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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
May 12, 1999
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Date of Report (Date of Earliest Event Reported)
RFS HOTEL INVESTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
Tennessee 0-22164 62-1534743
(State or Other Jurisdiction (Commission File No.) (I.R.S. Employer
of Incorporation) Identification No.)
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850 Ridge Lake Boulevard, Suite 220
Memphis, Tennessee 38120
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(Address of Principal Executive Offices) (Zip Code)
(901) 767-7005
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS.
DISCLOSURE OF RISK FACTORS
RFS Hotel Investors, Inc. is filing this Current Report on Form 8-K to describe
material risk factors that may affect our business and financial condition.
SOME OF THE INFORMATION YOU WILL FIND IN OUR 1934 ACT FILINGS AND OUR
PROSPECTUSES OR ANY PROSPECTUS SUPPLEMENTS MAY CONTAIN "FORWARD-LOOKING"
STATEMENTS. ALSO, DOCUMENTS SUBSEQUENTLY FILED BY OUR COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION MAY CONTAIN FORWARD-LOOKING STATEMENTS. YOU
CAN IDENTIFY THESE TYPES OF STATEMENTS BY THEIR USE OF FORWARD-LOOKING WORDS
SUCH AS "MAY," "WILL," "SHOULD," "COULD," "PLANS," "INTENDS," "EXPECTS,"
"ANTICIPATES," "ESTIMATES," "PROJECTS," "CONTINUES," "IS DESIGNED TO,"
"POTENTIAL" OR OTHER SIMILAR WORDS. THESE TYPES OF STATEMENTS DISCUSS FUTURE
EVENTS OR EXPECTATIONS OR CONTAIN PROJECTIONS OR ESTIMATES. WHEN CONSIDERING
THESE FORWARD-LOOKING STATEMENTS, YOU SHOULD KEEP IN MIND THE FOLLOWING RISK
FACTORS. THESE RISK FACTORS COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY
AND ADVERSELY FROM THOSE CONTAINED IN OR IMPLIED BY ANY FORWARD-LOOKING
STATEMENT.
The following risk factors are not necessarily exhaustive, particularly as to
possible future events, and new risk factors may emerge periodically. Many
things can happen that can cause our actual results to be very different than
those we describe in our SEC filings. Any statements we make that are not
historical facts should be considered to be forward-looking statements. We make
no promise to update any of our forward-looking statements, or to publicly
release the results if we revise any of them.
RISK FACTORS
WE MUST RELY ON LESSEES TO OPERATE OUR HOTELS.
In order for us to continue to qualify as a real estate investment trust, or
"REIT," we need to lease substantially all of our hotels to third parties. Under
the terms of the leases, our ability to participate in operating decisions
regarding the hotels is very limited. RFS, Inc., an unrelated third party, and
its affiliates, and three other unrelated third parties currently lease
substantially all of our hotels. Our lessees presently control the daily
operations of our leased hotels. We depend on lease payments from our lessees
for substantially all of our revenues. Even if we believe that our hotels aren't
being operated efficiently or in a manner that results in satisfactory rent
payments, we may not be able to require a lessee to change the way it operates
our hotels.
OUR ABILITY TO GROW DEPENDS ON ADDITIONAL FINANCING.
We are required to distribute to our shareholders at least 95% of our taxable
income each year in order to continue to qualify as a REIT. As a result, our
retained earnings available to fund acquisitions or development are nominal. Our
ability to grow through acquisitions or development of hotels will be limited if
we can't continue to obtain additional financing. Our growth strategy includes
continuing to acquire hotel properties, as well as developing new hotel
properties. As a result, we will rely primarily upon the availability of debt or
equity capital to fund our acquisitions. Debt financing could include loans from
third parties or the issuance of debt securities by us. Equity capital could
include issuance of shares of common stock or preferred stock or units of
limited partnership interest of our operating partnership, RFS Partnership, L.P.
Neither our Charter nor our bylaws limits the amount of debt that we can incur.
Our Board of Directors has adopted a current policy that limits our outstanding
indebtedness to approximately 40% of our investment in hotel properties at cost.
Our Board can modify or eliminate this debt limitation policy at any time
without shareholder approval. Market conditions may make it difficult to obtain
financing and we can't assure you that we will be able to obtain additional debt
or equity financing or that we will be able to obtain it on favorable terms.
