<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 MARCH 31, 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 MAY
6, 1996 WAS 23,062,046.
1 OF 22
<PAGE> 2
EQUITY INNS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
Consolidated Balance Sheets - March 31, 1996 (unaudited)
and December 31, 1995 3
Consolidated Statements of Operations (unaudited) - For the
three months ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows (unaudited) - For the
three months ended March 31, 1996 and 1995 5
Notes to consolidated financial statements 6
TRUST LEASING, INC. (formerly McNeill Hotel Co., Inc.)
Balance Sheets - March 31, 1996 (unaudited) and December 31, 1995 9
Statements of Operations (unaudited) - For the three months ended
March 31, 1996 and 1995 10
Statements of Cash Flows (unaudited) - For the three months ended
March 31, 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 6. Exhibits and Reports on Form 8-K 20
</TABLE>
2
<PAGE> 3
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONSOLIDATED BALANCE SHEETS
___________________________
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $232,736,659 $218,428,938
Cash and cash equivalents 22,543 132,630
Due from Lessee 2,598,751 2,299,330
Deferred expenses, net 4,260,627 4,189,436
Prepaid and other assets 207,153 16,537
------------ ------------
Total assets $239,825,733 $225,066,871
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 91,687,589 $ 74,938,763
Accounts payable and accrued expenses 2,911,296 2,515,449
Distributions payable 4,365,257 4,046,952
Minority interest in Partnership 4,578,002 6,072,829
------------ ------------
Total liabilities 103,542,144 87,573,993
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $.01 par value, 50,000,000 shares
authorized, 15,084,202 and 14,907,231 shares
issued and outstanding at March 31, 1996 and
December 31, 1995, respectively 150,842 149,072
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding
Additional paid-in capital 145,268,728 143,576,024
Unearned directors' compensation (85,344) (93,103)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (7,786,750) (4,875,228)
------------ ------------
Total shareholders' equity 136,283,589 137,492,878
------------ ------------
Total liabilities and shareholders' equity $239,825,733 $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
March 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenue
Percentage lease revenues $6,947,838 $4,502,598
Other income 36,350 12,845
---------- ----------
Total revenue 6,984,188 4,515,443
---------- ----------
Expenses
Real estate and personal property taxes 771,071 514,519
Depreciation and amortization 2,708,243 1,506,613
Interest 1,558,974 1,150,958
General and administrative 586,258 372,485
---------- ----------
Total expenses 5,624,546 3,544,575
---------- ----------
Income before minority interest 1,359,642 970,868
Minority interest 47,587 75,055
---------- ----------
Net income applicable to common shareholders $1,312,055 $ 895,813
========== ==========
Net income per common share $ .09 $ .09
========== ==========
Weighted average number of common shares
outstanding 15,045,000 9,615,000
========== ==========
</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>
Three Months Ended
March 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,312,055 $ 895,813
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,327,112 1,431,302
Amortization of loan costs 373,374 67,553
Amortization of unearned directors' compensation 7,758 7,758
Minority interest 47,587 75,055
Changes in assets and liabilities:
Due from Lessee (299,421) 772,675
Deferred expenses (49,308) 70,592
Prepaid and other assets (190,616) 64,215
Accounts payable and accrued expenses 689,587 (322,691)
------------ -----------
Net cash flow provided by operating activities 4,218,128 3,062,272
------------ -----------
Cash flows from investing activities:
Investment in hotel properties (16,613,142) (9,620,770)
Cash paid for franchise applications (93,800)
------------ -----------
Net cash flow used by investing activities (16,706,942) (9,620,770)
------------ -----------
Cash flows from financing activities:
Cash paid for offering expenses (138,075)
Distributions paid (4,046,952) (2,292,784)
Borrowings under revolving credit facility 19,300,000 9,259,392
Payments on revolving credit facility (2,550,000)
Cash paid for loan costs (185,072)
Payments on capital lease obligations (1,174) (1,672)
------------ -----------
Net cash flow provided by financing activities 12,378,727 6,964,936
------------ -----------
Net increase (decrease) in cash and cash equivalents (110,087) 406,438
Cash and cash equivalents at beginning of period 132,630 1,086,384
------------ -----------
Cash and cash equivalents at end of period $ 22,543 $ 1,492,822
============ ===========
Supplemental disclosure of cash flow information-interest paid $ 1,586,836 $ 1,059,419
============ ===========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
At March 31, 1996, $4,365,257 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on April
26, 1996. At December 30, 1995, $4,046,952 in distributions to shareholders
and limited partners had been declared but not paid.
