GAAP, (ii) is not indicative of cash
available to fund all cash flow needs and liquidity, including its ability to
make distributions, and (iii) should not be considered as an alternative to net
income (as determined in accordance with GAAP) for purposes of evaluating the
Company's operating performance.
The Company's FFO for the periods ended March 31, 1998 and 1997 was
computed as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
-------------------
1998 1997
---- ----
(in thousands, except per share amounts)
<S> <C> <C>
Income before allocation
to minority interest $(2,384) $ 8,529
Deferred revenue 12,145
Add depreciation 4,918 3,908
Less gain on sale of hotel (523)
Less preferred dividend (348) (348)
------- -------
FFO $13,808 $12,089
======= =======
Weighted average shares and
partnership units outstanding 26,949 26,930
FFO per share $ 0.51 $ 0.45
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Pursuant to the general instructions to Item 305 of SEC Regulation S-K,
the quantitative and qualitative disclosures called for by this Item 3 and by
Rule 305 of Regulation S-K are inapplicable to the Company at this time.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - A Form 8-K dated March 25, 1998
containing an underwriting agreement and tax opinion was filed
with the Securities and Exchange Commission on March 27, 1998.
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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.
September 21, 1998 /s/ Michael J. Pascal
- ---------------------- --------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting Officer)
September 21, 1998 /s/ Robert M. Solmson
- ---------------------- --------------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
19
