<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 10, 2000 was 24,511,179.
1
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RFS HOTEL INVESTORS, INC.
INDEX
<TABLE>
<CAPTION>
FORM 10-Q
REPORT
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RFS Hotel Investors, Inc.
Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations - For the three and
nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - For the nine
months ended September 30, 2000 and 1999 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 Disclosure About Market Risk 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
2
<PAGE> 3
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30 December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $ 661,103 $ 651,988
Cash and cash equivalents 4,926 5,913
Restricted cash 6,467 4,550
Due from Lessees 18,524 10,801
Notes receivable 1,226 5,352
Deferred expenses, net 6,386 4,458
Other assets 4,645 4,180
--------- ---------
Total assets $ 703,277 $ 687,242
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses 9,212 8,063
Borrowings on Line of Credit 77,853 98,807
Long-term obligations 228,619 183,471
Deferred revenue 18,715
Minority interest in Operating Partnership, 2,561 and 2,565
units issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 33,480 35,618
--------- ---------
Total liabilities 367,879 325,959
--------- ---------
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, 25,182 and 25,157 shares issued at September 251 251
30, 2000 and December 31, 1999, respectively
Additional paid-in capital 375,704 374,087
Treasury stock, at cost, 671 and 262 shares at
September 30, 2000 and December 31, 1999, respectively (8,100) (3,656)
Distributions in excess of income (32,467) (9,409)
--------- ---------
Total shareholders' equity 335,398 361,283
--------- ---------
Total liabilities and shareholders' equity $ 703,277 $ 687,242
========= =========
</TABLE>
The accompanying notes are an integral
part of these consolidated statements.
3
<PAGE> 4
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Lease revenue $ 38,628 $ 27,600 $ 64,022 $ 77,188
Other revenue 143 164 653 540
-------- -------- -------- --------
Total revenue 38,771 27,764 64,675 77,728
-------- -------- -------- --------
Expenses:
Taxes and insurance 2,772 2,357 8,369 7,349
Depreciation 6,896 6,286 20,302 17,658
Amortization 342 510 1,232 1,557
General and administrative 1,418 844 4,750 2,729
Loss on sale of hotel properties and franchise
termination fees 1,358 4,000 1,597
Interest expense, net 6,093 5,038 17,296 14,369
Minority interest in Operating Partnership 2,162 1,155 964 3,055
-------- -------- -------- --------
Total expenses 19,683 17,548 56,913 48,314
-------- -------- -------- --------
Net income 19,088 10,216 7,762 29,414
Preferred stock dividends (355) (356) (1,054) (1,056)
-------- -------- -------- --------
Net income applicable to common shareholders $ 18,733 $ 9,860 $ 6,708 $ 28,358
======== ======== ======== ========
Basic earnings per share $ 0.76 $ 0.39 $ 0.27 $ 1.13
Weighted average common shares outstanding 24,500 24,990 24,576 25,001
Diluted earnings per share $ 0.75 $ 0.39 $ 0.27 $ 1.13
Weighted average common shares, preferred 25,508 25,964 24,591 25,984
shares and dilutive common stock equivalents
outstanding
Pro Forma Amounts:
Total revenue $ 35,456 $ 59,667
Total expenses 18,200 46,553
Net income 17,256 13,114
Net income applicable to common shareholders 16,900 12,058
Earnings per share, basic $ 0.68 $ 0.48
Earnings per share, diluted $ 0.66 $ 0.48
</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)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
2000 1999
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,762 $ 29,414
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 21,532 19,215
Minority interest in Operating Partnership 964 3,055
Loss on sale of hotel properties 4,000 74
Loss on retirement of assets 6
Change in unearned compensation 96
Changes in assets and liabilities:
Due from Lessees (7,723) (5,432)
Other assets (465) 2,819
Accounts payable and accrued expenses 1,149 1,177
Deferred revenue 18,715
-------- --------
Net cash provided by operating activities 46,036 50,322
-------- --------
Cash flows from investing activities:
Investment in hotel properties and hotels
under development (29,420) (28,285)
Cash paid for franchise fees (40)
Restricted cash (1,917) 6,113
Proceeds from sale of hotel properties 808
-------- --------
Net cash used by investing activities (31,337) (21,404)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (4,444)
Proceeds from borrowings 52,200 10,000
Payments on debt (28,006) (5,803)
Distributions to common and preferred shareholders (29,969) (29,938)
Distributions to limited partners (2,958) (2,966)
Redemption of units (43) (22)
Issuance of common stock/units 162
Collections on notes receivable 126 35
Loan fees paid (2,754) (533)
-------- --------
Net cash used by financing activities (15,686) (29,227)
-------- --------
Net increase (decrease) in cash and cash equivalents (987) (309)
Cash and cash equivalents at beginning of years 5,913 2,014
-------- --------
Cash and cash equivalents at end of periods $ 4,926 $ 1,705
======== ========
Supplemental disclosure of non-cash financing activities:
In 2000, the Company recorded a $101 allocation to paid-in capital from minority interest.
