<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For The Quarter Ended June 30, 1997 Commission File Number 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 Identification No.)
Incorporation or Organization
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, Former Address and Former Fiscal Year,
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 6, 1997 was 31,825,578.
1 of 20
<PAGE>
EQUITY INNS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
Condensed Consolidated Balance Sheets - June 30, 1997
(unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations (unaudited) -
For the three and six months ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
For the six months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $538,766,672 $309,201,932
Cash and cash equivalents 250,947 128,974
Due from Lessee 8,052,131 3,376,781
Deferred expenses, net 8,383,523 3,779,500
Deposits and other assets 1,880,429 1,393,250
------------ ------------
Total assets $557,333,702 $317,880,437
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $207,809,352 $ 77,399,734
Accounts payable and accrued expenses 8,114,100 2,938,192
Distributions payable 9,266,670 6,864,126
Minority interest in Partnership 12,742,424 7,727,726
------------ ------------
Total liabilities 237,932,546 94,929,778
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $.01 par value, 50,000,000
shares authorized, 31,825,578 and 23,693,278
shares issued and outstanding, respectively 318,256 236,933
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding
Additional paid-in capital 341,702,548 238,747,049
Unearned directors' and officers' compensation (319,625) (365,767)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (21,036,136) (14,403,669)
------------ ------------
Total shareholders' equity 319,401,156 222,950,659
------------ ------------
Total liabilities and shareholders' equity $557,333,702 $317,880,437
============ ============
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
3
<PAGE>
EQUITY INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
----------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1997 1996 1997 1996
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Percentage lease revenue $15,713,892 $9,609,142 $27,491,755 $16,556,980
Interest income 324,632 42,737 341,943 79,087
----------- ---------- ----------- -----------
Total revenues 16,038,524 9,651,879 27,833,698 16,636,067
----------- ---------- ----------- -----------
Expenses
Real estate and personal
property taxes 1,647,708 822,346 2,957,550 1,593,417
Depreciation and amortization 4,493,384 2,569,276 8,339,504 4,896,388
Amortization of loan costs 238,049 415,198 427,018 788,571
Interest 2,496,476 536,562 4,641,800 2,095,536
General and administrative 1,208,726 543,737 2,227,861 1,137,753
----------- ---------- ---------- -----------
Total expenses 10,084,343 4,887,119 18,593,733 10,511,665
----------- ---------- ----------- -----------
Income before minority
interest 5,954,181 4,764,760 9,239,965 6,124,402
Minority interest 207,964 144,855 327,151 192,442
----------- ---------- ----------- -----------
Net income applicable to
common shareholders $ 5,746,217 $4,619,905 $ 8,912,814 $ 5,931,960
=========== ========== =========== ===========
Net income per common share $ .22 $ .21 $ .35 $ .32
=========== ========== =========== ===========
Weighted average number of
common shares outstanding 26,603,000 21,688,000 25,156,000 18,366,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
4
<PAGE>
EQUITY INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 8,912,814 $5,931,960
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,339,503 4,896,388
Amortization of loan costs 427,018 788,571
Amortization of unearned directors' and
officers' compensation 46,142 15,517
Minority interest 327,151 192,442
Changes in assets and liabilities:
Due from Lessee (4,675,350) (2,716,390)
Deferred expenses (6,466) (20,546)
Deposits and other assets (487,179) (475,837)
Accounts payable and accrued expenses 5,175,908 764,927
------------- ----------
Net cash flow provided by operating
activities 18,059,541 9,377,032
------------- ----------
Cash flows from investing activities:
Investment in hotel properties (222,482,927) (37,910,000)
Improvements and additions to hotel properties (9,242,682) (12,081,151)
Cash paid for franchise applications (2,018,650) ( 382,850)
------------- -----------
Net cash flow used by investing
activities (233,744,259) (50,374,001)
------------- -----------
Cash flows from financing activities:
Gross proceeds from public offering 108,769,513 91,390,500
Payment of offering expenses (6,474,036) (5,652,952)
Proceeds from issuance of Common Stock 4,000,000
Proceeds from private placement of Partnership
units 2,875,000
Distributions paid (13,765,565) (8,412,209)
Borrowings under revolving credit facility 194,095,395 49,350,000
Payments on revolving credit facility (151,010,395) (92,409,220)
Borrowings under CMBS credit facility 88,000,000
Payments under CMBS credit facility (674,968)
Cash paid for loan costs (3,132,839) (247,391)
Payments on capital lease obligations (414) (2,366)
------------- ------------
Net cash provided by financing
activities 215,806,691 40,891,362
------------- ------------
Net increase (decrease) in cash and cash
equivalents 121,973 (105,607)
Cash and cash equivalents at beginning of period 128,974 132,630
------------- -----------
Cash and cash equivalents at end of period $ 250,947 $ 27,023
============= ===========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
At June 30, 1997, $9,266,670 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on August
1, 1997. At December 31, 1996, $6,864,126 in distributions to shareholders and
limited partners had been declared but not paid.