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OUR DEBT SERVICE OBLIGATIONS COULD AFFECT OUR CASH FLOWS, COULD REQUIRE US TO
SELL PROPERTIES, AND COULD JEOPARDIZE OUR TAX STATUS AS A REIT.
To the extent we can't meet our debt service obligations, including principal
payments, we risk losing some or all of our hotels to foreclosure. Higher
interest rates could increase debt service requirements on our floating rate
debt which would reduce amounts available for distribution to shareholders.
In November 1996, we issued $75 million of fixed-rate, collateralized bonds in
two classes. The Class A bonds require monthly payments of approximately
$516,000 of principal and interest and mature on August 20, 2008. The Class B
bonds mature on November 21, 2011, and principal payments on the Class B bonds
are payable based on a 39-month amortization schedule beginning in September
2008. In December 1998, we completed a $95.8 million long-term financing.
Principal and interest payments, based on a 25-year amortization of $700,000 and
escrow payments of $400,000 are due monthly through December 2008, at which time
all outstanding principal and interest is due. If the remaining principal
amounts for either the bonds or the long-term debt can't be refinanced, when
due, we might have to utilize our available cash to repay the debt which could
terminate our REIT status. In addition, our ability to make distributions to
shareholders could be adversely affected.
OUR DEVELOPMENT ACTIVITIES MAY BE MORE COSTLY THAN WE HAVE ANTICIPATED.
As part of our growth strategy, we plan to develop additional hotels.
Development involves many substantial risks, which include the following:
- - actual development costs may exceed our budgeted or contracted amounts;
- - construction delays may prevent us from opening hotels on schedule;
- - we may not be able to obtain all necessary zoning, land use, building,
occupancy and construction permits;
- - our developed properties may not achieve our desired revenue goals;
- - we face intense competition for suitable development sites from competitors
with greater financial resources than ours; and
- - we may incur substantial development costs and then have to abandon a
development project before completion.
OUR ABILITY TO MAKE DISTRIBUTIONS TO SHAREHOLDERS MAY BE AFFECTED BY FACTORS
BEYOND OUR CONTROL.
Operating Risks
Our hotels are subject to various operating risks common to the hotel industry,
many of which are beyond our control, including the following:
- - our hotels compete with other hotel properties in their geographic markets
and many of our competitors have substantial marketing and financial
resources;
- - over-building in our markets, which adversely affects occupancy and
revenues at our hotels; and
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- - adverse effects of general, regional and local economic conditions and
increases in energy costs and other expenses affecting travel, which may
affect travel patterns and reduce the number of business and commercial
travelers and tourists.
These factors could adversely affect our lessees' hotel revenues and expenses
and their ability to make lease payments, which in turn could adversely affect
our ability to make distributions to our shareholders. Decreases in room
revenues of our hotels will result in decreased lease revenues to our company
under our system of leases, called Percentage Leases, which provide for annual
rent equal to the greater of either (a) a fixed annual base rent or (b)
percentage rent which is based on each hotel's revenues.
Competition for Acquisitions
We compete for hotel acquisitions with entities that have substantially greater
financial resources than we have. These entities generally may be able to accept
more risk than we can manage wisely. This competition may generally limit the
number of suitable investment opportunities offered to us. This competition may
also increase the bargaining power of property owners seeking to sell to us,
making it more difficult for us to acquire new properties on attractive terms.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, occupancy rates and hotel
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can cause quarterly fluctuations in our lease
revenues under our Percentage Leases. Our quarterly earnings may be adversely
affected by factors outside our control, including bad weather conditions and
poor economic factors. As a result, we may enter into short-term borrowing in
our first and fourth quarters in order to make regular quarterly distributions
to our shareholders.
Investment Concentration in Particular Segments of Single Industry
Our entire business is hotel-related. Our current investment strategy is to own
a diversified portfolio of hotels, including full-service, extended stay and
limited service hotel properties, and adverse conditions in the hotel industry,
or in our segments of the industry, will have a material adverse effect on our
lease revenues and amounts available for distribution to our shareholders.
Concentration of Investment in California
Ten of our hotels are located in California. Adverse events, such as economic
recessions or natural disasters, including earthquakes, could cause a loss of
revenues from the California hotels, resulting in less cash available for
distribution to shareholders.
Capital Expenditures
Our hotels have an ongoing need for renovations and other capital improvements,
including replacements, from time to time, of furniture, fixtures and equipment.