</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 September 30, 2000, owned interests in 62
hotels with 9,089 rooms located in 24 states (collectively the "Hotels"). RFS
owns 90.8% 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 Annual Report on Form 10-K for the year ended December 31, 1999. 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. The effect of this change on the nine months ended September 30, 2000
Statement of Operations was to decrease total revenue by approximately $18.7
million, net income applicable to common shareholders by approximately $17.3
million and net income applicable to common shareholders by $0.71 per share on a
basic and diluted basis. The pro forma effect of this change on the nine months
ended September 30, 1999 Statement of Operations was to decrease total revenue
by approximately $18.1 million, net income applicable to common shareholders by
approximately $16.3 million and net income applicable to common shareholders by
$0.65 per share on a basic and diluted basis.
6
<PAGE> 7
The effect of this change on the three months ended September 30, 2000
Statement of Operations was to increase total revenue by approximately $8.8
million, net income applicable to common shareholders by approximately $8.0
million and net income applicable to common shareholders by $0.31 per share on a
basic basis and by $0.30 per share on a diluted basis. The pro forma effect of
this change on the three months ended September 30, 1999 Statement of Operations
was to increase total revenue by approximately $7.7 million, net income
applicable to common shareholders by approximately $7.0 million and net income
applicable to common shareholders by $0.29 per share on a basic basis and by
$0.27 per share on a diluted basis.
3. BASIC AND DILUTED EARNINGS PER SHARE. Basic earnings per share is computed by
dividing net income less preferred stock dividends by the weighted average
number of common shares outstanding. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares and
equivalents outstanding. Common share equivalents represent shares issuable upon
exercise of options and unvested directors and officers restricted stock grants.
For the nine months ended September 30, 2000 and for the pro forma nine months
ended September 30, 1999, the preferred shares would be antidilutive.
Accordingly, for those periods, preferred shares are not included in the
computation of diluted earnings per share.
4. DECLARATION OF DIVIDEND. On October 26, 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
November 10, 2000. The dividend will be paid on November 15, 2000.
5. NOTES RECEIVABLE. The Company has three notes receivable from prior years'
hotel sales that aggregate approximately $5.2 million. During the second quarter
of 2000, a reserve of $4 million was established against these notes receivable.
The following details these hotel sales and the related notes receivable:
<TABLE>
<CAPTION>
Notes
Receivable
Date Total Balance at Interest
Hotel of Sale Sales Price September 30, 2000 Rate Due Date
----- ------- ----------- ------------------ ---- --------
<S> <C> <C> <C> <C> <C>
Holiday Inn Express November
Tupelo, MS 1997 $2.8 million $ 2.2 million 9% November 2002
Executive Inn February
Tupelo, MS 1998 $5.0 million 1.4 million 9% August 2000
Comfort Inn August
Clemson, NC 1998 $5.2 million 1.6 million 9% August 2000
--------------
5.2 million
Reserve for Collection (4.0) million
--------------
$ 1.2 million
==============
</TABLE>
7
<PAGE> 8
6. AGREEMENT WITH HILTON. At September 30, 2000, Hilton leases and manages 52 of
the Company's hotels under agreements that expire, with respect to the hotels,
at various dates from 2007 through 2012.
Under the REIT Modernization Act (the "RMA") which becomes effective January 1,
2001, the Company is permitted to lease its hotels to wholly owned taxable REIT
subsidiaries of the Company ("TRS Lessees"). On January 26, 2000, the Company
entered into an agreement with Hilton that gives the Company the right to
terminate these leases, management contracts and related ancillary agreements.
