<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, 2000
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, Suite 220, (901) 767-7005
Memphis, TN 38120 (Registrant's Telephone Number
(Address of Principal Executive Offices) Including Area Code)
(Zip Code)
n/a
(Former address, if changed since last report)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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, 2000 was 24,485,846.
<PAGE> 2
RFS HOTEL INVESTORS, INC.
INDEX
<TABLE>
<CAPTION>
FORM 10-Q
REPORT
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
RFS Hotel Investors, Inc.
Consolidated Balance Sheets - March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Operations - For the three
months ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows - For the three
months ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 18
</TABLE>
2
<PAGE> 3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in Hotel Properties, net $ 660,417 $ 651,988
Cash and cash equivalents 319 5,913
Restricted cash 1,512 1,082
Due from Lessees 13,714 10,801
Notes receivable 5,339 4,902
Deferred expenses, net 5,580 4,458
Other assets 8,292 8,098
----------- ---------
Total assets $ 695,173 $ 687,242
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 9,941 $ 8,063
Borrowings on Line of Credit 116,807 98,807
Long-term obligations 178,917 183,471
Deferred revenue 13,696
Minority interest in Operating Partnership, 2,561
and 2,565 units issued and outstanding at
March 31, 2000 and December 31, 1999, respectively 34,051 35,618
----------- ---------
Total liabilities. 353,412 325,959
----------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000 shares
authorized, 974 shares issued and outstanding 10 10
Common Stock, $.01 par value, 100,000 shares
authorized, 25,157 shares issued 251 251
Additional paid-in capital 374,247 374,087
Treasury stock, at cost, 671 and 262 shares at
March 31, 2000 and December 31, 1999, respectively (8,100) (3,656)
Distributions in excess of income (24,647) (9,409)
---------- ---------
Total shareholders' equity 341,761 361,283
---------- ---------
Total liabilities and shareholders' equity $ 695,173 $ 687,242
========== =========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
3
<PAGE> 4
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended Pro Forma
March 31, 2000 March 31, 1999 March 31, 1999
-------------- -------------- --------------
(unaudited) (unaudited) (unaudited)
*
<S> <C> <C> <C>
Revenue:
Lease revenue $ 10,923 $ 23,515 $ 10,937
Other 475 211 211
-------- -------- --------
Total revenue 11,398 23,726 11,148
-------- -------- --------
Expenses:
Taxes and insurance 2,834 2,409 2,409
Depreciation 6,623 5,602 5,602
Amortization 421 551 551
General and administrative 1,838 1,012 1,012
Loss on sale of hotel properties and
franchise termination fees 239 239
Interest expense, net 5,466 4,624 4,624
Minority interest in Operating Partnership (538) 865 (306)
-------- -------- --------
Total expenses 16,644 15,302 14,131
-------- -------- --------
Net income (loss) (5,246) 8,424 (2,983)
Preferred stock dividends (348) (348) (348)
-------- -------- --------
Net income (loss) applicable to common
Shareholders $ (5,594) $ 8,076 $ (3,331)
======== ======== ========
Basic earnings per share $ (0.23) $ .32 $ (0.13)
Diluted earnings per share $ (0.23) $ .32 $ (0.13)
Weighted average common shares 24,744 25,006 25,006
</TABLE>
* As originally filed.
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)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,246) $ 8,424
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,044 6,153
Minority interest in Operating Partnership (538) 865
Changes in assets and liabilities:
Due from Lessees (2,913) (1,942)
Other assets (644) 1,851
Accounts payable and accrued expenses 1,878 1,471
Deferred revenue 13,696
-------- --------
Net cash provided by operating activities 13,277 16,822
-------- --------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (15,055) (8,888)
Restricted cash (430) 7,130
-------- --------
Net cash used by investing activities (15,485) (1,758)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (4,444)
Proceeds from borrowings 18,000 3,000
Payments on debt (4,554) (3,467)
Distributions to common and preferred shareholders (9,992) (9,983)
Distributions to limited partners (986) (988)
Redemption of units (43)
Collections on notes receivable 13 11
Loan fees paid (1,380) (193)
-------- --------
Net cash used by financing activities (3,386) (11,620)
-------- --------
Net increase (decrease) in cash and cash equivalents (5,594) 3,444
Cash and cash equivalents at beginning of years 5,913 2,014
-------- --------
Cash and cash equivalents at end of periods $ 319 $ 5,458
======== ========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
5
<PAGE> 6
RFS HOTEL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION. RFS Hotel Investors, Inc. ("RFS or the Company"), is a hotel
real estate investment trust which, at March 31, 2000, owned interests in 62
hotels with 9,086 rooms located in 24 states (collectively the "Hotels"). RFS
owns 90.7% of RFS Partnership, L.P. (the "Operating Partnership"). RFS, the
Operating Partnership, and their subsidiaries are herein referred to,
collectively, as the "Company".
