<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 1999 Commission File Number 01-12073
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.)
7700 Wolf River Boulevard, Germantown, TN 38138
--------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(901) 754-7774
----------------------------------------------------
(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 the Registrant's Common Stock, $.01 par value,
outstanding on May 10, 1999 was 37,238,728.
1 of 20
<PAGE>
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations
(unaudited) - For the three months ended March 31,
1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
(unaudited) - For the three months ended March 31,
1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $789,679,227 $790,132,156
Cash and cash equivalents 181,255 399,952
Due from Lessees 7,898,067 6,288,402
Note receivable 2,634,052 2,884,052
Deferred expenses, net 6,291,396 6,312,495
Deposits and other assets 1,550,413 1,005,508
------------ ------------
Total assets $808,234,410 $807,022,565
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $340,032,005 $331,393,822
Accounts payable and accrued expenses 12,176,078 12,315,770
Distributions payable 13,048,658 12,978,727
Minority interest in Partnership 13,081,033 19,070,568
------------ ------------
Total liabilities 378,337,774 375,758,887
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 10,000,000 shares
authorized, 2,750,000 shares issued and outstanding 68,750,000 68,750,000
Common Stock, $.01 par value, 50,000,000
shares authorized, 37,236,964 and 36,438,535
shares issued and outstanding 372,369 364,385
Additional paid-in capital 415,748,141 407,833,313
Unearned directors' and officers' compensation (3,012,183) (2,006,442)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (50,697,804) (42,413,691)
------------ ------------
Total shareholders' equity 429,896,636 431,263,678
------------ ------------
Total liabilities and shareholders' equity $808,234,410 $807,022,565
============ ============
</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>
For the Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenue
Percentage lease revenues $25,860,068 $21,406,934
Other income 215,923 170,318
----------- -----------
Total revenue 26,075,991 21,577,252
----------- -----------
Expenses
Real estate and personal property taxes 3,499,898 2,433,363
Depreciation and amortization 8,742,545 6,682,119
Amortization of loan costs 207,954 212,997
Interest 6,051,972 4,290,630
General and administrative 2,422,103 1,639,809
----------- -----------
Total expenses 20,924,472 15,258,918
----------- -----------
Income before minority interest and change
in accounting 5,151,519 6,318,334
Minority interest 126,168 314,124
----------- -----------
Income before change in accounting 5,025,351 6,004,210
Change in accounting for corporate
organizational costs 133,193
----------- -----------
Net income 4,892,158 6,004,210
Preferred stock dividends 1,632,813
Net income applicable to common shareholders $ 3,259,345 $ 6,004,210
=========== ===========
Net income per common share - basic
and diluted $ .09 $ .17
=========== ===========
Weighted average number of common shares
and units outstanding - diluted 38,553,000 37,160,000
=========== ===========
</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>
For the Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,892,158 $ 6,004,210
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,742,545 6,682,119
Amortization of loan costs 207,954 212,997
Change in accounting for corporate organizational costs 133,193
Amortization of unearned directors' compensation 211,059 23,070
Directors' compensation 18,727 8,468
Minority interest 126,168 314,124
Changes in assets and liabilities:
Due from Lessees (1,609,665) (1,967,529)
Deferred expenses (25,001) (110,166)
Deposits and other assets (544,905) (1,552,244)
Accounts payable and accrued expenses 848,548 (525,532)
----------- -----------
Net cash provided by operating activities 13,000,781 9,089,517
----------- -----------
Cash flows from investing activities:
Improvements and additions to hotel properties (8,216,048) (9,145,727)
Payments received on note receivable 250,000
----------- -----------
Net cash used in investing activities (7,966,048) (9,145,727)
----------- -----------
Cash flows from financing activities:
Gross proceeds from public offering 20,144,615
Payment of offering expenses (1,042,258)
Proceeds from exercise of stock options 112,500
Distributions paid (13,522,999) (10,645,348)
Borrowings under revolving credit facilities 26,700,000 25,950,000
Payments on revolving credit facilities (17,425,000) (27,750,000)
Payments on CMBS credit facility (572,658) (534,570)
Payments on debt assumed (62,775)
Cash paid for loan costs (368,614) (45,128)
Payments on capital lease obligations (1,384) (427)
----------- -----------
Net cash provided by (used in) financing activities (5,253,430) 6,189,384
----------- -----------
Net increase (decrease) in cash and cash equivalents (218,697) 6,133,174
Cash and cash equivalents at beginning of period 399,952 190,458
----------- -----------
Cash and cash equivalents at end of period $ 181,255 $ 6,323,632
=========== ===========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During January 1999, the Company issued 98,824 shares of common stock at $10.00
per share to officers under the 1994 Stock Incentive Plan in lieu of cash as a
performance bonus. Additionally, the Company issued 1,556 shares of common stock
at $9.63 per share and 402 shares of common stock at $9.31 per share to the
independent directors of the Company in lieu of cash as compensation.