On January 24, 1996, 151,971 limited partnership units with a book value of
approximately $1.4 million 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.
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. On March 1, 1994, the Company completed an initial public
offering (the "IPO") of 5,117,500 shares of common stock, $.01 par value
(the "Common Stock") (including the underwriters' over-allotment option)
and a private placement (the "Private Placement") of 72,500 shares. There
were no operations from November 24, 1993 to February 28, 1994.
Upon completion of the IPO, the Company contributed substantially all of
the net proceeds of the IPO and the Private Placement to Equity Inns
Partnership, L.P. (the "Partnership") in exchange for an approximately
86.5% sole general partnership interest in the Partnership. The
Partnership used the proceeds to acquire eight Hampton Inn hotels (the
"Initial Hotels") from various partnerships (the "Selling Partnerships")
free of debt, to finance certain capital improvements to the Initial
Hotels, including improvements required by franchisors, to pay franchise
fees and for general working capital. Rather than receiving cash for their
interest in the Selling Partnerships, upon the sale of the Initial Hotels,
certain partners in the Selling Partnerships, including affiliates of the
Company, elected to receive units of limited partnership interests
("Units") in the Partnership aggregating an approximately 13.5% equity
interest in the Partnership.
Effective January 3, 1995, the Company transferred its then 92.3%
partnership 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 and prior to April 16, 1996, the Company has completed two
additional public offerings (the "Follow-On Offerings") for a total of
9,535,000 shares of Common Stock. The net proceeds of the Follow-On
Offerings were contributed to the Partnership which used the proceeds to
repay acquisition related borrowings against the Company's line of credit
and to fund additional acquisitions. The Partnership has also issued
limited partnership units to third parties in exchange for interests in
hotel properties. At March 31, 1996, the Trust owned approximately 96.8%
of the Partnership.
As of March 31, 1996, the Partnership owned 39 hotel properties, with a
total of 4,678 rooms in 22 states. Trust Leasing, Inc. (the "Lessee",
which formerly operated as McNeill Hotel Co., Inc.) operates and 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 rend 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.
6
<PAGE> 7
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
____________________
1. Organization and Basis of Presentation, continued
These unaudited consolidated financial statements include the accounts of
the Company, the Trust and its majority owned partnership, Equity Inns
Partnership, L.P. (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.
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 February 22, 1996, the Company declared a $0.28 per share distribution
on each share of Common Stock and each Unit outstanding on March 29, 1996.
The distribution was paid on April 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 issued in conjunction with the Partnership's acquisition of the
Initial Hotels as described in Note 1. In January 1996, 151,971 shares of
Common Stock 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. This activity increased the Company's equity interest
in the Partnership (through the Trust) to approximately 96.8%
7
<PAGE> 8
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
____________________
5. Subsequent Events
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 estimated
offering expenses, the Company received approximately $86,000,000. In
addition, Trust Leasing, Inc. purchased, in a private placement, 250,000
Units at $11.50 per unit on April 16, 1996, resulting in gross proceeds of
$2,875,000 to the Partnership. The Company utilized the proceeds from the
Fourth Offering and the Lessee Private Placement to repay approximately
$86,500,000 of the Company's line of credit.
Promus Hotels, Inc. ("Promus") has agreed to purchase up to $15 million of
Common Stock over the next three years, including $4 million of Common
Stock, which will be purchased at the offering price of $11.50 per share.
This transaction is expected to be completed in May 1996, in conjunction
with the Company's purchase of two hotel properties (a Hampton Inn in
Detroit [Northville], Michigan and a Homewood Suites in Hartford [Windsor
Locks], Connecticut) from Promus as previously announced.
The Company, after completing its due diligence efforts, has terminated its
contract to purchase the Hampton Inn in Nashville (Murfreesboro),
Tennessee.