The franchisors of our hotels may also require periodic capital improvements as
a condition of keeping the franchise licenses. Generally, we are responsible for
the costs of these capital improvements which give rise to the following risks:
- - possible environmental problems;
- - construction cost overruns and delays;
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- - the cost of funding renovations and the possibility that financing for
these renovations may not be available on attractive terms; and
- - the risk that our return on our investment in these capital improvements
will not be what we expect.
INVESTMENT RISKS IN THE REAL ESTATE INDUSTRY GENERALLY MAY ADVERSELY AFFECT OUR
ABILITY TO MAKE DISTRIBUTIONS TO OUR SHAREHOLDERS.
General Risks of Investing in Real Estate
Our investments in hotels are subject to varying degrees of risk that generally
arise from the ownership of real property. The underlying value of our real
estate investments and our income and ability to make distributions to our
shareholders depend upon the ability of our lessees to operate our hotels so as
to maintain or increase room revenues and generate enough income in excess of
operating expenses to make rent payments under the Percentage Leases. Both
income from our hotels and our ability to make distributions may be adversely
affected by changes beyond our control, including the following:
- - adverse changes in national and local economic and market conditions;
- - changes in interest rates and in the availability, cost and terms of
mortgage financing;
- - changes in governmental laws and regulations, fiscal policies and zoning
ordinances and the related costs of compliance with laws and regulations,
fiscal policies and ordinances;
- - the ongoing need for capital improvements, particularly in older
structures;
- - changes in real property tax rates and other operating expenses;
- - civil unrest, acts of God, including earthquakes, floods and other natural
disasters (which may result in uninsured losses) and acts of war; and
- - the relative illiquidity of real estate investments.
Uninsured and Underinsured Losses
Various types of catastrophic losses, like earthquakes and floods, may not be
insurable or may not be economically insurable. In the event of a substantial
loss, our insurance coverage may not cover the full current market value or
replacement cost of our lost investment. Inflation, changes in building codes
and ordinances, environmental considerations and other factors might cause
insurance proceeds to be insufficient to fully replace or renovate a hotel after
it has been damaged or destroyed.
FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS COULD AFFECT OUR OPERATING
RESULTS.
Environmental Matters
Our hotel properties are subject to various federal, state and local
environmental laws. Under these laws, courts and government agencies have the
authority to require the owner of a contaminated property to clean up the
property, even if the owner did not know of or was not responsible for the
contamination. These laws also apply to persons who owned a property at the time
it became contaminated. In addition to the costs of cleanup, contamination can
affect the value of a property and, therefore, an owner's ability to borrow
funds using the property as collateral. Under the environmental laws, courts and
government agencies also have the authority to require that a person who
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sent waste to a waste disposal facility, like a landfill or an incinerator, pay
for the clean-up of that facility if it becomes contaminated and threatens human
health or the environment. Furthermore, decisions by courts have established
that third parties may recover damages for injury caused by property
contamination. For instance, a person exposed to asbestos while staying in a
hotel may seek to recover damages if he suffers injury from the asbestos.
Our company could be responsible for the costs discussed above, if one or more
of our properties were found to be contaminated. The costs to clean up a
contaminated property, to defend against a claim, or to comply with
environmental laws could be material and could affect the funds available for
distribution to our shareholders. To determine whether any costs of this nature
might be required, we commissioned studies - called "Phase I environmental site
assessments," or "ESAs"--before we acquired our hotels. We obtained the ESAs to
help us identify whether we might be responsible for cleanup costs or other
costs in connection with our hotels. The ESAs on our hotels did not reveal any
environmental costs that might have a material adverse effect on our business,
assets, results of operations or liquidity. However, ESAs do not always identify
all potential problems and sometimes do not identify all potential environmental
liabilities. Consequently, we may have material environmental liabilities of
which we are unaware.
Americans with Disabilities Act and Other Changes in Governmental Rules and
Regulations
Under the Americans with Disabilities Act of 1990, or the "ADA", all public
accommodations must meet various federal requirements related to access and use
by disabled persons. Compliance with the ADA's requirements could require
removal of access barriers, and our failure to comply could result in the U.S.
government imposing fines or in private litigants winning damages. If we are
required to make substantial modifications to our hotels, whether to comply with
the ADA or other changes in governmental rules and regulations, our ability to
make distributions to our shareholders could be adversely affected.
FLUCTUATIONS IN PROPERTY TAXES CAN ADVERSELY AFFECT OUR DISTRIBUTIONS TO OUR
SHAREHOLDERS.