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 31, 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.
During February, March and June 1997, 448,215 limited partnership units valued
at $6,051,720 were issued as part of the total acquisition cost of certain hotel
properties. Of this amount, $5,310,375 and $741,345 were allocated to minority
interest and additional paid-in capital, respectively, after giving effect to
the Company's Fifth Offering.
The accompanying notes are an integral
part of these condensed consolidated financial statements
5
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED 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 self-administered 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, 1997
owned an approximate 96.2% interest in the Partnership. The Company was
formed to acquire equity interests in hotel properties and at June 30,
1997 owned, through the Partnership, 85 hotel properties with a total of
10,223 rooms in 31 states (the "Hotels").
The Company leases forty-eight of the Hotels to Crossroads/Memphis
Company, L.L.C. and thirty-seven of the Hotels to Crossroads/Memphis
Future Company, L.L.C. (referred to collectively as the "Lessee"),
pursuant to percentage lease agreements (the "Percentage Leases"). The
sole general partner of the Lessee is a wholly-owned subsidiary of
Interstate Hotels Company ("Interstate"), a publicly traded hotel
management company. The Percentage Leases 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. All payments due under the Percentage Leases
are guaranteed by Interstate.
On May 29, 1997, the Company completed a public offering (the "Fifth
Offering") of 8,000,000 shares of common stock and an additional 132,300
shares were issued on June 25, 1997 upon exercise of a portion of the
underwriters' over-allotment option. The offering price was $13.375 per
share resulting in gross proceeds of approximately $108,770,000
(including the over-allotment shares). Net of underwriters' discount and
offering expenses, the Company received approximately $102,295,000.
During the six months ended June 30, 1997, the Company acquired the
following hotel properties:
<TABLE>
<CAPTION>
Date of # of Cost (in
Acquisition Property Rooms millions)
----------------- --------------------------------- ----- ---------
<S> <C> <C> <C>
January 10, 1997 Residence Inn-Colorado Springs,
Colorado 96 $ 9.7
January 10, 1997 Residence Inn-Oklahoma City,
Oklahoma 135 11.2
January 10, 1997 Residence Inn-Tucson, Arizona 128 8.6
February 14, 1997 Hampton Inn-Savannah, Georgia 129 5.0
March 5, 1997 Hampton Inn-Norfolk, Virginia 119 5.6
March 11, 1997 Hampton Inn-Pickwick, Tennessee 50 2.1
March 11, 1997 Hampton Inn-Southaven (Memphis),
Mississippi 86 4.3
April 23, 1997 Hampton Inn-Overland Park, Kansas 134 7.1
</TABLE>
6
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
1. Organization and Basis of Presentation, Continued
<TABLE>
<CAPTION>
Date of # of Cost (in
Acquisition Property Rooms millions)
------------- --------------------------------- ----- ---------
<S> <C> <C> <C>
June 24, 1997 Hampton Inn-Addison, Texas 160 10.1
June 24, 1997 Hampton Inn-Amarillo, Texas 116 3.7
June 24, 1997 Hampton Inn-Albuquerque, New Mexico 125 6.0
June 24, 1997 Hampton Inn-Atlanta (Northlake),
Georgia 130 7.5
June 24, 1997 Hampton Inn-Atlanta (Roswell),
Georgia 129 5.0
June 24, 1997 Hampton Inn-Birmingham (Vestavia),
