<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 34-0-23290
EQUITY INNS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1550848
- ------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER)
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
4735 SPOTTSWOOD, SUITE 102, MEMPHIS, TN 38117
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(901) 761-9651
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME OR 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 (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
X YES NO
----- -----
THE NUMBER OF SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING ON
AUGUST 9, 1996 WAS 23,409,872.
1 OF 24
<PAGE> 2
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information ----
Item 1. Financial Statements
EQUITY INNS, INC.
Consolidated Balance Sheets - June 30, 1996 (unaudited)
and December 31, 1995 3
Consolidated Statements of Operations (unaudited) - For the
three and six months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) - For the
six months ended June 30, 1996 and 1995 5
Notes to consolidated financial statements 6
TRUST LEASING, INC. (formerly McNeill Hotel Co., Inc.)
Balance Sheets - June 30, 1996 (unaudited) and December 31, 1995 9
Statements of Operations (unaudited) - For the three and six months
ended June 30, 1996 and 1995 10
Statements of Cash Flows (unaudited) - For the six months ended
June 30, 1996 and 1995 11
Notes to financial statements 12
EQUITY INNS, INC. AND TRUST LEASING, INC.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations of Equity Inns, Inc. and Trust
Leasing, Inc. 14
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
2
<PAGE> 3
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONSOLIDATED BALANCE SHEETS
_________________
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $263,602,097 $218,428,938
Cash and cash equivalents 27,023 132,630
Due from Lessee 5,015,720 2,299,330
Deferred expenses, net 3,803,422 4,189,436
Prepaid and other assets 492,374 16,537
------------ ------------
Total assets $272,940,636 $225,066,871
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 31,877,177 $ 74,938,763
Accounts payable and accrued expenses 2,986,636 2,515,449
Distributions payable 6,757,807 4,046,952
Minority interest in Partnership 6,939,570 6,072,829
------------ ------------
Total liabilities 48,561,190 87,573,993
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $.01 par value, 50,000,000 shares
authorized, 23,409,872 and 14,907,231 shares
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 234,098 149,072
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding
Additional paid-in capital 235,208,430 143,576,024
Unearned directors' compensation (77,586) (93,103)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (9,721,609) (4,875,228)
------------ ------------
Total shareholders' equity 224,379,446 137,492,878
------------ ------------
Total liabilities and shareholders' equity $272,940,636 $225,066,871
============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
3
<PAGE> 4
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
______________________
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Percentage lease revenue $ 9,609,142 $5,905,426 $16,556,980 $10,408,024
Interest income 42,737 3,039 79,087 15,884
----------- ---------- ----------- -----------
Total revenues 9,651,879 5,908,465 16,636,067 10,423,908
----------- ---------- ----------- -----------
Expenses
Real estate and personal property taxes 822,346 537,948 1,593,417 1,052,467
Depreciation and amortization 2,992,233 1,653,807 5,700,476 3,160,420
Interest 536,562 1,173,172 2,095,536 2,324,130
General and administrative 535,978 278,028 1,122,236 650,513
----------- ---------- ----------- -----------
Total expenses 4,887,119 3,642,955 10,511,665 7,187,530
----------- ---------- ----------- -----------
Income before minority interest 4,764,760 2,265,510 6,124,402 3,236,378
Minority interest 144,855 142,107 192,442 217,162
----------- ---------- ----------- -----------
Net income applicable to
common shareholders $ 4,619,905 $2,123,403 $ 5,931,960 $ 3,019,216
=========== ========== =========== ===========
Net income per common share $ .21 $ .22 $ .32 $ .31
=========== ========== =========== ===========
Weighted average number of
common shares outstanding 21,688,000 9,774,000 18,366,000 9,695,000
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
4
<PAGE> 5
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,931,960 $ 3,019,216
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,895,086 2,992,086
Amortization of loan costs 789,873 152,817
Amortization of unearned directors' compensation 15,517 15,517
Minority interest 192,442 217,162
Changes in assets and liabilities:
Due from Lessee (2,716,390) (983,751)
Deferred expenses (20,546) (513,511)
Prepaid and other assets (475,837) 79,229
Accounts payable and accrued expenses 764,927 381,343
----------- -----------
Net cash flow provided by operating activities 9,377,032 5,360,108
----------- -----------
Cash flows from investing activities:
Investment in hotel properties (49,991,151) (15,740,485)
Cash paid for franchise applications (382,850)
----------- ------------
Net cash flow used by investing activities (50,374,001) (15,740,485)
----------- -----------
Cash flows from financing activities:
Proceeds of public offerings 85,737,548
Proceeds of issuance of Common Stock 4,000,000
Proceeds of private placement of Partnership Units 2,875,000
Distributions paid (8,412,209) (4,794,001)
Borrowings under revolving credit facility 49,350,000 14,119,392
Payments on revolving credit facility (92,409,220)
Cash paid for loan costs (247,391)
Payments on capital lease obligations (2,366) (3,367)
----------- -----------
Net cash flow provided by financing activities 40,891,362 9,322,024
----------- -----------
Net increase (decrease) in cash and cash equivalents (105,607) (1,058,353)
Cash and cash equivalents at beginning of period 132,630 1,086,384
----------- -----------
Cash and cash equivalents at end of period $ 27,023 $ 28,031
=========== ===========
Supplemental disclosure of cash flow information-interest paid $ 2,578,934 $ 2,225,286
=========== ===========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
At June 30, 1996, $6,757,807 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on July
26, 1996. At December 30, 1995, $4,046,952 in distributions to shareholders
and limited partners had been declared but not paid. The distributions were
paid on January 29, 1996.