The Company issued 124,800 shares of restricted common stock to its officers
under the 1994 Stock Incentive Plan. The shares were valued at $9.75, and the
restriction periods are tied to employment and range from three to five years.
In addition, 572,847 units were exchanged for common stock by certain limited
partners.
At March 31, 1999, $11,960,116 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on May 3,
1999. At December 31, 1998, $11,890,186 in distributions to shareholders and
limited partners had been declared but not paid.
At March 31, 1998, $11,602,786 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on May 1,
1998. At December 31, 1997, $10,645,348 in distributions to shareholders and
limited partners had been declared but not paid.
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 March 31,
1999 owned an approximate 96.5% interest in the Partnership. The Company
was formed to acquire equity interests in hotel properties and at March
31, 1999 owned, through the Partnership, 102 hotel properties with a
total of 12,640 rooms in 36 states.
At March 31, 1999, the Partnership or its affiliates, under operating
leases providing for the payment of percentage rent (the "Percentage
Leases"), leased 80 of the Company's hotels to affiliates of Patriot
American Hospitality, Inc. (collectively, the "Patriot Lessee"),
successor by merger to Interstate Hotels Company ("Patriot"). All
payments due under these Percentage Leases were guaranteed by Patriot and
by Interstate Hotels, LLC ("Interstate"), successor by merger to
Interstate Hotels Corporation and an indirect subsidiary of Patriot. The
Partnership leased 19 hotels to a wholly-owned subsidiary of Prime
Hospitality Corporation (the "Prime Lessee"). The Prime Lessee is
required, under the terms of its master lease agreement, to maintain
capitalization of 20% of the expected annual percentage rents. The
Patriot Lessee and the Prime Lessee are referred to herein collectively
as the "Lessees", and individually as a "Lessee". The Lessees operate and
lease hotels owned by the Partnership pursuant to separate Percentage
Leases which provide for rent payments equal to the greater of (i) a
fixed base rent ("Base Rent") or (ii) percentage rent based on the
revenues of the hotels ("Percentage Rent"). The remaining three hotels
are operated pursuant to management agreements, two of which are operated
by a subsidiary of Interstate and one of which is operated by a
wholly-owned subsidiary of MeriStar Hotels & Resorts, Inc.
During the quarter ended March 31, 1999, the Company did not acquire any
additional hotel properties.
Effective January 1, 1999 the Company implemented Statement of Position
98-5 which requires organizational costs to be expensed as incurred.
Accordingly, the Company recognized a charge to income for its
unamortized balance of corporate organizational costs as of January 1,
1999 as a cumulative effect of the change in accounting in the quarter
ended March 31, 1999.
These unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and should be read in conjunction with the
financial statements and notes thereto of the Company included in the
Company's 1998 Annual Report on Form 10-K. 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.
6
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which changes the computation and presentation of earnings
per share. SFAS 128 requires the presentation of basic and diluted
earnings per share, replacing primary and fully diluted earnings per
share previously required. Earnings per share for all prior years
presented have been presented in accordance with SFAS 128.
A reconciliation of the numerator and denominator used in the basic
earnings per share computation to the numerator and denominator used in
the diluted earnings per share computation is presented below for the
three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1999 1998
----------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income - basic $3,259,345 37,171,182 $.09 $6,004,210 35,221,367 $.17
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest 126,168 1,382,246 314,124 1,842,520
Dilutive effect of stock
options outstanding
using the treasury
stock method 96,234
---------- ---------- ---- ---------- ---------- ----
Net income-diluted $3,385,513 38,553,428 $.09 $6,318,334 37,160,121 $.17
========== ========== ==== ========== ========== ====
</TABLE>
3. Debt
Debt is comprised of the following at March 31, 1999:
<TABLE>
<S> <C>
Commercial Mortgage Bonds $ 83,515,843
Unsecured Lines of Credit 245,875,000
Other 10,641,162
------------
$340,032,005
============
</TABLE>
The Company's $250 million unsecured line of credit (the "Bank One Line")
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
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
3. Debt, Continued
the interest rate is adjusted as necessary. At March 31, 1999, the
interest rate on the Bank One Line was LIBOR (4.94% at March 31, 1999)
plus 1.75%. The Bank One Line has a three-year term, expiring in October
2000.