8
<PAGE> 9
TRUST LEASING, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ----------
<S> <C> <C>
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $4,592,543 $4,176,309
Accounts receivable:
Trade 1,828,239 1,228,260
Affiliates 1,852,036 1,779,223
Inventories 180,826 168,315
Prepaid expenses 363,471 517,658
----------- ----------
Total current assets 8,817,115 7,869,765
Furniture and equipment 25,016 23,659
Investment in Equity Inns, Inc. 268,750 268,750
----------- ----------
Total assets $9,110,881 $8,162,174
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,534,975 $1,400,264
Accrued expenses - affiliate 2,597,310 2,279,577
Accrued expenses - other 2,622,259 2,202,441
----------- ----------
Total liabilities 6,754,544 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
Retained earnings 2,356,237 2,279,792
----------- ----------
Total shareholders' equity 2,356,337 2,279,892
----------- ----------
Total liabilities and shareholders' equity $9,110,881 $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
March 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenue
Room revenues $15,897,571 $10,194,345
Other revenue 1,199,752 889,502
----------- -----------
Total revenue 17,097,323 11,083,847
----------- -----------
Expenses
Hotel operating costs and expenses 4,393,140 2,872,578
General and administrative 1,533,516 1,063,821
Franchise costs 1,257,218 798,345
Advertising and promotion 530,941 333,058
Utilities 1,114,402 644,940
Repairs and maintenance 748,940 467,295
Insurance expense 244,883 187,031
Consulting fees (Note 2) 250,000
Percentage lease expense 6,947,838 4,502,598
----------- -----------
Total expenses 17,020,878 10,869,666
----------- -----------
Net income $ 76,445 $ 214,181
=========== ===========
</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>
Three Months Ended
March 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 76,445 $ 214,181
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 943
Changes in assets and liabilities:
Accounts and note receivable (599,979) (601,173)
Inventories (12,511) (3,198)
Prepaid expenses 154,187 (6,430)
Accounts payable 134,711 (402,664)
Accrued expenses 737,551 (171,884)
---------- ----------
Net cash provided by (used in) operating activities 491,347 (971,168)
---------- ----------
Cash flows from investing activities:
Advance to affiliates (72,813)
Investment in furniture and equipment (2,300)
----------
Net cash used in investing activities (75,113)
----------
Net increase in cash and cash equivalents 416,234
Cash and cash equivalents at beginning of period 4,176,309 2,411,501
---------- ----------
Cash and cash equivalents at end of period $4,592,543 $1,440,333
========== ==========
</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 Mr.
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 March 31, 1996, approximately 96.8% 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 March 31, 1996, the Lessee leased
thirty-nine hotels from the Partnership. Twenty-nine of the hotels are
operated by the Lessee as Hampton Inn hotels under franchise agreements
with Promus Hotels, Inc. Three 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. Four 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-three of the hotels are limited service hotels, three of the hotels
are full service hotels, and three 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 entered into 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 total fees of $1,000,000, payable $250,000 per quarter.
3. Subsequent Event
On April 16, 1996, Trust Leasing, Inc. purchased 250,000 Units of limited
partnership interest 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.
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 March 31, 1996:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
----------------------- ---------------- ------------
<S> <C> <C>
Limited Service Hotels:
Hampton Inn 29 3,522
Comfort Inn 3 362
Holiday Inn Express 1 101
--- -----
33 3,985
Extended Stay Hotels:
Residence Inn 3 296
Full Service Hotels:
Holiday Inn 3 397
--- -----
Total 39 4,678
=== =====
</TABLE>
At March 31, 1996, the Partnership owned thirty-nine hotels (the "Hotels") in
22 states and the Trust owned a 96.7% interest in the Partnership. The Lessee
leases and operates the Hotels pursuant to the Percentage Leases which provide
for rent payments 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.
In order for the Company to qualify as a REIT, neither the Company, 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 months ended March 31, 1996 and 1995.
THE COMPANY
For the three months ended March 31, 1996, the Company had total revenues of
$6,984,188, consisting primarily of Percentage Lease revenue of $6,947,838.
Interest expense of $1,558,974 was due to an average outstanding balance under
the line of credit of approximately $82.5 million which was used for the
acquisition of hotel properties. Net income for the period was $1,312,055 or
$.09 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 $3,665,063 or $.24 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 March 31, 1995, the Company had total revenues of
$4,515,443, consisting primarily of Percentage Lease revenue of $4,502,598.