Alabama 123 6.8
June 24, 1997 Hampton Inn-Chapel Hill, North
Carolina 122 9.1
June 24, 1997 Hampton Inn-Charleston, South
Carolina 125 6.4
June 24, 1997 Hampton Inn-Colorado Springs,
Colorado 128 5.1
June 24, 1997 Hampton Inn-Columbia, South
Carolina 121 7.8
June 24, 1997 Hampton Inn-Denver, Colorado 132 4.5
June 24, 1997 Hampton Inn-Detroit (Madison
Heights), Michigan 124 5.6
June 24, 1997 Hampton Inn-Dublin, Ohio 123 5.0
June 24, 1997 Hampton Inn-Eden Prairie, Minnesota 122 3.9
June 24, 1997 Hampton Inn-Greensboro, North
Carolina 121 7.1
June 24, 1997 Hampton Inn-Greenville, South
Carolina 123 5.1
June 24, 1997 Hampton Inn-Kansas City, Missouri 120 5.3
June 24, 1997 Hampton Inn-Little Rock, Arkansas 123 7.0
June 24, 1997 Hampton Inn-Memphis (Poplar),
Tennessee 126 9.2
June 24, 1997 Hampton Inn-Memphis (Sycamore),
Tennessee 117 3.0
June 24, 1997 Hampton Inn-Nashville (Brentwood),
Tennessee 114 7.2
June 24, 1997 Hampton Inn-Nashville (Briley),
Tennessee 120 7.1
June 24, 1997 Hampton Inn-Dallas (Richardson),
Texas 130 7.6
June 24, 1997 Hampton Inn-San Antonio, Texas 123 4.4
June 24, 1997 Hampton Inn-Spartanburg, South
Carolina 112 2.6
June 24, 1997 Hampton Inn-St. Louis, Missouri 122 4.8
June 24, 1997 Hampton Inn-Syracuse, New York 117 1.9
June 26, 1997 Hampton Inn-Destin, Florida 104 6.7
June 26, 1997 Homewood Suites-Germantown
(Memphis), Tennessee 92 7.7
----- ------
4,421 $226.8
===== ======
</TABLE>
These unaudited condensed consolidated 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 Company included in the
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
1. Organization and Basis of Presentation, Continued
Company's 1996 Annual Report on Form 10-K. The following notes to the
condensed 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 condensed 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. Debt
Debt is comprised of the following at June 30, 1997:
<TABLE>
<S> <C>
Commercial Mortgage Bonds $ 87,325,032
Two-Year Revolving Line of Credit 49,410,000
One-Year Term Loan 71,000,000
Other 74,320
------------
$207,809,352
============
</TABLE>
The Line of Credit bears interest at 1.75% over the 30, 60, or 90-day
LIBOR (7.5% at June 30, 1997). The Line of Credit is collateralized by a
first mortgage on twenty-seven of the eighty-five hotels owned by the
Partnership as of June 30, 1997. The Line of Credit extends through
November 1998 with an additional one-year renewal option.
On February 10, 1997, the Company issued $88 million of rated Commercial
Mortgage Bonds ("Bonds"), as follows:
<TABLE>
<CAPTION>
Initial Principal Interest Stated
Class Amount Rate Maturity Rating
----- ----------------- -------- ----------------- ------
<S> <C> <C> <C> <C>
A $27.4 million 6.825% November 20, 2006 AA
B $50.6 million 7.370% December 20, 2015 A
C $10.0 million 7.580% February 20, 2017 BBB
</TABLE>
The combined interest rate for all three issues of Bonds is fixed at
7.22%. Principal payments are to be applied to each class of Bonds in
order of their respective maturities with no principal payment on any
Bond until all Bonds in a bond class with an earlier stated maturity have
been paid in full. The Company expects to repay these bonds in full
within 10 years. In connection with this transaction, twenty-three of the
Company's hotel properties with a carrying value of approximately $136.5
million collateralize the Bonds.