In March 1999, the Company obtained an additional $25 million unsecured
line of credit (the "NationsBank Line") from NationsBank. The NationsBank
Line bears interest at a variable rate of LIBOR plus 1.775%, 1.875%,
2.00%, or 2.25% as determined by the Company's percentage of total debt
to total value of the Company's investment in hotel properties, as
defined in the loan agreement. The percentage is reviewed quarterly, and
the interest rate is adjusted as necessary. At March 31, 1999, the
interest rate on the NationsBank Line was LIBOR (4.94% at March 31, 1999)
plus 2.25%. The NationsBank Line expires in October 2000.
4. Subsequent Events
As a result of certain restructuring changes taking place at Patriot,
including a proposed spin-off of the hotel management business Patriot
acquired from Interstate Hotels Company (which includes the Percentage
Leases with the Patriot Lessee) into a separate public company, the
Company entered into a consolidated lease amendment on March 31, 1999.
This consolidated lease amendment, entered into with Patriot, affiliates
of Crossroads Hospitality Company, LLC and Interstate Hotels Management,
Inc. ("Interstate Management"), amends the leases under which the
Crossroads affiliates are lessees and Patriot and Interstate serve as
guarantors of leases for 80 of the Company's hotels. The consolidated
lease amendment became effective as of April 15, 1999 but remains subject
to third party consents for several of the Company's hotels.
Under the terms of the consolidated amendment, Crossroads relinquished
the right of first refusal to lease the Company's hotels, with the
exception of two new Homewood Suites hotels in Chicago and Orlando, which
the Company expects to acquire in mid-1999. The Company relinquished the
right of first refusal to purchase Interstate assets in the future. In
the event Crossroads desires to sell its current leases with the Company,
the Company has the right of first offer for their purchase.
In addition, performance standards have been included in all existing
leases based on revenues of the hotels and expenditures for marketing and
maintenance of the hotels, and the Company, in April 1999, received $2
million of additional 1999 incentive rent, to be recognized over the
remaining portion of 1999. As a condition of the consolidated lease
amendment, the Company and Patriot have released each other from any
claims or threatened litigation related to these matters.
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
4. Subsequent Events, Continued
Subsequent to the proposed spin-off by Patriot of its hotel management
business, the Company has the right to designate one member of the Board
of Directors of Interstate Management, which will replace Patriot as the
guarantor of the Company's leases.
During April and May 1999, the Partnership sold four hotels (Hampton Inn,
Nashville (Brentwood), Tennessee; Comfort Inn, Enterprise, Alabama;
Hampton Inn, Destin, Florida; Hampton Inn, Memphis (Southaven),
Mississippi) to third parties for an aggregate sales price of
approximately $21.6 million. The Company realized a gain of approximately
$250,000 as a results of these sales. The sale prices were paid in cash.
On April 10, 1999, a subsidiary of Hudson Hotels Corporation ("Hudson")
defaulted on its obligation to make a $250,000 principal payment to the
Company under a promissory note, which note was issued to the Company in
connection with the sale of nine of the Company's hotels to a subsidiary
of Hudson in October 1997. The unpaid principal balance on the note is
approximately $2.6 million. The Company has accelerated the full loan
amount upon such default in accordance with the terms of the note. The
Company may modify the payment terms with respect to principal. Hudson
has not defaulted on the payment of interest. The promissory note is
secured by a pledge of two million shares of Hudson's common stock.
On May 3, 1999, the Company entered into an interest rate swap agreement
with a financial institution. The agreement effectively fixes the
interest rate on floating rate debt at a rate of 5.24% plus the
Percentage for a notional principal amount of $40 million. The swap
agreement will expire in October 2000 and is in addition to the Company's
existing swap agreement in the amount of $75 million.