On January 24, 1996, 151,971 limited partnership units were exchanged for
shares of Common Stock by certain limited partners. Additionally, on April 19,
1996, 30,844 limited partnership units were exchanged for shares of Common
Stock by certain limited partners.
In January 1996, the Company issued 25,000 shares of Common Stock to its
officers in lieu of cash to satisfy bonus compensation accrued at December 31,
1995. These shares, at the date of issuance, were valued at $11.75 per share.
Offering expenses of $169,833, which were paid in 1995 and included in deferred
offering expenses at December 31, 1995, have been deducted from the proceeds of
the Fourth Offering which occurred in April 1996. Accordingly, these amounts
have been reclassified to additional paid-in capital.
In 1996, approximately $151,000 of the net proceeds of the Company's public
offering was allocated to minority interest. The remainder of the net proceeds
increased common stock and additional paid-in capital.
The accompanying notes are an integral
part of these consolidated financial statements
5
<PAGE> 6
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
____________________
1. Organization and Basis of Presentation
Equity Inns, Inc. (the "Company") was incorporated on November 24, 1993.
The Company is a real estate investment trust ("REIT") for federal income
tax purposes. The Company, through its wholly owned subsidiary, Equity
Inns Trust (the "Trust"), is the sole general partner of Equity Inns
Partnership, L.P. (the "Partnership") and at June 30, 1996 owned an
approximate 97.0% interest in the Partnership. The Company was formed to
acquire equity interests in hotel properties and at June 30, 1996 owned,
through the Partnership, 43 hotel properties with a total of 5,175 rooms in
23 states.
On April 16, 1996, the Company completed a public offering (the "Fourth
Offering") of 7,000,000 shares of common stock and an additional 947,000
shares were issued on May 3, 1996 upon exercise of a portion of the
underwriters' over-allotment option. The offering price was $11.50 per
share resulting in gross proceeds of approximately $91,390,000 (including
the over-allotment shares). Net of underwriters' discount and offering
expenses, the Company received approximately $86,000,000. In addition,
Trust Leasing, Inc. purchased, in a private placement, 250,000 Units of
limited partnership interest in the Partnership ("Units") at $11.50 per
unit on April 16, 1996, resulting in gross proceeds of $2,875,000 to the
Partnership. On May 31, 1996, Promus Hotels, Inc. ("Promus") purchased
347,826 shares at the offering price of $11.50, in conjunction with the
Partnership's purchase of two hotel properties, which resulted in gross
proceeds of $4,000,000 to the Partnership. Promus has agreed to purchase
up to an additional $11 million of common stock over the next three years
as the Company develops or converts hotels to Promus brand hotels.
Trust Leasing, Inc. (the "Lessee", which formerly operated as McNeill Hotel
Co., Inc.) leases hotels owned by the Partnership pursuant to separate
percentage lease agreements (the "Percentage Leases") which provide for
rent payments equal to the greater of (i) a fixed based rent or (ii)
percentage rent based on the revenues of the hotels. The Lessee is wholly
owned by Phillip H. McNeill, Sr., Chairman of the Board and Chief Executive
Officer of the Company.
These unaudited consolidated financial statements include the accounts of
the Company, the Trust and the Partnership 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 1995 Annual
Report on Form 10-K. The following notes to the consolidated financial
statements highlight significant changes to the 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.
6
<PAGE> 7
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
____________________
2. Net Income Applicable to Common Shareholders
Net income per common share has been computed by dividing net income
applicable to common shareholders by the weighted average number of shares
of Common Stock and equivalents outstanding.
3. Distributions
On June 6, 1996, the Company declared a $0.28 per share distribution on
each share of Common Stock and each Unit outstanding on June 28, 1996. The
distribution was paid on July 26, 1996.
4. Shareholders' Equity
On March 29, 1995, the Company filed a Registration Statement on Form S-3
with the SEC relating to the possible issuance by the Company of up to
806,745 shares of Common Stock upon redemption of 806,745 Units in the
Partnership. On January 24, 1996, and on April 19, 1996, 151,971 shares
and 30,844 shares, respectively, were issued upon redemption of Units. In
addition, 25,000 shares of Common Stock were issued to fund officers'
bonuses accrued at December 31, 1995.