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. Debt, Continued
On June 24, 1997, the Company obtained a one-year term loan in the amount
of $75 million to fund a portion of the purchase price of twenty-seven of
the hotels acquired from a common seller. Only $71 million of the
proceeds were drawn by the Company, leaving $4 million available under
the terms of the loan. The loan will bear interest at a variable rate
equal to the 30-day, 60-day or 90-day LIBOR rate plus 1.625% for the
first six months of the loan and the 30-day, 60-day or 90-day LIBOR rate
plus 1.875% for the second six months of the loan. The loan is
collateralized by first mortgages on twenty-seven of the Company's
Hotels.
3. Distributions
On June 12, 1997, the Company declared a $0.28 per share distribution on
each share of Common Stock and each Unit of limited partnership interest
in the Partnership ("Unit") outstanding on June 30, 1997. The
distributions were paid on August 1, 1997.
4. Shareholders' Equity
In connection with the purchase of the Hampton Inn, Savannah, Georgia
hotel on February 14, 1997, the purchase of the Hampton Inn, Southaven,
Mississippi hotel on March 11, 1997, and the purchase of the Hampton Inn,
Destin, Florida and the Homewood Suites, Germantown, Tennessee on June
26, 1997, the Partnership issued 26,315, 106,944, 162,154 and 152,802
units, respectively, valued at $6,051,720 in the aggregate.
5. Subsequent Events
On July 10, 1997, the Company acquired a 65-room Homewood Suites hotel in
Augusta, Georgia for $5.0 million. On July 31, 1997, the Company acquired
a 131-room Hampton Inn hotel in Birmingham, Alabama for $8.7 million.
6. Recently Issued Statement of Financial Accounting Standards
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", was issued in February 1997 and established new standards for
compiling and presenting earnings per share. The Company is required to
adopt this statement beginning with the annual financial statements for
the year ended December 31, 1997; however, the impact is not expected to
be material.
9
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
7. Pro Forma Information (Unaudited)
Due to the impact of the acquisitions in 1997, 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,
1997 and 1996, are presented as if the acquisition of all 85 hotels owned
at June 30, 1997 and the consummation of the IPO and the four Follow-On
Offerings had occurred on January 1, 1996, 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,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Percentage lease revenues $40,915,965 $38,165,718
Interest income 341,943 79,087
----------- -----------
Total revenues 41,257,908 38,244,805
Expenses:
Real estate and personal property taxes 4,301,782 3,657,670
Depreciation and amortization 11,485,128 10,502,557
Amortization of loan costs 597,789 1,072,314
Interest 8,108,850 6,797,439
General and administrative 2,387,691 1,703,833
----------- -----------
Total expenses 26,881,240 23,733,813
----------- -----------
Income before minority interest 14,376,668 14,510,992
Minority interest 552,064 557,222
----------- -----------
Net applicable to common shareholders $13,824,604 $13,953,770
=========== ===========
Net income per share $ .43 $ .44
=========== ===========
Weighted average number of common shares
outstanding 31,826,000 31,826,000
=========== ===========
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
BACKGROUND
The Company 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. Since the IPO, the Company
has actively implemented its acquisition strategy. The following chart
summarizes information regarding the Company's hotels at June 30, 1997:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Premium Limited Service Hotels:
Hampton Inn 65 7,904
Comfort Inn 2 182
Holiday Inn Express 1 101
-- ------
68 8,187
Premium Extended Stay Hotels:
Residence Inn 8 831
Homewood Suites 4 471
-- ------
12 1,302
Full Service Hotels:
Holiday Inn 4 557
Comfort Inn 1 177
-- ------
5 734
-- ------
Total 85 10,223
== ======
</TABLE>
In order for the Company to qualify as a REIT, neither the Company 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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
For the three months ended June 30, 1997 and 1996, the Company had revenues of
$16,038,524 and $9,651,879, respectively, consisting of Percentage Lease revenue
of $15,713,892 and $9,609,142. This represents a 63.5% increase in Percentage
Lease revenue for the three months ended June 30, 1997 over the comparable
period last year and is the result of (i) the number of hotels increasing from
43 at June 30, 1996 to 85 at June 30, 1997 and (ii) increased Percentage Lease
revenue for the Hotels
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
owned throughout both periods. On a comparable basis, the increase in Percentage
Lease revenue was caused by an increase in revenue per available room ("REVPAR")
for Hotels owned by the Company of 6.9% from $51.23 to $47.92. In addition, for
hotels which were in operation for the full quarter in both 1997 and 1996,
REVPAR (on a pro forma basis) increased to $51.21 from $48.88, an increase of
4.8%.
