<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 September 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
November 5, 1997 was 31,915,578.
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 - September 30, 1997
(unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations (unaudited) -
For the three and nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
For the nine months ended September 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 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information
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>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $570,662,619 $309,201,932
Cash and cash equivalents 130,838 128,974
Due from Lessee 13,020,113 3,376,781
Deferred expenses, net 8,287,035 3,779,500
Deposits and other assets 2,277,821 1,393,250
------------ ------------
Total assets $594,378,426 $317,880,437
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $240,292,866 $ 77,399,734
Accounts payable and accrued expenses 9,124,796 2,938,192
Distributions payable 9,623,723 6,864,126
Minority interest in Partnership 12,808,101 7,727,726
------------ ------------
Total liabilities 271,849,486 94,929,778
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common Stock, $.01 par value, 50,000,000
shares authorized, 31,915,578 and 23,693,278
shares issued and outstanding, respectively 319,156 236,933
Preferred Stock, $.01 par value, 10,000,000
shares authorized, no shares issued and
outstanding
Additional paid-in capital 342,826,647 238,747,049
Unearned directors' and officers' compensation (296,553) (365,767)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (19,056,423) (14,403,669)
------------ ------------
Total shareholders' equity 322,528,940 222,950,659
------------ ------------
Total liabilities and shareholders' equity $594,378,426 $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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Percentage lease revenue $24,713,825 $12,325,995 $52,205,580 $28,882,975
Interest income 31,476 15,050 373,419 94,137
----------- ----------- ----------- -----------
Total revenues 24,745,301 12,341,045 52,578,999 28,977,112
----------- ----------- ----------- -----------
Expenses
Real estate and personal
property taxes 2,050,054 1,001,467 5,007,604 2,594,884
Depreciation and
amortization 5,518,009 3,174,485 13,857,513 8,070,873
Amortization of loan costs 352,574 408,872 779,593 1,197,443
Interest 4,109,401 945,187 8,751,201 3,040,723
General and administrative 1,046,152 602,611 3,274,012 1,740,364
----------- ----------- ----------- -----------
Total expenses 13,076,190 6,132,622 31,669,923 16,644,287
----------- ----------- ----------- -----------
Income before minority
interest 11,669,111 6,208,423 20,909,076 12,332,825
Minority interest 433,882 186,252 761,033 378,694
----------- ----------- ----------- -----------
Net income applicable to
common shareholders $11,235,229 $ 6,022,171 $20,148,043 $11,954,131
=========== =========== =========== ===========
Net income per common share $ .35 $ .26 $ .74 $ .60
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 31,840,000 23,415,000 27,409,000 20,062,000
========== ========== ========== ==========
</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>
Nine Months Ended
September 30,
---------------------------
1997 1996
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income applicable to common shareholders $ 20,148,043 $11,954,131
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,857,513 8,070,873
Amortization of loan costs 779,593 1,197,443
Amortization of unearned directors' and
officers' compensation 69,214 23,276
Minority interest 761,033 378,694
Changes in assets and liabilities:
Due from Lessee (9,643,332) (4,670,671)
Deferred expenses (24,540) (82,204)
Deposits and other assets (884,571) (269,531)
Accounts payable and accrued expenses 6,186,604 400,241
------------- -----------
Net cash flow provided by operating
activities 31,249,557 17,002,252
------------- -----------
Cash flows from investing activities:
Investment in hotel properties (255,334,261) (65,005,596)
Improvements and additions to hotel properties (13,741,443) (16,424,173)
Cash paid for franchise applications (2,143,569) ( 322,100)
------------- -----------
Net cash flow used by investing
activities (271,219,273) (81,751,869)
------------- -----------
Cash flows from financing activities:
Gross proceeds from public offering 108,769,513 85,737,548
Payment of offering expenses (6,474,036)
Proceeds from issuance of Common Stock 5,537,500
Proceeds from private placement of Partnership
units 2,875,000
Proceeds from exercise of stock options 1,125,000
Distributions paid (23,032,235) (15,170,016)
Borrowings under revolving credit facility 232,050,395 84,125,000
Payments on revolving credit facility (155,965,395) (92,409,220)
Borrowings under CMBS credit facility 88,000,000
Payments under CMBS credit facility (1,191,454)
Cash paid for loan costs (3,309,794) (316,507)
Payments on capital lease obligations (414) (3,577)
------------- ------------
Net cash provided by financing
activities 239,971,580 70,375,728
------------- -----------
Net increase (decrease) in cash and cash
equivalents 1,864 5,626,111
Cash and cash equivalents at beginning of period 128,974 132,630
------------- -----------
Cash and cash equivalents at end of period $ 130,838 $ 5,758,741
============= ===========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
At September 30, 1997, $9,623,723 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on November
3, 1997. At December 31, 1996, $6,864,126 in distributions to shareholders and
limited partners had been declared but not paid.