These unaudited consolidated financial statements include the accounts of
the Company 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 1999 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 December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 provides that a lessor
shall defer recognition of contingent rental income in interim periods until
specified targets that trigger the contingent income are met. The Company has
reviewed the terms of its percentage leases and has determined that the
provisions of SAB 101 will significantly impact the Company's revenue
recognition on an interim basis, effectively deferring the recognition of
revenue from its percentage leases from the first and second quarters of the
calendar year to the third and fourth quarters. SAB 101 will not impact the
Company's revenue recognition on an annual basis given that the Company has only
calendar year leases. SAB 101 will have no impact on the Company's interim or
annual cash flow from its third party leases, and therefore on its ability to
pay dividends.
The Company is accounting for SAB 101 as a change in accounting principle
and recorded the results of the 2000 first quarter in accordance with SAB 101.
The effect of this change on the three months ended March 31, 2000 statement of
operations was to decrease total revenue by approximately $13.7 million, net
income applicable to common shareholders by approximately $12.4 million and net
income applicable to common shareholders by $0.50 per share on a basic and
diluted basis. The pro forma effect of this change on the three months ended
March 31, 1999 statement of operations was to decrease total revenue by
approximately $12.6 million, net income applicable to common shareholders by
approximately $11.4 million and net income applicable to common shareholders by
$0.45 per share on a basic and diluted basis.
6
<PAGE> 7
Upon initial adoption of SAB 101, the Company filed its first quarter
2000 10-Q reflecting the enclosed 1999 proforma statement of operations as
historical 1999 data. The Company has subsequently refiled its first quarter
2000 10-Q to reflect the originally filed 1999 statement of operations as the
Company's historical 1999 data and has included the 1999 proforma statement of
operations as proforma data.
3. DECLARATION OF DIVIDEND. On April 25, 2000, the Company declared a $0.385
dividend on each share of Common Stock outstanding and a $0.3625 dividend on
each share of Series A Preferred Stock outstanding to shareholders of record on
May 10, 2000. The dividend will be paid on May 15, 2000.
4. DEBT. The Company increased the availability under its Line of Credit from
$100 million to $140 million during the first quarter of 2000. The increased
Line of Credit matures on July 30, 2003. The interest rate remained
substantially unchanged ranging from 150 basis points to 225 basis points above
LIBOR, depending on the Company's ratio of total debt (as defined) to its
investment (prior to depreciation) in hotel properties. The interest rate was
approximately 8.2% at March 31, 2000. The Line of Credit is collateralized by
first priority mortgages on 16 hotels and agreements restricting the transfer,
pledge or other hypothecation of an additional 16 hotels (collectively, the
"Collateral Pool"). The Company can obtain a release of the pledge of any hotel
in the Collateral Pool if the Company provides a substitute hotel or reduces the
total availability under the Line of Credit. The Line of Credit contains various
covenants including the maintenance of a minimum net worth, minimum debt
coverage and interest coverage ratios, and total indebtedness and total
liabilities limitations. The Company was not aware of any failure to comply with
these covenants at March 31, 2000.
5. NOTES RECEIVABLE. The Company has three notes receivable from prior years'
hotel sales which aggregate approximately $5.3 million. The following details
these hotel sales and the related notes receivable:
<TABLE>
<CAPTION>
NOTES RECEIVABLE
TOTAL SALES BALANCE AT INTEREST
HOTEL DATE OF SALE PRICE MARCH 31, 2000 RATE DUE DATE
----- ------------ ----- -------------- ---- --------
<S> <C> <C> <C> <C> <C>
Holiday Inn November 1997 $2.8 million $2.2 million 9% November 2002
Express
Tupelo, MS
Executive Inn February 1998 $4.5 million $1.5 million 9% August 2000
Tupelo, MS
Comfort Inn August 1998 $4.5 million $1.6 million 9% August 2000
Clemson, SC
</TABLE>
7
<PAGE> 8
The Holiday Inn Express, Tupelo, MS note receivable is collateralized by a
first mortgage on the hotel. The other two notes receivable are secured by an
interest in the partnership which owns the respective hotels. Payments to the
Company on the Executive Inn, Tupelo, MS note receivable are in arrears and the
Company has ceased the accrual of interest income. The Company is currently
evaluating its alternatives for collection of the Executive Inn, Tupelo, MS note
receivable and past due interest.