Interest expense of $1,150,958 was due to an average outstanding balance under
the line of credit of approximately $53 million which was used for the
acquisition of hotel properties. Net income for the period was $895,813 or
$.09 per share. Funds from Operations (under NAREIT's new definition) were
$2,376,607 or $.23 per share.
The increase in Percentage Lease revenue for the three months ended March 31,
1996 over the comparable period last year is the result of (i) the number of
hotels increasing from 25 at March 31, 1995 to 39 at March 31, 1996 and (ii) to
a lesser extent, increased Percentage Lease revenue for the Hotels owned
throughout both periods. In addition, for the 39 hotels owned at March 31,
1996 (after adjustment made to six 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 $38.89 for the three
months ended March 31, 1996, compared to $37.85 for the comparable period in
1995, representing an increase of 2.6%. 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
increased in the 1996 period due to the increased utilization of the line of
credit to fund acquisitions. 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
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
March 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Income before minority interest $1,359,642 $ 970,868
Add:
Depreciation of buildings, furniture
and equipment 2,305,421 1,405,739
---------- ----------
Funds From Operations $3,665,063 $2,376,607
========== ==========
Weighted average number of outstanding shares of
Common Stock and Units of the Partnership 15,589,377 10,421,475
========== ==========
Funds From Operations per Share and Unit $ .24 $ .23
========== ==========
</TABLE>
THE LESSEE
For the three months ended March 31, 1996, the Lessee had total revenues of
$17,097,323, consisting primarily of room revenue of $15,897,571. Hotel
expenses, other than Percentage Lease expense and consulting fees, as a
percentage of total revenue, were 57.5%. Percentage Lease expenses, as a
percentage of total revenue, were 40.6%. Consulting fees in the amount of
$250,000 were paid to Trust Management, Inc. during the three months ended
March 31, 1996, resulting in net income of $76,445. Pro forma REVPAR for the
39 hotels leased by the Lessee at March 31, 1996 (after adjustment made to six
hotels where a substantial number of rooms temporarily were removed from
service for refurbishments) was $38.89 for the three months ended March 31,
1996. Occupancy and average daily rate ("ADR") for the three months ended
March 31, 1996 were 64.3% and $60.48, respectively, for the same period.
For the three months ended March 31, 1995, the Lessee had total revenue of
$11,083,847, consisting primarily of room revenue of $10,194,345. Hotel
expenses, other than Percentage Lease expense, as a percentage of total
revenue, were 57.4%. Percentage Lease expenses, as a percentage of total
revenue, were 40.6%. Pro forma REVPAR for the 39 hotels was $37.85 for the
three months ended March 31, 1995. Occupancy and ADR for the three months
ended March 31, 1995 were 67.8% and $55.83, respectively.
The Lessee has elected Subchapter S status and as a result pays no federal
income tax.
16
<PAGE> 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
EQUITY INNS, INC. AND TRUST LEASING, INC.
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 March 31, 1996 were $22,543, 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 March 31, 1996 receivable due from the Lessee was received in April 1996.
Net cash provided by operating activities for the three months ended March 31,
1996 was $4,218,128.
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 (7.22% at March 31, 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 March 31, 1996, prior to the receipt of the
proceeds of the Fourth Offering, the Company had outstanding debt of
approximately $92 million, leaving approximately $38 million in the unused
portion of the Line of Credit.
The Line of Credit is secured by a first mortgage on all of the Partnership's
hotels owned as of December 31, 1995, 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.
On April 16, 1996, the Company completed 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
$91,390,000. Net of underwriters' discount and estimated offering expenses,
the Company received approximately $86,000,000 which was used to repay
outstanding debt under the Line of Credit. After completion of the Fourth
Offering, including the over-allotment, the Company will have the capacity to
borrow up to approximately $190 million, assuming all additional borrowings are
used to fund investments in hotel properties.
17
<PAGE> 18
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 quarter ended March 31, 1996, the Company spent $1.8 million to fund
capital improvements to its properties, including replacement of carpets,
drapes, renovation of common areas and improvement of hotel exteriors. In
addition, the Company has committed to fund approximately $4.8 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 with the capital improvements anticipated
and recurring repairs and maintenance 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.