Each of our hotels is subject to real and personal property taxes. These taxes
on our hotel properties may increase or decrease as tax rates change and as the
properties are assessed or reassessed by taxing authorities. If property taxes
increase, our ability to make distributions to our shareholders could be
adversely affected.
FRANCHISE REQUIREMENTS COULD ADVERSELY AFFECT OUR DISTRIBUTIONS TO OUR
SHAREHOLDERS.
Substantially all of our hotels operate under franchise agreements, and we are
subject to the risks that are found in concentrating our hotel investments in
several franchise brands. These risks include reductions in business following
negative publicity related to one of our particular brands. This could adversely
affect our lease revenues and the amounts available for distribution to our
shareholders.
The maintenance of the franchise licenses for our hotels is subject to our
franchisors' operating standards and other terms and conditions. Our franchisors
periodically inspect our hotels to ensure that we and our lessees follow their
standards. Failure by our company or one of our lessees to maintain these
standards or other terms and conditions could result in a franchise license
being canceled. As a condition of our continued holding of a franchise license,
a franchisor can require us to complete capital improvements. If we decide that
those capital improvements are too expensive or otherwise unnecessary, however,
we may decide to let the franchise license lapse. We may have to pay substantial
franchise termination fees.
The loss of a franchise license could materially and adversely affect the
operations or the underlying value of the hotel because of the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. Although the Percentage Leases require our
lessees to maintain the franchise licenses for each of our
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hotels, a lessee's loss of a franchise license for one or more hotels could
materially and adversely affect our revenues. This loss of revenues could,
therefore, also adversely affect our cash available for distribution to
shareholders.
OUR BOARD OF DIRECTORS MAY CHANGE OUR MAJOR POLICIES AT ANY TIME.
Our major corporate policies, including our debt, acquisition, financing,
growth, operations and distribution policies, are determined by our Board of
Directors. The Board of Directors may amend or revise these and other policies
at any time without the vote or consent of our shareholders.
PROVISIONS OF OUR CHARTER AND TENNESSEE LAW MAY LIMIT THE ABILITY OF A THIRD
PARTY TO ACQUIRE CONTROL OF OUR COMPANY.
Ownership Limitation
To preserve our tax status as a REIT, our Charter provides that no person may
directly or indirectly own more than 9.9% of our common stock and preferred
stock. This may prevent an acquisition of control of our company by a third
party without our Board of Directors' approval, even if shareholders believe the
change of control is in their interest.
Staggered Board of Directors
Under our Charter, our Board of Directors has three classes of directors.
Directors for each class are elected for staggered three-year terms. The
staggered terms of our directors may restrict the ability to change control of
our company, even if shareholders believe a change of control is in their
interest. The staggered terms for our directors may also discourage offers or
other bids being made for our capital stock at a premium over the market price.
Authority to Issue Preferred Stock
Our Charter authorizes the Board of Directors to issue up to 5,000,000 shares of
preferred stock and to establish the preferences and rights of any shares
issued. The issuance of shares of preferred stock may have the effect of
delaying or preventing a change in control of our company, even if shareholders
believe that a change of control is in their interest.
Tennessee Anti-Takeover Statutes
As a Tennessee corporation, we are subject to various laws found in Chapter 103
of Title 48 of the Tennessee Code. These laws place restrictions and require
compliance with various procedures designed to protect the shareholders of
Tennessee corporations against unfair or coercive mergers and acquisitions.
These restrictions and procedural requirements may discourage takeover offers
for, or changes in control of our company, even if shareholders believe that
such events may be in their interest.
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OUR FAILURE TO QUALIFY AS A REIT UNDER THE FEDERAL TAX LAWS WILL RESULT IN
ADVERSE TAX CONSEQUENCES.
REIT Minimum Distribution Requirements
To qualify as a REIT, among other requirements, each year we must distribute to
our shareholders at least 95% of our taxable income (other than any net capital
gain). In addition, we will incur a 4% nondeductible excise tax if the actual
amount we pay out to our shareholders in a calendar year is less than a minimum
amount specified under federal income tax law. We have distributed and intend to
continue to distribute our income to our shareholders so that we will satisfy
the 95% test and avoid the 4% excise tax. However, because the hotel industry is
seasonal, we could be required to include earnings in our taxable income for tax
purposes before we actually receive the related cash. That timing difference
could require us to borrow funds to meet the 95% test and avoid corporate income
tax and the 4% excise tax in a taxable year.