6. AGREEMENT WITH HILTON. On January 26, 2000, the Company entered into an
agreement with Hilton which gives the Company the right to terminate 52 leases
and related ancillary agreements with Hilton. In the event that the Company
elects to exercise this right, the Company will be required to pay Hilton
approximately $60 million, in cash, at closing. Specifically, in order to
exercise its right to terminate the lease, the Company must notify Hilton on or
before November 30, 2000, that the Company intends to terminate the leases and
related agreements and must complete the termination on or before January 31,
2001.
In connection with termination of the leases, Hilton may elect, at the
earlier of (i) ten days after receipt of the Company's notice of its intention
to terminate the Leases, or (ii) November 30, 2000, to require the Company to
repurchase the 973,684 shares of the Company's convertible preferred stock that
it currently owns. If the Company elects to terminate the leases, then Hilton
will have the right to require the Company to purchase the Series A Preferred
Stock for $13 million. If the Company elects not to terminate the leases, Hilton
will have the right to require the Company to redeem the Series A Preferred
Stock for $13.75 million. The Company may elect, in its sole discretion, to pay
all or part of the purchase price for the preferred shares in the form of shares
of its Common Stock.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. The following chart summarizes information regarding the 62
Hotels owned at March 31, 2000:
<TABLE>
<CAPTION>
FRANCHISE AFFILIATION HOTEL PROPERTIES ROOMS/SUITES 1ST QUARTER 2000
--------------------- ---------------- ------------ ----------------
LEASE REVENUE
(IN THOUSANDS)
<S> <C> <C> <C>
Full Service hotels:
Holiday Inn 5 953 $ 2,225
Sheraton Four Points 2 516 1,080
Sheraton 4 757 2,792
Independent 2 326 2,016
DoubleTree 1 220 857
Ramada Plaza (1) 1 234 728
---- ------ --------
15 3,006 9,698
---- ------ --------
Extended Stay hotels:
Residence Inn by Marriott 14 1,851 6,358
Hawthorn Suites 1 280 813
TownePlace Suites by
Marriott 3 285 699
Homewood Suites by Hilton 1 83 313
---- ------ --------
19 2,499 8,183
---- ------ --------
Limited Service hotels:
Hampton Inn 19 2,368 4,398
Holiday Inn Express 5 637 1,404
Comfort Inn 3 474 626
Courtyard by Marriott 1 102 310
---- ------ --------
28 3,581 6,738
---- ------ --------
Deferred lease revenue (13,696)
--------
Total 62 9,086 $ 10,923
==== ====== ========
</TABLE>
(1) Converted to a Hilton full-service hotel in April 2000.
At March 31, 2000, the Company leased 52 hotels to wholly owned
subsidiaries of Hilton, six hotels to three other lessees and four hotels were
not leased. Fifty-one hotels are managed by wholly owned subsidiaries of Hilton
and 11 hotels are managed by six other third-party management companies.
9
<PAGE> 10
RESULTS OF OPERATIONS
Comparison of the Three Months ended March 31, 2000 and 1999
Revenues
The decrease in lease revenue for 2000 from 1999 is attributable to the
adoption of SAB 101 as of January 1, 2000. Included in deferred revenue at March
31, 2000 is $13.7 million of first quarter billed lease revenue collected or due
from the Lessees, which management expects the Company to recognize as lease
revenue in the third and fourth quarters of 2000.
For comparability purposes only, assuming that the amount included in
deferred revenue at March 31, 2000 was earned at March 31, 2000, the Company
would have had lease revenue of $28,459,000 from the Lessees compared with
$25,806,000 for 1999. This 4.7% increase over 1999 is due primarily to (i) an
average increase in RevPar at the 57 comparable hotels of 2.1%, (ii) two hotels
opened after the first quarter of 1999, and, (iii) a 40 room addition to the
Beverly Heritage hotel in Milpitas, California completed in late 1999.