5. Subsequent Events
Subsequent to June 30, 1996, the Partnership acquired the following
properties:
<TABLE>
<CAPTION>
Purchase
Closing Date Hotel Price
------------- ----------------------------------- -----------
<S> <C> <C>
July 16, 1996 Hampton Inn--Scottsdale, Arizona $ 9,485,000
July 22, 1996 Hampton Inn--Chattanooga, Tennessee 9,000,000
-----------
$18,485,000
===========
</TABLE>
7
<PAGE> 8
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
____________________
6. Pro Forma Information (Unaudited)
Due to the impact of the acquisitions in 1996, historical results of
operations may not be indicative of future results of operations and
earnings per share. The following unaudited pro forma condensed
consolidated statements of operations for the six months ended June 30,
1996 and 1995, are presented as if the acquisition of all 43 hotels owned
at June 30, 1996, the acquisition of the hotels discussed in Note 5, the
consummation of the IPO and the three Follow-On Offerings had occurred on
January 1, 1995, and the hotels had been leased to the Lessee pursuant to
the percentage leases. The pro forma condensed consolidated statement of
operations does not purport to present what actual results of operations
would have been if the acquisition of the hotels had occurred on such date
or to project results for any future period.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Percentage lease revenues $19,089,129 $17,979,490
Expenses:
Real estate and personal property taxes 1,885,160 1,600,405
Depreciation and amortization 6,737,936 6,737,936
Interest 1,808,249 1,998,829
General and administrative 1,007,039 981,115
----------- -----------
Total expenses 11,438,384 11,318,285
----------- -----------
Income before minority interest 7,650,745 6,661,205
Minority interest 229,522 199,831
----------- -----------
Net income applicable to common shareholders $ 7,421,223 $ 6,461,374
=========== ===========
Net income per share $ .32 $ .28
=========== ===========
Weighted average number of common shares
outstanding 23,410,000 23,410,000
=========== ===========
</TABLE>
8
<PAGE> 9
TRUST LEASING, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,359,314 $4,176,309
Accounts receivable:
Trade 2,750,663 1,228,260
Affiliates 2,091,667 1,779,223
Inventories 224,981 168,315
Prepaid expenses 454,072 517,658
----------- ----------
Total current assets 12,880,697 7,869,765
Furniture and equipment 24,045 23,659
Investment in Equity Inns, Inc. and
Equity Inns Partnership, L.P. 3,143,750 268,750
Other marketable securities 34,000
----------- ----------
Total assets $16,082,492 $8,162,174
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,101,104 $1,400,264
Accrued expenses - affiliate 5,037,666 2,279,577
Accrued expenses - other 3,359,116 2,202,441
----------- ----------
Total liabilities 9,497,886 5,882,282
----------- ----------
Commitments and contingencies
Shareholders' Equity:
Common Stock, no par value, 1,000 shares
authorized, issued and outstanding, $.10
stated value 100 100
Additional paid-in capital 2,875,000
Retained earnings 3,709,506 2,279,792
----------- ----------
Total shareholders' equity 6,584,606 2,279,892
----------- ----------
Total liabilities and shareholders' equity $16,082,492 $8,162,174
=========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements
9
<PAGE> 10
TRUST LEASING, INC.
STATEMENTS OF OPERATIONS
(unaudited)
______________________
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Room revenues $20,747,895 $12,792,451 $36,645,466 $22,986,796
Other revenue 1,567,043 938,231 2,766,795 1,827,733
----------- ----------- ----------- -----------
Total revenue 22,314,938 13,730,682 39,412,261 24,814,529
----------- ----------- ----------- -----------
Expenses
Hotel operating costs and
expenses 5,226,268 3,285,416 9,619,408 6,157,994
General and administrative 1,556,738 1,086,071 3,090,254 2,149,892
Franchise costs 1,631,524 1,004,985 2,888,742 1,803,330
Advertising and promotion 630,692 354,326 1,161,633 687,384
Utilities 986,097 563,810 2,100,499 1,208,750
Repairs and maintenance 864,212 524,207 1,613,152 991,502
Insurance expense 206,996 129,608 451,879 316,639
Consulting fees 250,000 500,000
Percentage lease expense 9,609,142 5,905,426 16,556,980 10,408,024
----------- ----------- ----------- -----------
Total expenses 20,961,669 12,853,849 37,982,547 23,723,515
----------- ----------- ----------- -----------
Net income $ 1,353,269 $ 876,833 $ 1,429,714 $ 1,091,014
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
10
<PAGE> 11
TRUST LEASING, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
______________________
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,429,714 $ 1,091,014
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 1,914
Changes in assets and liabilities:
Accounts and note receivable (1,522,403) (1,016,973)
Inventories (56,666) (3,667)
Prepaid expenses 63,586 96,263
Accounts payable (299,160) (155,013)
Accrued expenses 3,914,764 1,568,306
----------- -----------
Net cash provided by operating activities 3,531,749 1,579,930
----------- -----------
Cash flows from investing activities:
Purchase of Units in Equity Inns Partnership, L.P. (2,875,000)
Purchase of marketable securities (34,000)
Advance to affiliates (312,444)
Purchase of furniture and equipment (2,300)
-----------