In the event that the Company elects to exercise this right, the Company will be
required to pay Hilton approximately $60 million in cash and record the payment
as an expense 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. If the company
elects to terminate its leases with Hilton, the Company intends to cause newly
formed TRS Lessees to become the lessees for these hotels. Under the RMA, the
TRS Lessees are required to enter into management agreements with "eligible
independent contractors" which will manage the hotels.
In connection with termination of the leases, Hilton may elect by
November 30, 2000, to require the Company to repurchase the 973,684 shares of
the Company's convertible preferred stock (Series A 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 purchase the Series A Preferred Stock
for $13.75 million. Upon Hilton's election, the Company would be required to
repurchase the Series A Preferred Stock at the earlier of the base termination
date or January 31, 2001. In the event that the Company purchases the Series A
Preferred Stock from Hilton, the Company will record the difference between the
$18.1 million of proceeds from the original sale of the Series A Preferred Stock
and the payment to Hilton as an addition to net income to arrive at net income
available to common shareholders. 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 or cash.
7. DEBT. On August 1, 2000 the Company concluded an amendment to its line of
credit that changed certain definitions and financial covenants that provide the
Company with additional flexibility to complete the proposed Hilton lease
termination transaction in early 2001. The line of credit maturity remains
unchanged at July 30, 2003. The interest rate will continue to range from 150
basis points to 225 basis points above LIBOR. The initial interest rate of 200
basis points above LIBOR is unchanged.
On August 9, 2000 the Company completed a $52.2 million long-term
financing. The financing is collateralized by a lien on eight of the Company's
hotel properties, carries a fixed interest rate of 8.0%, has a 25-year
amortization and matures in 10 years. The proceeds were utilized to reduce
borrowings outstanding under the Company's Line of Credit.
8
<PAGE> 9
8. SUBSEQUENT EVENTS. On October 3, 2000, the Company completed the sale of the
280-room Hawthorn Suites in Atlanta, Georgia for $20.75 million and recorded a
nominal gain on the sale. The proceeds were used to reduce borrowings
outstanding under the line of credit. On October 26, 2000, the Company completed
the sale of the 124-room Hampton Inn in Warren, Michigan for $5.4 million and
recorded a gain on the sale of $0.7 million. The proceeds were used for general
corporate purposes.
On November 3, 2000, the Company entered into an interest rate swap
agreement for a notional amount of $40.0 million maturing in July 2003. The
agreement effectively converts a portion of the Company's floating rate debt to
fixed rate in order to reduce the Company's risk to movements in interest rates.
Such agreements involve the exchange of fixed and floating interest rate
payments over the life of the agreement without the exchange of the underlying
principal amounts. Accordingly, the impact of fluctuations in interest rates on
these interest rate swap agreements is fully offset by the opposite impact on
the related debt. Under the interest rate swap agreement, the Company receives
payments based on the one-month LIBOR rate of 6.62% and pays a fixed rate of
6.535%.
9
<PAGE> 10
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 September 30, 2000:
<TABLE>
<CAPTION>
HOTEL THREE MONTHS ENDED NINE MONTHS ENDED
FRANCHISE AFFILIATION PROPERTIES ROOMS/SUITES SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
--------------------- ---------- ------------ ------------------ ------------------
LEASE REVENUE (IN THOUSANDS)
<S> <C> <C> <C> <C>
Full Service Hotels:
Sheraton 4 862 $ 4,069 $10,631
Holiday Inn 5 953 2,548 7,354
Independent 2 329 2,368 6,686
Sheraton Four Points 2 412 1,538 4,207
DoubleTree 1 220 1,246 3,095
Hilton 1 234 1,324 2,780
------ ------- ------- -------
15 3,010 13,093 34,753
------ ------- ------- -------
Extended Stay Hotels:
Residence Inn by Marriott 14 1,851 6,990 20,395
Hawthorn Suites (1) 1 280 666 2,256
TownePlace Suites by
Marriott 3 285 643 1,965
Homewood Suites by
Hilton 1 83 105 578
------ ------- ------- -------
19 2,499 8,404 25,194
------ ------- ------- -------
Limited Service Hotels:
Hampton Inn (2) 19 2,367 5,044 14,175
Holiday Inn Express 5 637 2,089 5,349
Comfort Inn 3 474 828 2,247
Courtyard by Marriott 1 102 378 1,019
------ ------- ------- -------
28 3,580 8,339 22,790
------ ------- ------- -------
Billed Lease Revenue 29,836 82,737
Deferred Lease Revenue 8,792 (18,715)
------- -------
Total 62 9,089 $38,628 $64,022
====== ======= ======= =======
</TABLE>
(1) Sold on October 3, 2000.