The following shows hotel operating statistics for the 57 comparable hotels
for the three months ended March 31, 2000. Excluded are three hotels opened in
1999, and two hotels undergoing major renovations (Ramada Plaza in the
Fisherman's Wharf district of San Francisco, California converted to a Hilton
full service hotel in April 2000 and the Sheraton hotel in Birmingham, Alabama):
57 COMPARABLE HOTELS OPERATING STATISTICS
<TABLE>
<CAPTION>
BILLED LEASE REVENUE* ADR OCCUPANCY REVPAR
--------------------- --- --------- ------
VARIANCE VARIANCE VARIANCE VARIANCE
SEGMENT 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999
------- ---- -------- ---- -------- ---- -------- ---- --------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Full Service $ 9,156 11.6% $107.76 4.0% 71.1% 1.7 pts $76.61 6.6%
Extended Stay 7,485 2.3% 98.05 3.4% 79.1% (1.7) pts 77.57 1.2%
Limited Service 6,735 (2.5)% 69.76 0.0% 64.3% (1.6) pts 44.88 (2.3)%
---------
Total $ 23,376 4.2% 89.99 2.9% 70.3% (0.6) pts $63.28 2.1%
=========
</TABLE>
* Billed lease revenue equals lease revenue plus deferred revenue.
10
<PAGE> 11
The 15 full service hotels produced an average RevPar increase of 6.6%
in the first quarter of 2000. The following four full service hotels located in
Silicon Valley had average RevPar increases of 5.8%:
<TABLE>
<CAPTION>
HOTEL LOCATION PERCENTAGE CHANGE IN REVPAR
----- -------- ---------------------------
<S> <C> <C>
173-room Sheraton Sunnyvale, CA 14.5%
201-room Beverly Heritage Milpitas, CA 0.0
229-room Sheraton Milpitas, CA 5.8
214-room Sheraton Four Points Pleasanton, CA 2.8
</TABLE>
The Sunnyvale hotel was renovated and converted from a Sheraton Four
Points hotel to a Sheraton in December 1998. As a result, full year 1999 ADR
increased 13.1%. In the first quarter of 2000, ADR increased 2.0% and occupancy
increased 8.4 pts to 77.2%.
RevPar was essentially unchanged at the Beverly Heritage due to the
opening of a 40-room addition in November 2000. However, room revenues from the
Beverly Heritage increased 21.3% in the quarter.
The first quarter of 2000 RevPar increase at the Sheraton hotel in
Milpitas of 5.8% was consistent with the 5.2% increase in the fourth quarter of
1999. Occupancy increased 5.9 pts. to 73.9%.
Occupancy at the Sheraton Four Points in Pleasanton increased 5.7 pts.
in the first quarter while ADR declined 5.9%. A major account was lost in early
1999 which has taken some time to replace.
Other full service hotels include the 94-room Hotel Rex in San
Francisco Union Square which produced a RevPar increase of 23.3% in the quarter
on an occupancy increase of 5.6 pts. and an ADR increase of 14.2%, five Holiday
Inn hotels that produced an average RevPar increase of 2.9% for the quarter and
the 255-room Sheraton hotel in Clayton, MO, a suburb of St. Louis, which
produced RevPar gains of 15.0% in the quarter. The Clayton hotel was renovated
and converted from a Holiday Inn hotel to a Sheraton in August 1999.
The Ramada Plaza hotel in the Fisherman's Wharf district of San
Francisco, California and the Sheraton hotel in Birmingham, Alabama were
undergoing major renovations during the first quarter of 2000. RevPar decreased
30.6% and 22.2%, respectively. The Ramada Plaza hotel was converted to a Hilton
full service hotel in April 2000 after a $10 million renovation. The Sheraton
Birmingham hotel renovation of $1 million was primarily to correct
construction-related defects and was completed in April 2000.
The extended stay hotels, which comprised approximately 33% of billed
lease revenue, produced an increase in RevPar of 1.2%.
11
<PAGE> 12
The limited service hotels, which comprise approximately 27% of billed
lease revenue, experienced a decrease in RevPar of 2.3% in the quarter. Nineteen
of the Company's twenty-eight limited service hotels are Hampton Inn hotels.
Expenses
Taxes and insurance increased 17.6% in 2000 over 1999 primarily due to
an average increase in real estate taxes of 10.4% for the 57 comparable hotels
and real estate taxes attributable to two hotels opened following the end of the
first quarter of 1999.
Depreciation increased 18.2% in 2000 over 1999 due to increases in
depreciable assets in 2000 relating to two hotels opened in 1999 and renovation
expenditures at certain of the hotels. As a percentage of lease revenue,
depreciation increased from 23.8% to 26.9%. This increase is the result of an
increase in short-lived assets relative to total fixed assets from the Company's
renovation expenditures.