At September 30, 1996, $6,792,477 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on October
31, 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 $6,051,721 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 September 30,
1997 owned an approximate 96.2% interest in the Partnership. The Company
was formed to acquire equity interests in hotel properties and at
September 30, 1997 owned, through the Partnership, 88 hotel properties
with a total of 10,627 rooms in 31 states (the "Hotels").
The Company leases forty-eight of the Hotels to Crossroads/Memphis
Company, L.L.C. and forty 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 base rent or (ii) percentage rent based on the revenues of the
hotels. All obligations of the Lessee 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 of common stock 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 nine months ended September 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
July 10, 1997 Homewood Suites-Augusta, Georgia 65 5.0
August 1, 1997 Hampton Inn-Birmingham (Mountain
Brook), Alabama 131 8.7
September 18, 1997 Residence Inn-Princeton, New Jersey 208 19.2
----- ------
4,825 $259.7
===== ======
</TABLE>
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
1. Organization and Basis of Presentation, Continued
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 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 September 30, 1997:
<TABLE>
<S> <C>
Commercial Mortgage Bonds $ 86,808,546
Two-Year Revolving Line of Credit 78,410,000
One-Year Term Loan 75,000,000
Other 74,320
------------
$240,292,866
============
</TABLE>
The Line of Credit has a total commitment of $130 million and bears
interest at 1.75% over the 30, 60, or 90-day LIBOR (7.4% at September 30,
1997). The Line of Credit is collateralized by a first mortgage on thirty
of the eighty-eight hotels owned by the Partnership as of September 30,
1997.
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>
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. Debt, Continued
The combined interest rate for all three classes 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.
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-eight of
the hotels acquired from a common seller. Only $71 million of the
proceeds were drawn by the Company on June 24, 1997, with the remaining
$4 million being drawn on August 1, 1997 at the closing of the last
hotel. The loan bears interest at a variable rate equal to the 30-day,
60-day or 90-day LIBOR rate plus 1.625% (7.3% for September 30, 1997) 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 the twenty-eight hotels.
On October 10, 1997, the Company repaid the outstanding balance under the
Line of Credit and the one year term loan with borrowings under a $250
million unsecured line of credit (the "Unsecured Line of Credit"). The
Unsecured Line of Credit bears interest at a variable rate of LIBOR plus
1.4%, 1.5%, 1.625%, or 1.75% as determined by the Company's percentage of
total debt to the total value of the Company's investment in hotel
properties, as defined in the loan agreement (the "Percentage"). The
Percentage is reviewed quarterly and the interest rate is adjusted as
necessary. Currently, the interest rate on the Unsecured Line of Credit
is LIBOR plus 1.625%. The Unsecured Line of Credit has a three-year term
plus a one-year option. In the fourth quarter of 1997, the Company
expects to write off as an extraordinary item approximately $1.9 million
of unamortized debt costs incurred for the Line of Credit and the
one-year term loan.
3. Distributions
On September 9, 1997, the Company declared a $0.29 per share distribution
on each share of Common Stock and each unit of limited partnership
interest in the Partnership ("Unit") outstanding on September 30, 1997.
The distributions were paid on November 3, 1997.