Net cash used in investing activities (3,223,744)
-----------
Cash flows from financing activities:
Contribution of capital 2,875,000
----------- -----------
Net increase in cash and cash equivalents 3,183,005 1,579,930
Cash and cash equivalents at beginning of period 4,176,309 2,411,501
----------- -----------
Cash and cash equivalents at end of period $ 7,359,314 $ 3,991,431
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
11
<PAGE> 12
TRUST LEASING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
____________________
1. Organization
Trust Leasing, Inc. ("the Lessee", which formerly operated as McNeill Hotel
Co., Inc.) began operations on March 1, 1994 and is wholly owned by Phillip
H. McNeill, Sr. The Lessee has elected status as a Subchapter S
corporation under the Internal Revenue Code. The Lessee was formed to
operate and lease hotels owned by Equity Inns Partnership, L.P. (the
"Partnership") pursuant to separate percentage lease agreements (the
"Percentage Leases"). At June 30, 1996, approximately 97.0% of the
Partnership was owned by Equity Inns, Inc. (through its wholly-owned
subsidiary, Equity Inns Trust) in which Mr. McNeill is also Chairman of the
Board and Chief Executive Officer. As of June 30, 1996, the Lessee leased
forty-three hotels from the Partnership. Thirty-one of the hotels are
operated by the Lessee as Hampton Inn hotels or Homewood Suites hotels
under franchise agreements with Promus Hotels, Inc. Four of the hotels are
operated by the Lessee as Residence Inn hotels under franchise agreements
with Marriott Corporation. Three of the hotels are operated by the Lessee
as Comfort Inn hotels under a franchise agreement with Choice Hotels
International, Inc. Five of the hotels are operated by the Lessee as
Holiday Inn hotels or Holiday Inn Express hotels under franchise agreements
with Holiday Inn, Inc. Thirty-four of the hotels are limited service
hotels, four of the hotels are full service hotels, and five of the hotels
are extended stay hotels.
Each hotel is separately leased by the Partnership to the Lessee under a
Percentage Lease that provides for a non-cancelable term of ten years,
subject to earlier termination upon certain events. The Percentage Leases
require a base rental payment to be made to the Partnership on a monthly
basis and additional quarterly payments to be made based upon percentages
of room revenue and, to a lesser extent, food and beverage revenue at the
hotels. The Lessee will not be considered in default for non-payment of
the percentage rent for any calendar year as long as such payment is made
within ninety days following the end of each calendar year.
These unaudited financial statements 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 Lessee included in Equity Inns, Inc.'s 1995 Annual Report on Form 10-K.
The following notes to the financial statements highlight significant
changes to the notes included in the Form 10-K and present interim
disclosures required by the SEC. The accompanying financial statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are
of a normal and recurring nature.
12
<PAGE> 13
TRUST LEASING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
____________________
2. Consulting Agreement
The Lessee has a consulting agreement with Trust Management, Inc. (an
affiliated company, wholly owned by Phillip H. McNeill, Sr., which formerly
operated as McNeill Hospitality Corporation) to provide consulting and
other technical services through December 31, 1996. The agreement provides
for annual fees of $1,000,000, payable $250,000 per quarter.
3. Investment in Equity Inns, Inc. and Equity Inns Partnership, L.P.
On April 16, 1996, the Lessee purchased 250,000 units of limited
partnership interest ("Units") of the Partnership in a private placement.
The Units were purchased at $11.50 per Unit, resulting in a total cost of
$2,875,000.
In addition, the Lessee owns 25,000 shares of the Common Stock of Equity
Inns, Inc. Both the Units and Common Stock are pledged as collateral for
personal indebtedness of Phillip H. McNeill, Sr.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
EQUITY INNS, INC. AND TRUST LEASING, INC.
BACKGROUND
The Company and the Lessee commenced operations on March 1, 1994 upon
completion of the Company's initial public offering (the "IPO") and the
simultaneous acquisition of eight Hampton Inn hotel properties with 995 rooms.
At the time of the IPO, the Company was the sole general partner of the
Partnership. Effective January 3 , 1995, the Company transferred its equity
interest in the Partnership to Equity Inns Trust (the "Trust"), a wholly-owned
subsidiary of the Company, and the Trust became the sole general partner of the
Partnership. Since the IPO, the Company has actively implemented its
acquisition strategy. The following chart summarizes information regarding the
Company's hotels at June 30, 1996:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Limited Service Hotels:
Hampton Inn 30 3,647
Comfort Inn 3 362
Holiday Inn Express 1 101
-- -----
34 4,110
Extended Stay Hotels:
Residence Inn 4 376
Homewood Suites 1 132
-- -----
5 508
Full Service Hotels:
Holiday Inn 4 557
-- -----
Total 43 5,175
== =====
</TABLE>
At June 30, 1996, the Partnership owned forty-three hotels (the "Hotels") in 23
states and the Trust owned an approximate 97.0% interest in the Partnership.