General and administrative expenses increased $826,000 in 2000 over
1999 due, in part, to the write-off of development and due diligence costs of
$246,000 associated with potential projects that the Company decided not to
pursue and to increased compensation costs due to additional employees.
Interest expense increased $842,000 in 2000 over 1999 due to an
increase in the weighted average debt balance outstanding in 2000 by
approximately $17 million and an increase in the weighted average interest rate
in 2000 from 7.2% to 7.8%.
Net Income
Net income (loss) applicable to common shareholders for 2000 was ($5.6
million), or ($0.23) per diluted share, compared with $8.1 million, or $0.32 per
diluted share, for 1999. This change is due primarily to the adoption of SAB 101
in the first quarter of 2000 as discussed above.
12
<PAGE> 13
FUNDS FROM OPERATIONS AND EBITDA
The Company considers Funds From Operations ("FFO") and Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") to be appropriate
measures of a REIT's performance which should be considered along with, but not
as an alternative to, net income and cash flow as a measure of the Company's
operating performance and liquidity.
The National Association of Real Estate Investment Trusts ("NAREIT"),
defines FFO as net income (computed in accordance with generally accepted
accounting principles or "GAAP"), excluding gains (losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after comparable adjustments for the Company's portion of these
items related to unconsolidated partnerships and joint ventures. The Company
computes FFO in accordance with standards established by NAREIT, with the
exception that deferred revenue and franchise termination fees have been
included as a component of the calculation, which may not be comparable to FFO
reported by other REITS that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition
differently than the Company. FFO and EBITDA do not represent cash flows from
operations as determined by GAAP and should not be considered as an alternative
to net income as an indication of the Company's financial performance or to cash
flow from operating activities determined in accordance with GAAP as a measure
of the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
13
<PAGE> 14
The following details the computation of FFO (in thousands except per
share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31
2000 1999
---- ----
<S> <C> <C>
Net income (loss) $ (5,246) $ 8,424
Minority interest in Operating Partnership (538) 865
Deferred revenue 13,696
Depreciation 6,623 5,602
Loss on sale of hotel properties and
franchise termination fees 239
Preferred stock dividends (348) (348)
-------- --------
FFO $ 14,187 $ 14,782
======== ========
Weighted average shares and
partnership units outstanding 27,305 27,574
</TABLE>
The following details the computation of EBITDA (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31
2000 1999
---- ----
<S> <C> <C>
FFO $ 14,187 $ 14,782
Interest expense, net 5,466 4,624
Amortization 421 551
Preferred stock dividends 348 348
-------- --------
$ 20,422 $ 20,305
======== ========
</TABLE>
HILTON AGREEMENT
On January 26, 2000, the Company entered into an agreement with Hilton
which gives the Company the right to terminate 52 leases and related ancillary
agreements with Hilton. In the event that the Company elects to exercise this
right, the Company will be required to pay Hilton approximately $60 million, in
cash, at closing. Specifically, in order to exercise its right to terminate the
leases, the Company must notify Hilton on or before November 30, 2000, that the
Company intends to terminate the leases and related agreements and must complete
the termination on or before January 31, 2001. The Company may finance this
termination payment through a combination of additional borrowings or asset
sales.
In connection with termination of the leases, Hilton may elect, at the
earlier of (i) ten days after receipt of the Company's notice of its intention
to terminate the Leases, or (ii) November 30, 2000, to require the Company to
repurchase the 973,684 shares of the Company's convertible preferred stock that
it currently owns. If the Company elects to terminate the leases, then Hilton
will have the right to require the Company to purchase the Series A Preferred
Stock for $13 million. If the Company elects not to terminate the leases, Hilton
will have the right to require
14
<PAGE> 15
the Company to redeem the Series A Preferred Stock for $13.75 million. The
Company may elect, in its sole discretion, to pay all or part of the purchase
price for the preferred shares in the form of shares of its Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders and repayments of indebtedness, is its
share of the Operating Partnership's cash flow from the Percentage Leases. For
the three months ended March 31, 2000, cash flow provided by operating
activities, consisting primarily of Percentage Lease revenue, was $13.3 million
and FFO was $14.2 million.
The lessees' obligations under the Percentage Leases are unsecured.
However, the leases with Hilton contain certain covenants including the
maintenance of a ratio of total debt to consolidated net worth (as defined) of
the lessee of not more than 50%. Management fees paid to affiliates of Hilton
are subordinated to the lease payments. The lessees have limited capital
resources, and accordingly, their ability to make lease payments under the
Percentage Leases is substantially dependent on the ability of the lessees to
generate sufficient cash flow from the operations of the Hotels. At May 5, 2000,
the lessees had paid all amounts due the Company under the Percentage Leases as
of March 31, 2000. At March 31, 2000, the Company had utilized $116.8 million
under its $140 million Line of Credit.