9
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
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 (Memphis), Tennessee
on June 26, 1997, the Partnership issued 26,315, 106,944, 162,154 and
152,802 units, respectively, valued at $6,051,721 in the aggregate.
5. Subsequent Events
On August 13, 1997, the Company announced that it had entered into an
agreement to sell nine Hampton Inn hotels to a subsidiary of Hudson
Hotels Corporation for a purchase price of approximately $46.25 million,
$3.9 million of which will be in the form of a two-year note bearing an
annual interest rate of 10%, secured by 2 million shares of Hudson Hotel
Corporation stock. The hotels were part of a portfolio of twenty-eight
hotels acquired from Growth Hotel Investors in June 1997. The transaction
was completed on October 31, 1997. The Company expects to record a gain
on the sale of these properties.
In September 1997, the Company announced that it had entered into an
agreement to acquire 10 AmeriSuites hotels with an aggregate of 1,239
rooms in seven states from Prime Hospitality Corporation ("Prime") for a
purchase price of approximately $86.3 million, ten percent of which will
be paid through the issuance of Units in the Partnership.
The AmeriSuites hotels are located principally in the Southeastern and
Midwestern United States in major urban and suburban markets. The
agreement provides for a due diligence period which expires November 7,
1997, during which time the Company may terminate the agreement for any
reason. In connection with this transaction, the Company has placed a
refundable $500,000 security deposit with an escrow agent. The deposit is
refundable through the end of the due diligence period if the Company
chooses to terminate the agreement. The purchase of the hotels is subject
to customary real estate closing conditions.
The hotels will be leased to a subsidiary of Prime upon acquisition. As a
part of the agreement, the Company will have the right of first offer to
purchase from Prime up to twenty AmeriSuites per year for three years.
Prime has committed to offer to sell to the Company at least five
AmeriSuites per year for three years.
10
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
6. 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 nine months ended September
30, 1997 and 1996, are presented as if the acquisition of all 88 hotels
owned at September 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>
Nine Months Ended
September 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Percentage lease revenues $68,851,738 $65,378,800
Interest income 373,419 94,137
----------- -----------
Total revenues 69,225,157 65,472,937
Expenses:
Real estate and personal property taxes 6,610,310 5,769,546
Depreciation and amortization 18,115,503 17,074,250
Amortization of loan costs 1,021,775 1,735,101
Interest 13,665,203 12,066,962
General and administrative 3,489,744 2,412,672
----------- -----------
Total expenses 42,902,535 39,058,531
----------- -----------
Income before minority interest 26,322,622 26,414,406
Minority interest 1,008,156 1,011,672
----------- -----------
Net applicable to common shareholders $25,314,466 $25,402,734
=========== ===========
Net income per share $ .79 $ .80
=========== ===========
Weighted average number of common shares
outstanding 31,916,000 31,916,000
========== ==========
</TABLE>
11
<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 66 8,035
Comfort Inn 2 182
Holiday Inn Express 1 101
-- ------
69 8,318
Premium Extended Stay Hotels:
Residence Inn 9 1,039
Homewood Suites 5 536
-- ------
14 1,575
Full Service Hotels:
Holiday Inn 4 557
Comfort Inn 1 177
-- ------
5 734
-- ------
Total 88 10,627
== ======
</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 September 30, 1997 and 1996
For the three months ended September 30, 1997 and 1996, the Company had revenues
of $24,745,301 and $12,341,045, respectively, consisting of Percentage Lease
revenue of $24,713,825 and $12,325,995. This represents a 100.5% increase in
Percentage Lease revenue for the three months ended September 30, 1997 over the
comparable period last year and is primarily the result of (i) the number of
hotels increasing from 46 at September 30, 1996 to 88 at September 30, 1997
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
and (ii) increased Percentage Lease revenue for the Hotels 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 throughout both periods of 5.2% to $53.22 from $50.62. In
addition, for hotels, on a pro forma basis, which were in operation for the full
quarter in both 1997 and 1996 excluding the nine hotels covered under a sales
agreement, REVPAR (on a pro forma basis) increased to $53.51 from $52.36, an
increase of 3.3%.