(2) The Hampton Inn in Warren, Michigan was sold on October 26, 2000.
10
<PAGE> 11
At September 30, 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-two hotels are managed by wholly owned subsidiaries of Hilton
and five other third-party management companies manage 10 hotels. (See
Management's Discussion and Analysis of Financial Conditions and Results of
Operations- Hilton Agreement).
Results of Operations
Comparison of the Three Months ended September 30, 2000 and 1999 and the Nine
Months Ended September 30, 2000 and 1999.
Revenues
The decrease in lease revenue for the nine months ended September 30,
2000 as compared to 1999 is attributable to the adoption of SAB 101 as of
January 1, 2000. At September 30, 2000, $18.7 million of first and second
quarter billed lease revenue collected or due from the Lessees was deferred due
to the adoption of SAB 101. Management expects the Company to recognize this
deferred revenue as lease revenue in the fourth quarter of 2000. Lease revenue
for the three months ended September 30, 2000 increased $11.0 million, as
compared to 1999, primarily due to the recognition of approximately $8.8
million of previously deferred revenue.
For purposes of comparison, assuming that the amount included in
deferred revenue at September 30, 2000 was earned at September 30, 2000, the
Company's lease revenue would have increased 8.1% for the quarter and 7.2% year
to date over the comparable periods in 1999. These increases over 1999 are due
primarily to (i) an average increase in RevPar at the comparable hotels of 7.1%
for the quarter and 4.8% year to date, (ii) two hotels opened in the third
quarter of 1999, (iii) a 40 room addition to the Beverly Heritage hotel in
Milpitas, California completed in late 1999 and (iv) conversion in April 2000 of
the Company's Ramada Plaza hotel in San Francisco, California to a Hilton hotel.
The following shows hotel operating statistics for the 58 comparable
hotels for the three months ended September 30, 2000 and for the 56 comparable
hotels for the nine months ended September 30, 2000. Excluded from the 58
comparable hotels for the three months ended September 30, 2000 are two hotels
opened in 1999, the Hilton San Francisco Fisherman's Wharf hotel, which
underwent major renovations and was converted from a Ramada Plaza in the second
quarter 2000 and the e Suites hotel sold on October 3, 2000. Excluded from the
56 comparable hotels for the nine months ended September 30, 2000 are the
previously described four hotels and the Sheraton Hotel in Birmingham, Alabama
which was undergoing major renovation in the first quarter 2000 and one hotel
opened in the first quarter 1999.
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<PAGE> 12
COMPARABLE HOTELS OPERATING STATISTICS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
<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
------- ---- -------- ---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Full Service $ 11,769 21.3% $111.63 8.6% 77.6% 3.2 pts $86.63 13.3%
Extended Stay 7,249 3.3% 96.65 1.9% 83.9% 1.2 pts 81.08 3.4%
Limited Service 8,339 3.5% 70.69 2.2% 73.6% 0.4 pts 52.05 2.8%
---------
Total $ 27,357 10.4% 91.08 5.0% 77.4% 1.5 pts 70.52 7.1%
=========
</TABLE>
* Billed lease revenue equals lease revenue after eliminating deferred
revenue.
COMPARABLE HOTELS OPERATING STATISTICS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<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
------- ---- -------- ---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Full Service $ 31,324 15.6% $110.53 6.8% 76.2% 2.1 pts $84.21 9.7%
Extended Stay 20,973 3.8% 98.51 2.5% 83.7% 0.5 pts 82.42 3.1%
Limited Service 22,928 0.4% 69.84 0.8% 70.4% (0.3) pts 49.19 0.5%
---------
Total $ 75,225 7.3% 90.51 3.9% 75.4% 0.6 pts 68.27 4.8%
=========
</TABLE>
*Billed lease revenue equals lease revenue after eliminating deferred
revenue.