The following details the Company's debt outstanding at March 31, 2000
(dollar amounts in thousands):
<TABLE>
<CAPTION>
COLLATERAL
----------
# OF NET BOOK VALUE
BALANCE INTEREST RATE MATURITY HOTELS AT MARCH 31, 2000
------- ------------- -------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Line of Credit $ 116,807 LIBOR + 200bp Variable July 2003 32 $ 291,816
Mortgage 39,646 6.83% Fixed August 2008
Mortgage 25,000 7.03 Fixed November 2011 15 145,622
Mortgage 94,395 7.83 Fixed December 2008 10 130,888
Mortgage 18,750 8.22 Fixed November 2007 1 40,417
Mortgage 1,125 3.50 Variable January 2001 1 21,320
---------- ---------
$ 295,723 $ 630,063
========== =========
</TABLE>
The Company increased the availability under its Line of Credit from
$100 million to $140 million during the first quarter of 2000. The increased
Line of Credit matures on July 30, 2003. The interest rate remained
substantially unchanged ranging from 150 basis points to 225 basis points above
LIBOR, depending on the Company's ratio of total debt (as defined) to its
investment in hotel properties. The interest rate was approximately 8.2% at
March 31, 2000. The Line of Credit is collateralized by first priority mortgages
on 16 hotels and agreements restricting the transfer, pledge or other
hypothecation on an additional 16 hotels (collectively, the "Collateral Pool").
The Company can obtain a release of the pledge of any hotel in the Collateral
Pool if the Company provides a substitute hotel or reduces the total
availability under the Line of Credit. The Line of Credit contains various
covenants including the
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maintenance of a minimum net worth, minimum debt coverage and interest coverage
ratios, and total indebtedness and total liabilities limitations. The Company
was not aware of any failure to comply with these covenants at March 31, 2000.
The Company's other borrowings are nonrecourse to the Company and
contain provisions allowing for the substitution of collateral, upon
satisfaction of certain conditions, after the respective loans have been
outstanding for approximately four years. Most of the mortgage borrowings are
repayable and subject to various prepayment penalties, yield maintenance, or
defeasance obligations.
Future scheduled principal payments at March 31, 2000 are as follows
(in thousands):
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Remainder of 2000 $ 3,809
2001 6,574
2002 5,857
2003 123,103
2004 6,747
2005 7,274
Thereafter 142,360
---------
$ 295,724
=========
</TABLE>
Certain significant credit and debt statistics at March 31, 2000 are as
follows:
- Total debt to trailing twelve month EBITDA is 3.4x
- Weighted average maturity of fixed rate debt of 9.2 years
- Trailing twelve month interest coverage ratio of 4.2x
- Fixed interest rate debt equal to 60% of total debt
- Debt equal to approximately 40% of investment in hotel properties, at cost
(before depreciation and after capital expenditures)
The Company expects to spend approximately $21.3 million on capital
improvements to its hotels in 2000. Additionally, approximately $6.5 million
will be spent in 2000 at the Company's hotel in the Fisherman's Wharf district
of San Francisco, California which was converted from a Ramada Plaza to a Hilton
full service hotel in April 2000.
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 current 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 (as defined). The Board of
Directors may modify its debt limitation at anytime without shareholder
approval.
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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.
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.
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 including those described in
the Company's Form 8-K filed with the Securities and Exchange Commission on May
12, 1999 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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates. The Company monitors interest
rate fluctuations as an integral part of our overall risk management program,
which recognizes the unpredictability of financial markets and seeks to reduce
the potentially adverse effect on our results. The effect of interest rate
fluctuations historically has been small relative to other factors affecting
operating results, such as occupancy.
Our operating results are affected by changes in interest rates
primarily as a result of borrowing under our line of credit. If interest rates
increased by 25 basis points, our quarterly interest expense would have
increased by approximately $100,000, based on balances outstanding during the
quarter ending March 31, 2000.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Financial Data Schedule
(b) Reports on Form 8-K - None
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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.
May 15, 2000 /s/ MICHAEL J. PASCAL
------------- --------------------------------------------
Date Michael J. Pascal, Secretary and Treasurer
(Principal Financial and Accounting Officer)
May 15, 2000 /s/ ROBERT M. SOLMSON
------------- --------------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
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