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 46 properties at September 30,
1996 to 88 properties at September 30, 1997.
General and administrative expenses increased primarily as a result of (i)
increased corporate staff and related expenses due to the sale of the former
lessee, Trust Leasing, Inc., in November 1996, (ii) increased land rent expense
due to the number of hotels with land leases increasing from five to nine, and
(iii) an increase in the number of hotels owned in 1997 over 1996.
Interest expense increased $3,164,214 in the three months ended September 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 $51
million for the three months ended September 30, 1996 to $220 million for the
three months ended September 30, 1997. Average interest rates increased
slightly, from 7.4% to 7.5% for the quarter ended September 30, 1997. Weighted
average shares increased from 23,415,000 to 31,840,000, an increase of 8,425,000
shares over the same period last year as a result of the Fifth Offering
completed in May 1997.
Nine Months Ended September 30, 1997 and 1996
For the nine months ended September 30, 1997 and 1996, the Company had revenues
of $52,578,999 and $28,977,112, respectively, consisting of Percentage Lease
revenue of $52,205,580 and $28,882,975. The increase in Percentage Lease revenue
for the nine months ended September 30, 1997 over the comparable period last
year is the result of (i) the number of hotels increasing from 46 at September
30, 1996 to 88 at September 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 throughout both periods of 6.3% to $49.12
from $46.21. In addition, for hotels, on a pro forma basis, which were in
operation for the full nine months in both 1997 and 1996 excluding the nine
hotels covered under a sales agreement, REVPAR (on a pro forma basis) increased
to $49.77 from $48.03, an increase of 4.6%.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
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 46 properties at September 30,
1996 to 88 properties at September 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 due diligence expenses 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; (iv) increased land rent expense due to the number of
hotels with land leases increasing from five to nine; and (v) an increase in the
number of hotels owned in 1997 over 1996.
Interest expense increased $5,710,478 in the nine months ended September 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 $58
million for the nine months ended September 30, 1996 to $217 million for the
nine months ended September 30, 1997.
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") 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.
Funds From Operations were $17,123,259 or $0.52 per share for the three months
ended September 30, 1997, compared to $9,339,195 or $0.39 per share for the
three months ended September 30, 1996. The increase in FFO per share is due
primarily to (i) increased Percentage Lease revenue earned as a result of a 5.2%
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 46 at
September 30, 1996 to 88 at September 30, 1997.
Funds From Operations were $34,575,814 or $1.22 per share for the nine months
ended September 30, 1997, compared to $20,281,589 or $0.98 per share for the
nine months ended September 30, 1996. The increase in FFO per share is due
primarily to (i) increased Percentage Lease revenue received as a result of a
6.3% 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 46 at
September 30, 1996 to 88 at September 30, 1997.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
FUNDS FROM OPERATIONS, Continued
The following is a reconciliation of net income before minority interest to
Funds From Operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before minority
interest $11,669,111 $ 6,208,423 $20,909,076 $12,332,825
Add:
Depreciation of buildings,
furniture and equipment 5,454,148 3,130,772 13,666,738 7,948,764
----------- ----------- ----------- -----------
Funds From Operations $17,123,259 $ 9,339,195 $34,575,814 $20,281,589
=========== =========== =========== ===========
Weighted average number
of outstanding shares
of Common Stock and
Units of the Partnership 33,109,925 24,140,411 28,444,072 20,715,018
=========== =========== =========== ===========
Funds From Operations per
Share and Unit $ .52 $ .39 $ 1.22 $ .98
=========== =========== =========== ===========
</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.
Cash and cash equivalents as of September 30, 1997 were $130,838, compared to
$128,974 at December 31, 1996. The Company intends to keep cash balances at a
minimum to avoid unnecessary use of funds from the Unsecured Line of Credit.
Additionally, all of the September 30, 1997 receivable due from the Lessee was
received in October 1997. Net cash provided by operating activities for the nine
months ended September 30, 1997 was $31,249,557.