Real estate and personal property taxes and depreciation and amortization
increased over the comparable period in 1996 due to the increase in the number
of hotel properties owned by the Company, from 43 properties at June 30, 1996 to
85 properties at June 30, 1997.
General and administrative expenses increased primarily as a result of (i)
increased activity by the Company in evaluating potential hotel properties for
acquisition, (ii) increased corporate staff and related expenses due to the sale
of the former lessee, Trust Leasing, Inc., in November 1996, and (iii) an
increase in the number of hotels owned in 1997 over 1996.
Interest expense increased $1,965,777 in the three months ended June 30, 1997
over the comparable period in 1996. The increase was due primarily to an
increase in the average outstanding balance of the Company's debt from $35
million for the three months ended June 30, 1996 to $140 million for the three
months ended June 30, 1997. Average interest rates increased slightly, from 7.2%
to 7.4% for the quarter ended June 30, 1997. Weighted average shares increased
from 21,688,000 to 26,603,000, an increase of 4,915,000 shares over the same
period last year as a result of the Fifth Offering completed in May 1997.
Funds From Operations were $10,382,010 or $0.38 per share for the three months
ended June 30, 1997, compared to $7,277,331 or $0.33 per share for the three
months ended June 30, 1996. The increase in FFO per share is due to (i)
increased Percentage Lease revenue earned as a result of a 6.9% increase in
REVPAR over the same period last year for hotels owned by the Company and (ii)
an increase in the number of hotel properties owned from 43 at June 30, 1996 to
85 at June 30, 1997. 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.
Six Months Ended June 30, 1997 and 1996
For the six months ended March 31, 1997 and 1996, the Company had revenues of
$27,833,698 and $16,636,067, respectively, consisting of Percentage Lease
revenue of $27,491,755 and $16,556,980. The increase in Percentage Lease revenue
for the six months ended June 30, 1997 over the comparable period last year is
the result of (i) the number of hotels increasing from 43 at June 30,
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
1996 to 85 at June 30, 1997 and (ii) increased Percentage Lease revenue for the
Hotels owned by the Company throughout both periods. On a comparable basis, the
increase in Percentage Lease revenue was caused by an increase in REVPAR for
hotels owned by the Company of 7.0% from $46.71 to $43.65. In addition, for
hotels which were in operation for the full six months in both 1997 and 1996,
REVPAR (on a pro forma basis) increased to $47.24 from $45.24, an increase of
4.4%.
Real estate and personal property taxes and depreciation and amortization
increased over the comparable period in 1996 due to the increase in the number
of hotel properties owned by the Company, from 43 properties at June 30, 1996 to
85 properties at June 30, 1997.
General and administrative expenses increased primarily as a result of (i)
increased shareholder expenses related to listing the Company's Common Stock on
the New York Stock Exchange and a larger shareholder base as a result of the
Company's most recent stock offering; (ii) increased activity by the Company in
evaluating potential hotel properties for acquisition; (iii) increased corporate
staff and related expenses due to the sale of the former lessee, Trust Leasing,
Inc., in November 1996; and (iv) an increase in the number of hotels owned in
1997 over 1996.
Interest expense increased $2,546,264 in the six months ended June 30, 1997 over
the comparable period in 1996. The increase was due primarily to an increase in
the average outstanding balance under the line of credit from $56 million for
the six months ended June 30, 1996 to $130 million for the six months ended June
30, 1997.