The 15 full service hotels, which comprise approximately 43% of billed
lease revenue, produced an average RevPar increase of 13.3% in the quarter and
9.7% year to date. The following four full service hotels located in Silicon
Valley had RevPar increases averaging 18.6% in the quarter and 12.3% year to
date.
<TABLE>
<CAPTION>
PERCENTAGE INCREASE IN REVPAR
-----------------------------
HOTEL LOCATION THIRD QUARTER YEAR TO DATE
----- -------- ------------- ------------
<S> <C> <C> <C>
173-room Sheraton Sunnyvale, CA 19.4% 16.9%
235-room Beverly Heritage Milpitas, CA 9.8% 4.7%
229-room Sheraton Milpitas, CA 23.5% 13.4%
214-room Sheraton Four Points Pleasanton, CA 22.7% 15.5%
</TABLE>
This is the fourth consecutive quarter of increases between 10% and 20%
in RevPar for the Sunnyvale hotel since it was renovated and converted from a
Sheraton Four Points to a full service Sheraton in December 1998. Occupancy
increased 4.7 points to 86.9% and ADR increased 12.9% to $164.82, for the three
months ended September 30, 2000 as compared to the same period in 1999.
12
<PAGE> 13
In November 1999 a 40-room addition was opened at the Beverly Heritage
hotel. In spite of a 20% increase in rooms at the hotel, occupancy for the
quarter was only 0.5 points lower but ADR increased 10.5%. Additionally, lease
revenues increased 38.2% in the quarter and 30.8% year to date.
Occupancy at the Sheraton in Milpitas increased 9.5 points to 82.0%
for the quarter and ADR increased 9.1% to $157.70.
Occupancy at the Sheraton Four Points in Pleasanton increased 6.7
points to 85.1% and ADR rose 13.2% to $116.49 in the quarter.
Other full service hotels include the 94-room Hotel Rex in San
Francisco Union Square that produced a RevPar increase of 16.5% in the quarter
on an occupancy increase of 4.8 pts. and an ADR increase of 10.1% to $179.46.
Year to date RevPar at the Hotel Rex has increased 18.8%. The five Holiday Inn
hotels, which have an average of 190 rooms per hotel, produced average RevPar
increases of 1.4% for the quarter and 2.4% year to date. These hotels are
located primarily in competitive secondary markets. The 255-room Sheraton hotel
in Clayton, MO, a suburb of St. Louis, produced RevPar gains of 20.1% in the
quarter and 17.0% year to date. The Sheraton Clayton was renovated and converted
from a Holiday Inn hotel to a Sheraton in August 1999. In the third quarter, ADR
increased 6.6% and occupancy increased 12.6%. Occupancy was 77% in the quarter
and is now 68.1% year to date.
The Hilton San Francisco Fisherman's Wharf was converted from a Ramada
Plaza hotel in April 2000 after approximately an $11 million renovation. For the
quarter, RevPar increased 21.2% and for the month of September, RevPar increased
26.0%. September RevPar was $161.09 based on occupancy of 65.1% and an average
daily rate of $185.53.
The extended stay hotels, which comprised approximately 29% of billed
lease revenue, produced an increase in RevPar of 3.4% for the quarter and 3.1%
year to date.
The limited service hotels, which comprise approximately 28% of billed
lease revenue, experienced an increase in RevPar of 2.8% in the quarter and an
increase in RevPar of 0.5% year to date.
The improvement in room revenue significantly impacts the Company
because its principal source of revenue is lease payments from the Lessees under
the Percentage Leases. The Percentage Leases provide for rent based on a
percentage of room revenue and other hotel revenue.
Expenses
As a percentage of billed lease revenue, expenses, before the loss on
sale of hotel properties and franchise termination fees and minority interest in
Operating Partnership, increased to 62.8% from 56.6% for the nine months ended
September 30, 2000 and to 58.7% from 54.5% for the quarter.
13
<PAGE> 14
Taxes and insurance expense for the quarter increased $415,000 over the
prior year. Year to date, taxes and insurance expenses represent 10.1% of billed
lease revenue versus 9.5% of billed lease revenue for the comparable period of
1999. These increases are due, in part, to renovations that have increased the
values used in the taxing authorities' reassessments.