The Lessee leases and operates the Hotels pursuant to the Percentage Leases
which provide for rent payments based, in part, on the revenues of the Hotels.
The Lessee is wholly owned by Phillip H. McNeill, Sr., Chairman of the Board
and Chief Executive Officer of the Company.
In order for the Company to qualify as a REIT, neither the Company (by itself
or through the Trust), nor the Partnership can operate hotels. Therefore, the
Partnership leases the Hotels to the Lessee pursuant to the Percentage Leases.
The Partnership's, and therefore the Company's, principal source of revenue is
lease payments by the Lessee under the Percentage Leases. Percentage Rent is
based primarily upon the Hotels' room revenue, and to a lesser extent, when
applicable, food and beverage revenue. The Lessee's ability to make payments
to the Partnership under the Percentage Leases is dependent on its ability to
generate sufficient cash flow from the operations of the Hotels.
14
<PAGE> 15
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
EQUITY INNS, INC. AND TRUST LEASING, INC.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations of the Company and
the Lessee for the three month periods ended June 30, 1996 and 1995.
THE COMPANY
Comparison of the Three Months Ended June 30, 1996 to the Three Months Ended
June 30, 1995
For the three months ended June 30, 1996, the Company had total revenues of
$9,651,879, consisting primarily of Percentage Lease revenue of $9,609,142.
Interest expense of $536,562 was incurred on borrowings used for the
acquisition of hotel properties, with an average outstanding balance under the
line of credit of approximately $29.7 million, at an average interest rate of
7.2%. Net income for the period was $4,619,905 or $.21 per share. Funds From
Operations (utilizing the new definition of Funds From Operations recommended
by the National Association of Real Estate Investment Trusts ["NAREIT"]) were
$7,277,331 or $.33 per share. The Company considers Funds From Operations to
be a key measure of a REIT's performance and believes that Funds From
Operations should be considered along with, but not as an alternative to, net
income and cash flows as a measure of the Company's operating performance and
liquidity.
For the three months ended June 30, 1995, the Company had total revenues of
$5,908,465, consisting primarily of Percentage Lease revenue of $5,905,426.
Interest expense of $1,173,172 was incurred on borrowings used for the
acquisition of hotel properties, with an average outstanding balance under the
line of credit of approximately $55 million, at an average interest rate of
8.3%. Net income for the period was $2,123,403 or $.22 per share. Funds From
Operations (under NAREIT's new definition) were $3,800,750 or $.36 per share.
This decrease in Funds From Operations over the same period last year is
primarily the result of a follow-on stock offerings in July 1995 and April 1996
that more than doubled the Company's weighted average number of shares
outstanding.
The increase in Percentage Lease revenue for the three months ended June 30,
1996 over the comparable period last year is the result of (i) the number of
hotels owned and leased increased from 27 at June 30, 1995 to 43 at June 30,
1996 and (ii) to a lesser extent, increased Percentage Lease revenue for the
Hotels owned throughout both periods. In addition, for the 43 hotels owned at
June 30, 1996 (after adjustment made to five hotels where a substantial number
of rooms temporarily were removed from service for refurbishments), on a pro
forma basis, room revenue per available room ("REVPAR") was $48.79 for the
three months ended June 30, 1996, compared to $46.51 for the comparable period
in 1995, representing an increase of 4.9%. Real estate and personal property
taxes and depreciation and amortization increased over the same period last
year as a result of the increase in number of hotels. Interest expense
decreased in the 1996 period due to the reduction in the average balance in the
line of credit, after applying the proceeds from the fourth offering received
during the second quarter, 1996. General and administrative expenses increased
primarily as a result of the increase in number of hotels over the comparable
period last year.
15
<PAGE> 16
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
EQUITY INNS, INC. AND TRUST LEASING, INC.
RESULTS OF OPERATIONS, Continued
Comparison of the Six Months Ended June 30, 1996 to the Six Months Ended June
30, 1995
For the six months ended June 30, 1996, the Company had total revenues of
$16,636,067, consisting primarily of Percentage Lease revenue of $16,556,980.
Interest expense of $2,095,536 was incurred on borrowings used for the
acquisition of hotel properties, with an average outstanding balance under the
line of credit of approximately $56 million, at an average interest rate of
7.3%. Net income for the period was $5,931,960 or $.32 per share. Funds From
Operations (utilizing the new definition of Funds From Operations recommended
by NAREIT) were $10,942,394 or $.58 per share.
For the six months ended June 30, 1995, the Company had total revenues of
$10,423,908, consisting primarily of Percentage Lease revenue of $10,408,024.