Funds From Operations were $17,452,555 or $0.67 per share for the six months
ended June 30, 1997, compared to $10,942,394 or $0.58 per share for the six
months ended June 30, 1996. The increase in FFO per share is due primarily to
(i) increased Percentage Lease revenue received as a result of a 7.0% increase
in REVPAR over the same period last year, for hotels owned by the Company and
(ii) an increase in the number of hotel properties owned from 43 at June 30,
1996 to 85 at June 30, 1997. 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.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
The following is a reconciliation of net income before minority interest to
Funds From Operations (under NAREIT's definition):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before minority
interest $ 5,954,181 $ 4,764,760 $ 9,239,965 $ 6,124,402
Add:
Depreciation of buildings,
furniture and equipment 4,427,829 2,512,571 8,212,590 4,817,992
----------- ----------- ------------ -----------
Funds From Operations $10,382,010 $ 7,277,331 $17,452,555 $10,942,394
=========== =========== =========== ===========
Weighted average number
of outstanding shares
of Common Stock and
Units of the Partnership 27,575,122 22,377,625 26,072,479 18,983,501
=========== =========== =========== ===========
Funds From Operations per
Share and Unit $ .38 $ .33 $ .67 $ .58
=========== =========== =========== ===========
</TABLE>
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 guaranteed by Interstate, a publicly traded hotel management company.
Interstate is the parent company of the general partner of the Lessee.
Cash and cash equivalents as of June 30, 1997 were $250,947, compared to
$128,974 at December 31, 1996. Additionally, all of the June 30, 1997 receivable
due from the Lessee was received in July 1997. Net cash provided by operating
activities for the six months ended June 30, 1997 was $18,059,542.
The Company intends to make additional investments in hotel properties and may
incur, or cause the Partnership to incur, indebtedness to make such investment
or to meet distribution requirements imposed on a REIT under the Internal
Revenue Code to the extent that working capital and cash flow from the Company's
investments are insufficient to make such distributions. The Company's Charter
limits aggregate indebtedness to 45% of the Company's investment in hotel
properties, at cost, after giving effect to the Company's use of proceeds from
any indebtedness. The Company's consolidated indebtedness is 36.4% of its
investment in hotels, at cost, at June 30, 1997 leaving approximately $95
million of borrowing capacity available for additional investment in hotels. At
June 30, 1997, the Company had outstanding indebtedness of $207.8 million.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
The Company's long-term debt at June 30, 1997 consists of (i) a Line of Credit
("Line of Credit") with a total commitment of $130 million, (ii) an issue of
Commercial Mortgage Bonds ("Bonds") in the original amount of $88 million, and
(iii) a $71 million Term Loan ("Term Loan") with a total commitment of $75
million.
The Line of Credit bears interest at 1.75% over the 30, 60, or 90-day LIBOR
(7.5% at June 30, 1997). At June 30, 1997, the Company had outstanding debt on
the Line of Credit of approximately $49.4 million, leaving approximately $80.6
million in the unused portion of the Line of Credit. The Line of Credit is
collateralized by a first mortgage on twenty-seven of the eighty-five hotels
owned by the Partnership as of June 30, 1997 and will be collateralized by
hotels acquired in the future using proceeds from the Line of Credit. The Line
of Credit extends through November 1998 with an additional one-year renewal
option.
The Bonds are payable in monthly installments of approximately $697,000,
including interest. The outstanding principal balance on the Bonds was
approximately $87.3 million at June 30, 1997. The Bonds are collateralized by a
first mortgage on twenty-three of the hotels owned by the Company. The Company
expects to repay these bonds in full within 10 years.
The Term Loan bears interest at 1.625% over the 30, 60, or 90-day LIBOR (7.4% at
June 30, 1997) for the first six months and at 1.875% over the 30, 60 or 90-day
LIBOR for the second six months. At June 30, 1997, the Company had outstanding
debt on the term loan of $71 million, leaving $4 million in the unused portion
of the term loan. The Term Loan is collateralized by a first mortgage on
twenty-seven of the eighty-five hotels owned by the Partnership as of June 30,
1997. The term loan matures in June 1997.
During the six months ended June 30, 1997, the Company invested approximately
$7.7 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
franchisors 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 $9.9 million during the remainder of 1997 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 and the Bonds, 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.