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
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
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 39.1% of its
investment in hotels, at cost, at September 30, 1997 leaving approximately $65
million of borrowing capacity available for additional investment in hotels. At
September 30, 1997, the Company had outstanding indebtedness of $240.3 million.
The Company's long-term debt at September 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 $75 million Term Loan ("Term Loan").
On October 10, 1997, the Company repaid the Term Loan and all the outstanding
borrowings under the Line of Credit with borrowings under a $250 million
unsecured line of credit (the "Unsecured Line of Credit"). The Unsecured Line of
Credit bears interest at a variable rate of LIBOR plus 1.4%, 1.5%, 1.625%, or
1.75% as determined by the Company's percentage of total debt to total value, as
defined in the loan agreement (the "Percentage"). The Percentage is reviewed
quarterly and the interest rate is adjusted as necessary. Currently, the
interest rate on the Unsecured Line of Credit is LIBOR plus 1.625%. The
Unsecured Line of Credit has a three-year term plus a one-year extension option.
At October 10, 1997, the Company had outstanding debt on the Unsecured Line of
Credit of approximately $153.5 million, leaving approximately $96.5 million in
the unused portion of the Unsecured Line of Credit.
During the nine months ended September 30, 1997, the Company invested
approximately $10.6 million to fund capital improvements to its Hotels,
including replacement of carpets, drapes, renovation of common areas and
improvement of hotel exteriors. Most of these capital improvements were required
by the franchisors as part of the franchisors' product improvement plan ("PIP")
on hotels that the Company purchased. 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 $6.9 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
Unsecured Line of Credit. Under the Unsecured 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.
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
During the nine months ended September 30, 1997, the Partnership declared
distributions in the aggregate of $25,791,832 to its partners, including Equity
Inns Trust, it sole general partner, which is wholly-owned by the Company, or
$.85 per Unit, and the Company declared distributions in the aggregate of
$24,800,797, or $.85 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 Unsecured 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, subject to certain holding period requirements, holders of Units
have the right to require the Partnership to redeem their Units. During the nine
months ended September 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 has 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 Unsecured Line of Credit.
17
<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.
PART II - OTHER INFORMATION
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 June 24, 1997 and filed on
July 10, 1997, reporting (a) the completion on June 24, 1997
of the Company's acquisition of 27 hotels from a series of
partnerships owned by Growth Hotel Investors and Growth
Hotel Investors II to acquire 28 hotels, (b) the Company's
entry into a one-year term loan of $75 million from First
National Bank of Chicago, Credit Lyonnais New York Branch
and AmSouth Bank, and (c) the third amendment and
restatement to the Partnership's agreement of limited
partnership (all financial information required therein
being incorporated by reference to the Company's Prospectus
Supplement dated May 22, 1997);
(ii) Current Report on Form 8-K dated July 11, 1997 and filed on
July 14, 1997, reporting the Company's Percentage Lease terms
for its hotels as of May 1, 1997 (no financial information
required); and
(iii) Amended Current Report on Form 8-K/A dated July 11, 1997 and
filed on July 22, 1997, reporting the Company's Percentage
Lease terms for its hotels as of May 1, 1997 (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.
November 5, 1997 By: /s/Howard A. Silver
- ---------------- ------------------------
Date Howard A. Silver
Executive Vice President, 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>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Equity Inns, Inc. for the nine months ended September
30, 1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 130,838
<SECURITIES> 0
<RECEIVABLES> 13,020,113
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 570,662,619
<DEPRECIATION> 0
<TOTAL-ASSETS> 594,378,426
<CURRENT-LIABILITIES> 0
<BONDS> 240,292,866
0
0
<COMMON> 319,156
<OTHER-SE> 322,209,784
<TOTAL-LIABILITY-AND-EQUITY> 594,378,426
<SALES> 24,713,825
<TOTAL-REVENUES> 24,745,301
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,076,190
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,109,401
<INCOME-PRETAX> 11,669,111
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,235,229
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