Interest expense of $2,324,130 was incurred on borrowings used for the
acquisition of hotel properties, with an average outstanding balance under the
line of credit of approximately $55 million, at an average interest rate of
8.4%. Net income for the period was $3,019,216 or $.31 per share. Funds From
Operations (under NAREIT's new definition) were $6,177,357 or $.59 per share.
The increase in Percentage Lease revenue for the six months ended June 30, 1996
over the comparable period last year is the result of (i) the number of hotels
owned and leased increased from 27 at June 30, 1995 to 43 at June 30, 1996 and
(ii) to a lesser extent, increased Percentage Lease revenue for the Hotels
owned throughout both periods. In addition, for the 43 hotels owned at June
30, 1996 (after adjustment made to five hotels where a substantial number of
rooms temporarily were removed from service for refurbishments), on a pro forma
basis, REVPAR was $44.24 for the six months ended June 30, 1996, compared to
$42.37 for the comparable period in 1995, representing an increase of 4.4%.
Real estate and personal property taxes and depreciation and amortization
increased over the same period last year as a result of the increase in number
of hotels. Interest expense decreased in the 1996 period due to the reduction
in the average balance in the line of credit, after applying the proceeds from
the fourth offering received during the quarter. General and administrative
expenses increased primarily as a result of the increase in number of hotels
over the comparable period last year.
16
<PAGE> 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
EQUITY INNS, INC. AND TRUST LEASING, INC.
RESULTS OF OPERATIONS, Continued
The following is a reconciliation of net income before minority interest to
Funds From Operations (under NAREIT's new definition):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before minority interest $ 4,764,760 $ 2,265,510 $ 6,124,402 $ 3,236,378
Add:
Depreciation of investment in
hotel properties 2,512,571 1,535,240 4,817,992 2,940,979
----------- ----------- ----------- -----------
Funds From Operations $ 7,277,331 $ 3,800,750 $10,942,394 $ 6,177,357
=========== =========== =========== ===========
Weighted average number of outstanding shares
of Common Stock and Units of the Partnership 22,377,625 10,431,946 18,983,501 10,426,874
=========== =========== =========== ===========
Funds From Operations per Share and Unit $ .33 $ .36 $ .58 $ .59
=========== =========== =========== ===========
</TABLE>
THE LESSEE
Comparison of the Three Months Ended June 30, 1996 to the Three Months Ended
June 30, 1995
For the three months ended June 30, 1996, the Lessee had total revenues of
$22,314,938, consisting primarily of room revenue of $20,747,895. Hotel
expenses, other than Percentage Lease expense and consulting fees, as a
percentage of total revenue, were 49.8%. Percentage Lease expenses, as a
percentage of total revenue, were 43.1%. Consulting fees in the amount of
$250,000 were paid to Trust Management, Inc. during the three months ended June
30, 1996, resulting in net income of $1,353,269. Pro forma REVPAR for the 43
hotels leased by the Lessee at June 30, 1996 (after adjustment made to five
hotels where a substantial number of rooms temporarily were removed from
service for refurbishments) was $48.79 for the three months ended June 30,
1996. Pro forma occupancy and average daily rate ("ADR") for the three months
ended June 30, 1996 were 76.6% and $63.66, respectively, for the same period.
For the three months ended June 30, 1995, the Lessee had total revenue of
$13,730,682, consisting primarily of room revenue of $12,792,451. Hotel
expenses, other than Percentage Lease expense, as a percentage of total
revenue, were 50.6%. Percentage Lease expenses, as a percentage of total
revenue, were 43.0%. Pro forma REVPAR for the 43 hotels was $46.51 for the
three months ended June 30, 1995. Occupancy and ADR for the three months ended
June 30, 1995 were 78.4% and $59.29, respectively.
17
<PAGE> 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
EQUITY INNS, INC. AND TRUST LEASING, INC.
RESULTS OF OPERATIONS, Continued
Comparison of the Six Months Ended June 30, 1996 to the Six Months Ended June
30, 1995
For the six months ended June 30, 1996, the Lessee had total revenues of
$39,412,261, consisting primarily of room revenue of $36,645,466. Hotel
expenses, other than Percentage Lease expense and consulting fees, as a
percentage of total revenue, were 53.1%. Percentage Lease expense, as a
percentage of total revenue, was 42.0%. Consulting fees in the amount of
$500,000 were paid to Trust Management, Inc. during the six months ended June
30, 1996, resulting in net income of $1,429,714. Pro forma REVPAR for the 43
hotels leased by the Lessee at June 30, 1996 (after adjustment made to five
hotels where a substantial number of rooms temporarily were removed from
service for refurbishments) was $44.24 for the six months ended June 30, 1996.
Pro forma occupancy and ADR for the six months ended June 30, 1996 were 70.8%
and $62.49, respectively, for the same period.