During the three months ended March 31, 1996, the Partnership declared
distributions in the aggregate of $4,365,257 to its partners, including the
Trust, or $.28 per Unit, and the Company declared distributions in the
aggregate of $4,223,577, or $.28 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.
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
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. In January 1996, holders of Units tendered 151,971 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 151,971 Units tendered in January
1996 in exchange for 151,971 shares of Common Stock increasing the Company's
ownership of the Partnership, through the Trust, from approximately 95.8
percent to approximately 96.8 percent. 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.
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.
19
<PAGE> 20
EQUITY INNS, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K -- The following Current Reports on Form 8-K
were filed during the period covered by this Quarterly Report on Form
10-Q.
(i) Current Report on Form 8-K dated December 27, 1995 and filed
on January 10, 1996, reporting the Partnership's acquisition of a
125-room Hampton Inn hotel in Garland, Texas and a 121-room Hampton
Inn hotel in Austin, Texas (no financial statements available);
(ii) Current Report on Form 8-K-A dated December 27, 1995 and
filed on February 14, 1996, reporting the Partnership's acquisition
of a 125-room Hampton Inn hotel in Garland, Texas and a 121-room
Hampton Inn hotel in Austin, Texas (collectively referred to herein
as the "MONY Hotels"), with the following financial statements:
Combined Balance Sheets of the Audited Acquisition Hotels as of
December 31, 1994 (audited) and September 30, 1995 (unaudited),
and Combined Statements of Operations, Changes in Equity and
Cash Flows of the Audited Acquisition Hotels for the year ended
December 31, 1994 (audited) and the nine month periods ended
September 30, 1995 and 1994 (unaudited).
Historical Combined Statements of Gross Revenues and Direct
Operating Expenses of the MONY Hotels for the year ended
December 31, 1994 (audited) and the nine month periods ended
September 30, 1995 and 1994 (unaudited);
Equity Inns, Inc. Pro Forma Consolidated Statements of
Operations for the year ended December 31, 1994 (unaudited) and
the nine month period ended September 30, 1995 (unaudited) and
Pro Forma Consolidated Balance Sheet as of September 30, 1995
(unaudited); and
Trust Leasing, Inc. (Lessee) Pro Forma Statements of Operations
for the year ended December 31, 1994 (unaudited) and the nine
month period ended September 30, 1995 (unaudited).
20
<PAGE> 21
EQUITY INNS, INC.
PART II - OTHER INFORMATION, CONTINUED
(iii) Current Report on From 8-K dated March 14, 1996 and filed on
March 20, 1996, reporting the signing of a memorandum of
understanding between Equity Inns, Inc., Trust Leasing, Inc. and
Promus Hotels, Inc.; and
(iv) Current Report on Form 8-K dated March 21, 1996 and filed on
March 22, 1996, reporting (a) the execution of an agreement by Trust
Leasing, Inc. to purchase 250,000 units of limited partnership
interest in Equity Inns Partnership, L.P. and (b) the proposed
economic lease terms for four hotels to be acquired by Equity Inns
Partnership, L.P.
No financial statements were required to be filed with the Current Reports on
Form 8-K dated March 14, 1996 and March 21, 1996.
21
<PAGE> 22
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.
May 6, 1996 By: /s/Howard A. Silver
- - ------------------- ------------------------------------------------
Date Howard A. Silver
Vice President of Finance, Secretary, Treasurer,
Chief Financial Officer (Principal Financial and
Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EQUITY INNS, INC. FOR THE THREE MONTHS ENDED MARCH 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,543
<SECURITIES> 0
<RECEIVABLES> 2,598,751
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 247,921,080
<DEPRECIATION> 15,184,421
<TOTAL-ASSETS> 239,825,733
<CURRENT-LIABILITIES> 0
<BONDS> 91,687,589
0
0
<COMMON> 150,842
<OTHER-SE> 136,132,747
<TOTAL-LIABILITY-AND-EQUITY> 239,825,733
<SALES> 0
<TOTAL-REVENUES> 6,948,188
<CGS> 0
<TOTAL-COSTS> 3,479,314
<OTHER-EXPENSES> 586,258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,558,774
<INCOME-PRETAX> 1,312,055
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