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
During the six months ended June 30, 1997, the Partnership declared
distributions in the aggregate of $16,168,109 to its partners, including Equity
Inns Trust, it sole general partner, which is wholly-owned by the Company, or
$.56 per Unit, and the Company declared distributions in the aggregate of
$15,545,280, 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 and the Term Loan. 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 subject to certain holding period requirements, holders of Units
have the right to require the Partnership to redeem their Units. During the six
months ended June 30, 1997, no Units were tendered for redemption. Pursuant to
the Partnership Agreement, the Company 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. The Company anticipates that it will acquire any
Units tendered for redemption in the foreseeable future in exchange for shares
of Common Stock and have agreed to register such shares so as to be freely
tradeable by the recipient.
INFLATION
Operators of hotels, including the Lessee and any third-party manager retained
by the Lessee, in general possess the ability to adjust room rates quickly.
However, competitive pressures have limited and may in the future limit the
ability of the Lessee and any third-party manager retained by the Lessee to
raise room rates in the face of inflation.
SEASONALITY
The hotel industry is seasonal in nature. The Hotel's operations historically
reflect higher occupancy rates and ADR 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. To the extent
that cash flow from operating activities from the Hotels for a quarter is
insufficient to generate Percentage Lease revenue necessary to fund all the
distributions for such quarter, the Company may maintain the annual distribution
rate by funding seasonal-related shortfalls with available cash or borrowings
under the Line of Credit.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to the General Instructions to Rule 305 of SEC Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of SEC Regulation S-K are inapplicable to the Company at this time.
17
<PAGE>
EQUITY INNS, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1997 annual meeting of the Company's shareholders (the "1997 Annual
Meeting") was held on April 29, 1997 for the following purposes: (i) to elect
Joseph W. McLeary as Class III director to serve until the Company's annual
meeting of shareholders in 2000 or until his successor has been duly elected and
qualified; (ii) to vote upon a proposal to amend Article 14 of the Company's
Charter to provide, in effect, that nothing contained therein will prohibit the
settlement of any transaction entered into through the facilities of any
national securities exchange registered under the Securities Exchange Act of
1934 (the "Exchange Act") or on the national market system of a national
securities association registered under the Exchange Act; and (iii) to 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 that may be
issued under the 1994 Plan pursuant to awards of restricted stock and in full or
partial settlement of awards of performance shares from 100,000 to 350,000.
The results of the shareholders' vote on each of the above matters submitted
before the 1997 Annual Meeting were summarized in the Company's Current Report
on Form 8-K dated April 29, 1997 and filed with the SEC on June 26, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- The following exhibit is filed in this Quarterly Report on
Form 10-Q.
27 Financial Data Schedule (filed only electronically with the SEC)
(b) Reports on Form 8-K -- The Company filed the following Current Reports
on Form 8-K during the period covered by this Quarterly Report on Form
10-Q.
(i) Current Report on Form 8-K dated April 29, 1997 and filed with
the SEC on June 26, 1997, reporting the results of the
Company's 1997 Annual Meeting of Shareholders on April 29,
1997 (no financial information required);
(ii) Current Report on Form 8-K dated May 14, 1997 and filed with
the SEC on May 14, 1997, reporting the Company's agreements
with a series of partnerships owned by Growth Hotel Investors
and Growth Hotel Investors II to acquire 28 hotels (no
financial information required); and
(iii) Current Report on Form 8-K dated May 22, 1997 and filed with
the SEC on May 23, 1997, reporting the filing of certain
exhibits in connection with the Company's public offering of
8,000,000 shares of Common Stock (no financial information
required).
18
<PAGE>
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 6, 1997 By: /s/Howard A. Silver
- -------------- ------------------------------------------------
Date Howard A. Silver
Vice President of Finance, Secretary, Treasurer,
Chief Financial Officer (Principal Financial and
Accounting Officer)
19
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<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,
1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 250,947
<SECURITIES> 0
<RECEIVABLES> 8,052,131
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 538,766,672
<DEPRECIATION> 0
<TOTAL-ASSETS> 557,333,702
<CURRENT-LIABILITIES> 0
<BONDS> 207,809,352
0
0
<COMMON> 318,256
<OTHER-SE> 319,082,900
<TOTAL-LIABILITY-AND-EQUITY> 557,333,702
<SALES> 15,713,892
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,759,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,496,476
<INCOME-PRETAX> 5,954,181
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,746,217
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