For the six months ended June 30, 1995, the Lessee had total revenue of
$24,814,529, consisting primarily of room revenue of $22,986,796. Hotel
expenses, other than Percentage Lease expense, as a percentage of total
revenue, were 53.7%. Percentage Lease expense, as a percentage of total
revenue, was 41.9%. Pro forma REVPAR for the 43 hotels was $42.37 for the six
months ended June 30, 1995. Occupancy and ADR for the six months ended June
30, 1995 were 73.0% and $58.06, respectively.
The Lessee has elected Subchapter S status and as a result pays no federal
income tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements, including
distributions to shareholders, is its share of the Partnership's cash flow.
The Partnership's principal source of revenue is rent payments from the Lessee
pursuant to the Percentage Leases. The Lessee's obligations under the
Percentage Leases are unsecured, and the Company's liquidity, including its
ability to make distributions to shareholders, is dependent upon the Lessee's
ability to make rent payments under the Percentage Leases by generating
sufficient cash flow from the operations of the Hotels in excess of hotel
operating expenses.
Cash and cash equivalents as of June 30, 1996 were $27,023, compared to $132,630
at December 31, 1995. The reduction in cash is due to the Company's desire to
keep the line of credit balance at a minimum. Additionally, all of the June 30,
1996 receivable due from the Lessee was received in July 1996. Net cash
provided by operating activities for the six months ended June 30, 1996 was
$9,377,032.
18
<PAGE> 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
EQUITY INNS, INC. AND TRUST LEASING, INC.
LIQUIDITY AND CAPITAL RESOURCES, Continued
In December 1995, the Company increased the principal amount of its Line of
Credit from $69 million to $130 million. The increased facility bears interest
at 1.75% over 90-day LIBOR (7.33% at June 30, 1996). Under the Company's
charter, the Company may incur debt of up to 45% of its investment in hotel
properties, at its cost. At June 30, 1996, the Company had outstanding debt of
approximately $32 million, leaving approximately $98 million in the unused
portion of the Line of Credit. The Line of Credit is secured by a first
mortgage on 35 of the 43 hotels owned by the Partnership as of June 30, 1996,
and will be secured by hotels acquired in the future using proceeds from the
Line of Credit. Future liquidity will be derived from remaining borrowing
capacity under the Line of Credit, cash balances and cash provided from
operations.
During the six months ended June 30, 1996, the Company invested approximately
$12 million to fund capital improvements to its properties, including
replacement of carpets, drapes, renovation of common areas and improvement of
hotel exteriors. Most of these capital improvements were required by the
franchisor on hotels that the Company purchased as part of the franchisors'
product improvement plan ("PIP"). The Company took the PIP into consideration
when negotiating the prices for these properties, and, as a result, purchased
them at substantially reduced prices. In addition, the Company has committed
to fund approximately $4 million during the remainder of 1996 for capital
improvements. The Company intends to fund such improvements out of future cash
from operations, present cash balances and borrowings under the Line of Credit.
Under the Line of Credit, the Partnership has agreed to fund a minimum of 4%
of room revenues per quarter on a cumulative basis, for the ongoing replacement
or refurbishment of furniture, fixtures and equipment at the hotels.
Management believes that these amounts will be sufficient to fund required
expenditures for the term of the Percentage Leases for the capital improvements
anticipated. Recurring repairs and maintenance are performed by the Lessee.
The Company elected to be taxed as a REIT, commencing with its taxable year
ended December 31, 1994 and expects to continue to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As
a result, the Company is not subject to federal and state income taxes on net
income.
REITs are subject to a number of organizational and operational requirements.
For example, for federal income tax purposes, a REIT, and therefore the Company,
is required to pay distributions of at least 95 percent of its taxable income to
its shareholders. The Company intends to pay these distributions from operating
cash flows. The Company also intends to retain as a reserve such amounts as it
considers necessary for the acquisition, expansion and renovation of hotel
properties consistent with continuing to distribute to its shareholders amounts
sufficient to maintain the Company's qualification as a REIT.
19
<PAGE> 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
EQUITY INNS, INC. AND TRUST LEASING, INC.
LIQUIDITY AND CAPITAL RESOURCES, Continued
During the six months ended June 30, 1996, the Partnership declared
distributions in the aggregate of $11,123,064 to its partners, including the
Trust, or $.56 per Unit, and the Company declared distributions in the
aggregate of $10,778,341, or $.56 per share to its shareholders.
The Company expects to meet its short-term liquidity requirements generally
through net cash provided by operations, existing cash balances and, if
necessary, short-term borrowings under its Line of Credit. The Company
believes that its net cash provided by operations will be adequate to fund both
operating requirements and payment of dividends by the Company in accordance
with REIT requirements.