For the quarter and year to date, depreciation increased 9.7% and
15.0%, respectively, due to increases in depreciable assets in 2000 and 1999
relating to two hotels opened in 1999 and renovation expenditures at certain of
the hotels, including the Hilton San Francisco Fisherman's Wharf. As a
percentage of billed lease revenue, year to date depreciation increased from
22.9% to 24.5%.
General and administrative expenses increased to 4.7% from 3.5% of
billed lease revenues in the quarter. Excluding first quarter non-recurring
items, year to date general and administrative expenses increased to 4.7% from
3.1% of billed lease revenues. In the first quarter 2000, the Company wrote off
development and due diligence costs, for potential projects that the Company
decided not to pursue, of $246,000 and incurred severance expense of
approximately $300,000 associated with a former employee. Increases in general
and administrative expenses for the quarter and year to date are due to
increases in compensation from incentive bonuses, additional personnel and other
expenses in response to initiatives associated with the REIT Modernization Act
and to Centrafuse (the Company's application service provider of hotel
accounting solutions) and expenses relating to the hiring of new personnel.
Interest expense increased $1.0 million over the prior year's quarter
and $2.9 million year to date. This increase is due to a weighted average
increase in borrowings for the quarter and year to date of approximately $28
million and $24 million, respectively, and an increase in borrowing costs of
approximately 60 basis points. Borrowings increased primarily due to funding of
renovation costs. From 1998 through year to date 2000, approximately $72 million
or approximately 10% of gross hotel revenues has been spent renovating,
expanding and rebranding hotels. The interest rate increase is due to a general
increase in interest rates that impacted variable rate debt. At September 30,
2000 variable rate debt was 26% of total debt.
Loss on sale of hotel properties and franchise termination fees of $4
million represents a reserve established against three notes receivable from
prior years hotel sales which aggregate approximately $5.3 million.
Net Income
Net income applicable to common shareholders for the third quarter and
year to date 2000 was $6.7 million and $18.7 million, respectively, compared
with $28.4 million and $9.9 million, respectively, for 1999. These changes are
due primarily to the adoption of SAB 101 as previously discussed.
14
<PAGE> 15
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 that 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
exceptions that deferred revenue has been added and franchise termination fees
have been excluded in 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.
The following details the computation of FFO (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999(1) 2000 1999(1)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 19,088 $ 17,256 $ 7,762 $ 13,114
Minority interest in Operating Partnership 2,162 1,807 964 1,294
Deferred revenue (8,792) (7,692) 18,715 18,061
Depreciation 6,896 6,286 20,302 17,658
Loss on sale of hotel properties and
franchise termination fees 1,358 4,000 1,597
Preferred stock dividends (355) (356) (1,054) (1,056)
-------- -------- -------- --------
FFO $ 18,999 $ 18,659 $ 50,689 $ 50,668
======== ======== ======== ========
Weighted average common shares,
partnership units and potential
dilutive shares outstanding 27,100 27,557 27,142 27,577
</TABLE>
(1) Pro forma for SAB 101.
15
<PAGE> 16
The following details the computation of EBITDA (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
FFO $18,999 $18,659 $50,689 $50,668
Interest Expense, net 6,093 5,038 17,296 14,369
Amortization 342 510 1,232 1,557
Preferred stock dividends 355 356 1,054 1,056
------- ------- ------- -------
EBITDA $25,789 $24,563 $70,271 $67,650
======= ======= ======= =======
</TABLE>
HILTON AGREEMENT
At September 30, 2000, Hilton leases and manages 52 of the Company's
hotels under agreements that expire, with respect to the hotels, at various
dates from 2007 through 2012.
Under the REIT Modernization Act (the "RMA") which becomes effective
January 1, 2001, the Company is permitted to lease its hotels to wholly owned
taxable REIT subsidiaries of the Company ("TRS Lessees"). On January 26, 2000,
the Company entered into an agreement with Hilton that gives the Company the
right to terminate these leases, management contracts and related ancillary
agreements. In the event that the Company elects to exercise this right, the
Company will be required to pay Hilton approximately $60 million in cash and
record the payment as an expense 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. If
the Company elects to terminate its leases with Hilton, the Company intends to
cause newly formed TRS Lessees to become the lessees for these hotels. Under the
RMA, the TRS Lessees are required to enter into management agreements with
"eligible independent contractors" which will manage the hotels.