Failure to Qualify as a REIT
We have operated and intend to continue to operate in a manner so as to qualify
as a REIT for federal income tax purposes. If we fail to qualify as a REIT in
any taxable year, we would pay federal income tax on our taxable income. We
might need to borrow money or sell assets in order to pay the tax. Our payment
of income tax would substantially decrease the amount available for distribution
to our shareholders. In addition, we no longer would be required to distribute
substantially all of our taxable income to our shareholders. Unless our failure
to qualify as a REIT is excused under federal income tax laws, we could not
re-elect REIT status until the fifth calendar year following the year in which
we fail to qualify.
OUR STOCK OWNERSHIP LIMITATION MAY PREVENT CERTAIN TRANSFERS OF OUR COMMON
STOCK.
To maintain our REIT qualification, no more than 50% in value of our outstanding
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the federal income tax laws to include various kinds of entities)
during the last half of any taxable year. In addition, if any shareholder or
group of related or affiliated shareholders of a lessee owns, actually or
constructively, 10% or more of our stock, we likely would lose our REIT status.
To preserve our REIT qualification, our Charter prohibits both direct and
indirect ownership of more than 9.9% of the outstanding shares of our common
stock and preferred stock by any person, subject to several exceptions.
Generally, any shares of our capital stock owned by affiliated owners will be
added together for purposes of the ownership limitation.
If anyone transfers shares in a way that would violate the ownership limitation
or prevent us from continuing to qualify as a REIT under the federal income tax
laws, we will consider the transfer to be null and void from the outset, and the
intended transferee of those shares will be deemed never to have owned the
shares. Those shares instead will be transferred to a trust for the benefit of a
charitable beneficiary and will be either redeemed by our company or sold to a
person whose ownership of the shares will not violate our Charter. Anyone who
acquires shares in violation of the ownership limitation or the other
restrictions or transfer in our Charter bears the risk of a financial loss when
the shares are redeemed or sold if the market price of our stock falls between
the date of purchase and the date of redemption or sale.
THE RISKS RELATING TO THE YEAR 2000 ISSUE COULD MATERIALLY AND ADVERSELY AFFECT
AMOUNTS OF CASH AVAILABLE FOR DISTRIBUTION TO OUR SHAREHOLDERS.
Many existing computer programs have been designed to use only two digits to
identify a year in the date field, without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000.
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Beginning in the fourth quarter of 1997, we began evaluating the impact of the
Year 2000 (Y2K) problem on our computer systems. We also began asking the
lessees whether the systems used in connection with operating our hotels were
Y2K compliant. The only software package that was not Y2K compliant was our
accounting system. We purchased a new accounting system in January of 1998. We
have been converting to the new format and plan to go live on July 1, 1999. All
our computers passed the Y2K check, as well as the phone system and other
hardware. We have been advised by the lessees and management companies that the
systems at our properties (reservation, accounting, etc.) are being upgraded
where necessary by the appropriate management company. Because we depend on the
lessees and management companies for revenue information at the hotels in order
to calculate percentage rent due to us under the leases, any Y2K problem which
affects revenue accounting by the lessees or management companies at our hotels
or our franchisors or otherwise adversely affects the operation of our hotels
could have a material adverse impact on our business. Although we do not believe
the Y2K issue will materially affect our operations, we can't assure you that
our Y2K remediations will be fully in compliance nor can we assure you that any
third party, on whose data or services we rely, will be fully in compliance.
Testing will continue throughout 1999 on both the new and old software to verify
its operation. We are in the process of obtaining statements from our vendors
about their Y2K status. We estimate our total cost related to the Y2K problem to
be approximately $80,000.
THE MARKET PRICE OF OUR EQUITY SECURITIES MAY VARY SUBSTANTIALLY.
The trading prices of equity securities issued by REITs historically have been
affected by changes in market interest rates. An increase in market interest
rates may lead prospective purchasers of our shares to demand a higher annual
yield, which could reduce the market price of our equity securities. Other
factors that could affect the market price of our equity securities include: (1)
differences between our actual financial results or operations and those
expected by investors and analysts; (2) changes in analysts' recommendations or
projections; (3) changes in general economic or market conditions; and (4) broad
market fluctuations.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RFS HOTEL INVESTORS, INC.
May 12, 1999 /s/ Michael J. Pascal
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Michael J. Pascal
Secretary, Treasurer and Chief Financial Officer
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