The Company expects to meet its long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowings, the issuance of additional equity securities of the
Company, or, in connection with acquisitions of hotel properties, issuance of
Units in the Partnership. Pursuant to the Partnership Agreement for the
Partnership, holders of Units have the right to require the Partnership to
redeem their Units. During the six months ended June 30, 1996, holders of
Units tendered 182,815 Units for redemption. Pursuant to the Partnership
Agreement, the Partnership has the option to redeem Units tendered for
redemption on a one-for-one basis for shares of Common Stock or for an
equivalent amount of cash. Alternatively, the Company may acquire directly
Units tendered to the Partnership for redemption. The Company, through the
Trust, acquired the 182,815 Units tendered in exchange for 182,185 shares of
Common Stock increasing the Company's ownership of the Partnership, through the
Trust, to approximately 97%. The Company anticipates that it will acquire,
through the Trust, any other Units tendered for redemption in the foreseeable
future in exchange for shares of Common Stock.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the Lessee's ability to
raise room rates in the face of inflation.
SEASONALITY
The Hotels' operations historically have been seasonal in nature, reflecting
higher occupancy rates during the second and third quarters. This seasonality
can be expected to cause fluctuations in the Partnership's quarterly revenue to
the extent that it receives Percentage Rent.
20
<PAGE> 21
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
EQUITY INNS, INC. AND TRUST LEASING, INC.
IMPLEMENTATION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation", which is effective for
fiscal years that begin after December 15, 1995. SFAS No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The Statement defines a fair value based method of
accounting for an employee stock option or similar equity instrument and is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. While the Statement encourages adoption of the fair value
based method, it also allows an entity to continue measuring compensation cost
as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." However, such entities will be required to
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting had been applied. Management believes that
the adoption of SFAS No. 123 will not have a material effect on the financial
statements of the Company.
21
<PAGE> 22
EQUITY INNS, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the Company's shareholders (the "1996 Annual Meeting")
was held on Tuesday, May 7, 1996, for the shareholders to take action on the
following proposals: (i) to elect James A. Thomas, III and William W. Deupree,
Jr. as Class II directors, each to serve until the 1999 annual meeting of
shareholders or until his successor is duly elected and qualified; (ii) to
consider and vote upon a proposal to amend Article 14 of the Company's Charter
to conform certain of the Company's existing share transfer restrictions with
share transfer restrictions approved recently by the Internal Revenue Service;
and (iii) to consider and vote upon a proposal to amend the Company's 1994
Stock Incentive Plan (the "1994 Plan") to increase the maximum aggregate number
of shares of Common Stock issuable under the 1994 Plan from 700,000 to
2,300,000 shares.
The results of the shareholders' votes on each of the above proposals presented
at the 1996 Annual Meeting were summarized in the Company's Current Report on
Form 8-K dated May 7, 1996 and filed with the SEC on May 28, 1996.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -- 27. Financial Data Schedule (filed only electronically
with the SEC)
(b) Reports on Form 8-K -- The following Current Reports on Form 8-K
were filed during the last quarter of the period covered by this
Quarterly Report on Form 10-Q.
(i) Current Report on Form 8-K dated May 7, 1996 and filed with
the SEC on May 28, 1996, reporting the results of the Company's
annual meeting of shareholders held on May 7, 1996;
(ii) Current Report on Form 8-K dated May 31, 1996 and filed with
the SEC on June 13, 1996, reporting the closing of a Stock Purchase
Agreement and a Development Agreement with Promus Hotels, Inc. and
the Partnership's acquisition of a 125-room Hampton Inn hotel in
Detroit (Northville), Michigan and a 132-suite Homewood Suites
hotel in Hartford (Windsor Locks), Connecticut (no financial
statements were required to be filed with this report); and
(iii) Current Report on Form 8-K dated June 25, 1996 and filed
with the SEC on August 5, 1996, reporting the Partnership's
acquisition of a 80-room Residence Inn hotel in Madison, Wisconsin,
a 160-room Holiday Inn hotel in Winston-Salem, North Carolina, a
126-room Hampton Inn hotel in Scottsdale, Arizona, and a 167-room
Hampton Inn hotel in Chattanooga, Tennessee (financial statements
to be filed by amendment on Form 8-K-A).
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.
Equity Inns, Inc.
August 9, 1996 By: /s/ Howard A. Silver
-------------- ------------------------------------------------
Date Howard A. Silver
Vice President of Finance, Secretary, Treasurer,
Chief Financial Officer (Principal Financial and
Accounting Officer)
23
<PAGE> 24
EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule (filed only electronically with the SEC)
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EQUITY INNS, INC. FOR THE SIX MONTHS ENDED JUNE 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 27,023
<SECURITIES> 0
<RECEIVABLES> 5,015,720
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 263,602,097
<DEPRECIATION> 0
<TOTAL-ASSETS> 272,940,636
<CURRENT-LIABILITIES> 0
<BONDS> 31,877,177
0
0
<COMMON> 234,098
<OTHER-SE> 224,145,348
<TOTAL-LIABILITY-AND-EQUITY> 272,940,636
<SALES> 0
<TOTAL-REVENUES> 16,636,067
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,511,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,095,536
<INCOME-PRETAX> 6,124,402
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,931,960
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