In connection with termination of the leases, Hilton may elect by
November 30, 2000, to require the Company to repurchase the 973,684 shares of
the Company's convertible preferred stock (Series A 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 purchase the Series A Preferred Stock
for $13.75 million. Upon Hilton's election, the Company would be required to
repurchase the Series A Preferred Stock at the earlier of the lease termination
date or January 31, 2001. In the event that the Company purchases the Series A
Preferred Stock from Hilton, the Company will record the difference between the
$18.1 million of proceeds from the original sale of the Series A Preferred Stock
and the payment to Hilton as an addition to net income to arrive at net income
available to common shareholders. 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 or cash.
16
<PAGE> 17
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 Percentage Leases and the
net operating income from hotels not leased to third parties. For the nine
months ended September 30, 2000, cash flow provided by operating activities,
consisting primarily of Percentage Lease revenue, was $46.0 million and FFO was
$50.7 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 November 5,
2000, the lessees had paid substantially all amounts due the Company under the
Percentage Leases as of September 30, 2000. At September 30, 2000, the Company
had utilized $77.9 million under its $140 million Line of Credit.
The following details the Company's debt outstanding at September 30, 2000
(dollar amounts in thousands):
<TABLE>
<CAPTION>
COLLATERAL
# OF NET BOOK VALUE
BALANCE INTEREST RATE MATURITY HOTELS AT SEPTEMBER 30, 2000
------- ------------- -------- ------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Line of Credit $ 77,853 LIBOR + 200bp Variable July 2003 25 $ 215,560
Mortgage 37,878 6.83% Fixed August 2008
Mortgage 25,000 7.03 Fixed November 2011 15 144,617
Mortgage 93,791 7.83 Fixed December 2008 10 130,044
Mortgage 18,625 8.22 Fixed November 2007 1 44,244
Mortgage 1,125 3.50 Variable January 2001 1 21,211
Mortgage 52,200 8.00 Fixed August 2010 8 88,398
-------- ----------
$306,472 $ 644,074
======== ==========
</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 8.6% at
September 30, 2000. The Line of Credit is collateralized by first priority
mortgages on 12 hotels and agreements restricting the transfer, pledge or other
hypothecation on an additional 13 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 September 30, 2000. The amendment to the line of credit in
August 2000, as previously discussed, includes some definitional and covenant
changes that provides the Company with additional flexibility.
17
<PAGE> 18
As noted earlier, on August 9, 2000, the Company completed a $52.2
million long-term financing. The financing is collateralized by a lien on eight
of the Company's hotel properties, carries a fixed interest rate of 8.0%, has a
25 year amortization and matures in 10 years. The financing allowed the Company
to extend its debt maturities over a longer term resulting in a weighted average
maturity of fixed rate debt of approximately 8.8 years and increased the
percentage of fixed interest rate debt from approximately 58% to 76%. The
proceeds were utilized to reduce borrowings outstanding under the Company's Line
of Credit.
As noted previously, proceeds from the sale of the Hawthorn Suites
hotel on October 3, 2000 of approximately $20.1 million were utilized to reduce
borrowings outstanding under the Company's Line of Credit.
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 September 30, 2000 are as
follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Remainder of 2000 $ 1,308
2001 7,448
2002 6,797
2003 85,160
2004 7,856
2005 8,446
Thereafter 189,457
---------
$ 306,472
=========
</TABLE>
Certain significant credit and debt statistics at September 30, 2000
are as follows:
- Total debt to trailing twelve month EBITDA is 3.5x
- Weighted average maturity of fixed rate debt of 8.8 years
- Trailing twelve month interest coverage ratio of 3.9x
- Fixed interest rate debt equal to 74% of total debt
- Debt equal to 41% of investment in hotel properties, at cost (before
depreciation and after capital expenditures)
18
<PAGE> 19
On November 3, 2000, the Company entered into an interest rate swap
agreement for a notional amount of $40.0 million maturing in July 2003. The
agreement effectively converts a portion of the Company's floating rate debt to
fixed rate in order to reduce the Company's risk to movements in interest rates.
Such agreements involve the exchange of fixed and floating interest rate
payments over the life of the agreement without the exchange of the underlying
principal amounts. Accordingly, the impact of fluctuations in interest rates on
these interest rate swap agreements is fully offset by the opposite impact on
the related debt. Under the interest rate swap agreement, the Company receives
payments based on the one-month LIBOR rate of 6.62% and pays a fixed rate of
6.535%.
After the completion of the $40 million interest rate swap on November
3, 2000, the Company's percentage of fixed interest rate debt increases from 74%
to 87%.
The Company has spent approximately $29.4 million on capital
improvements to its hotels year to date, including approximately $11 million
spent at the Hilton San Francisco Fisherman's Wharf. The Company expects to
spend approximately an additional $5.6 million on capital improvements to its
hotels during the remainder of 2000.
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.
19
<PAGE> 20
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.
20
<PAGE> 21
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 $74,000, based on balances outstanding during the
quarter ended September 30, 2000.
The Company's primary market risk exposure is to changes in interest
rates as a result of its Line of Credit and long-term debt. At September 30,
2000, the Company had outstanding total indebtedness of approximately $306.5
million. The Company's interest rate risk objective is to limit the impact of
interest rate fluctuations on earnings and cash flows and to lower its overall
borrowing costs. To achieve this objective, the Company manages its exposure to
fluctuations in market interest rates for its borrowings through the use fixed
rate debt instruments to the extent that reasonably favorable rates are
obtainable with such arrangements and derivative financial instruments such as
interest rate swaps, to effectively lock the interest rate on a portion of its
variable debt. The Company does not enter into derivative or interest rate
transactions for speculative purposes. Approximately 74% of the Company's
outstanding debt was subject to fixed rates with a weighted average interest
rate of 7.68% at September 30, 2000. On November 3, 2000, the Company entered
into an interest rate swap agreement for a notional amount of $40.0 million
which effectively locked an interest rate (before the spread over LIBOR) of
6.535% through its Interest Rate Swap agreements. After this transaction, the
Company's percentage of fixed interest rate debt increased from 74% to 87%. The
Company regularly reviews interest rate exposure on its outstanding borrowings
in an effort to minimize the risk of interest rate fluctuations.
The following table provides information about the Company's
instruments that are sensitive to changes in interest rates. For debt
obligations outstanding at September 30, 2000, the table presents principal
cash flows and related weighted average interest rates by expected maturity
dates. Weighted average variable rates are based on implied forward rates in
the yield curve as of September 30, 2000. The fair value of the Company's fixed
rate debt indicates the estimated principal amount of debt having similar debt
service requirements, which could have been borrowed by the Company at
September 30, 2000. The rate assumed in the fair value calculation of fixed
rate debt is equal to 7.83% which consist of the 7-year treasury of 5.83% at
September 30, 2000 plus 200 basis points.
<TABLE>
<CAPTION>
Expected Maturity
(in thousands)
----------------------------------------------------------------------------
Fair
Value
Liabilities 2000 2001 2002 2003 2004 Thereafter Total Total
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt:
Fixed Rate $1,308 $6,323 $6,797 $ 7,307 $7,856 $197,903 $227,494 $226,205
Average Interest Rate 7.68% 7.68% 7.68% 7.68% 7.68% 7.68%
Variable Rate -- $1.125 -- $77,853 -- -- $ 78,978 $ 78,978
Average Interest Rate 8.60% 8.64% 8.60% 8.81%
</TABLE>
The table incorporates only those exposures that exist as of September
30, 2000 and does not consider exposures or positions which could arise after
that date. In addition, because firm commitments are not represented in the
table above, the information presented therein has limited predictive value. As
a result, the Company's ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during future
periods, prevailing interest rates, and the Company's hedging strategies at
that time. There is inherent rollover risk for borrowings as they mature and
are renewed at current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest rates
and the Company's financing requirements.
21
<PAGE> 22
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
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
RFS HOTEL INVESTORS, INC.
November 14, 2000 /s/ KEVIN M. LUEBBERS
----------------- --------------------------------------------
Date Kevin M. Luebbers, Secretary and Treasurer
(Principal Financial and Accounting Officer)
November 14, 2000 /s/ ROBERT M. SOLMSON
----------------- --------------------------------------------
Date Robert M. Solmson, Chairman and
Chief Executive Officer
23