9
<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 March 31, 1999:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Premium Limited Service Hotels:
Hampton Inn 55 6,856
Hampton Inn & Suites 1 125
Comfort Inn 2 182
--- ------
Sub-total 58 7,163
--- ------
All-Suite Hotels:
AmeriSuites 19 2,403
Premium Extended Stay Hotels:
Residence Inn 12 1,431
Homewood Suites 7 808
--- ------
Sub-total 19 2,239
--- ------
Full Service Hotels:
Holiday Inn 3 397
Comfort Inn 1 177
--- ------
Sub-total 4 574
--- ------
Independent Hotels: 2 261
--- ------
Total 102 12,640
=== ======
</TABLE>
The Partnership leases 99 of the hotels to the Lessees pursuant to the
Percentage Leases. The remaining three hotels are operated by third parties
under management agreements. The Partnership's, and therefore the Company's,
principal source of revenue is lease payments by the Lessees 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.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
The increase in Percentage Lease revenue for the three months ended March 31,
1999 over the comparable period last year is the result of the number of hotels
increasing from 89 at March 31, 1998 to 102 at March 31, 1999. On a same store
basis, revenue per available room ("REVPAR") for hotels owned by the Company
throughout both periods decreased by 3.2% from $47.87 to $46.35. In addition,
for hotels, on a comparable hotel basis, which were in operation for the full
quarter in both 1999 and 1998, REVPAR (on a pro forma basis) decreased from
$48.94 from $47.72, a decrease of 2.5%.
Real estate and personal property taxes and depreciation and amortization
increased over the comparable period in 1998 due to the increase in the number
of hotel properties owned by the Company, from 89 properties at March 31, 1998
to 102 properties at March 31, 1999.
General and administrative expenses increased primarily as a result of (i)
increased legal and professional fees resulting from the Company's growth; and
(ii) increased salaries and directors' compensation.
Interest expense increased $1,761,342 in the three months ended March 31, 1999
over the comparable period in 1998. The increase was due primarily to an
increase in the average outstanding balance of the Company's debt from $232
million for the three months ended March 31, 1998 to $336 million for the three
months ended March 31, 1999. Average interest rates decreased slightly, from
7.6% to 7.4% for the quarter ended March 31, 1999.
Industry analysts generally consider Funds From Operations ("FFO") to be an
appropriate measure of the performance of an equity REIT. In accordance with the
resolution adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT"), FFO represents net income (loss) (computed
in accordance with generally accepted accounting principles), excluding gains
(or losses) from debt restructuring or sales of property, plus depreciation, and
after adjustments for unconsolidated partnerships and joint ventures. For the
periods presented, depreciation, minority interest and the extraordinary charge
from write-off of deferred organizational costs were the only adjustments. FFO
should not be considered an alternative to net income or other measurements
under generally accepted accounting principles as an indicator of operating
performance or to cash flows from operating, investing or financing activities
as a measure of liquidity. FFO does not reflect working capital changes, cash
expenditures for capital improvements or principal payments with respect to
indebtedness on the hotels.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
FFO was $12,187,683 or $0.32 per share for the three months ended March 31,
1999, compared to $12,929,776 or $0.35 per share for the three months ended
March 31, 1998. The decrease is due primarily to the decrease in REVPAR as
compared to the same period last year. The Company considers FFO to be a key
measure of a REIT's performance and believes that FFO 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.
The following is a reconciliation of income before minority interest to FFO:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Income before minority interest and change
in accounting $ 5,151,519 $ 6,318,334
Less:
Preferred stock dividends (1,632,813)
Add:
Depreciation of buildings, furniture
and equipment 8,668,977 6,611,442
----------- -----------
Funds From Operations $12,187,683 $12,929,776
=========== ===========
Weighted average number of outstanding shares of
Common Stock and Units of the Partnership 38,553,428 37,160,121
=========== ===========
Funds From Operations per Share and Unit $ .32 $ .35
=========== ===========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements, including
distributions to its shareholders, is its cash distributions from the
Partnership. The Partnership receives cash payments from the Lessees pursuant to
the Percentage Leases. The Company's liquidity, including its ability to make
distributions to shareholders, is dependent upon the Lessees' ability to make
payments under the Percentage Leases. All of the Patriot Lessee's lease
obligations were guaranteed through March 31, 1999 by Interstate and Patriot
and, following March 31, 1999, will be guaranteed by Interstate Management.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
The Company's other Lessee, Prime, is required, under the terms of its master
lease agreement, to maintain 20% of its expected annual percentage rents
generated from the Percentage Leases in cash or marketable securities.
Cash and cash equivalents as of March 31, 1999 were $181,255, compared to
$399,952 at December 31, 1998. Additionally, all of the March 31, 1999
receivables due from the Lessees were received prior to the filing of this Form
10-Q. Net cash provided by operating activities for the three months ended March
31, 1999 was $13,000,781.
The Company intends to make additional investments in hotel properties and may
incur, or cause the Partnership to incur, indebtedness to make such investments
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 Board of
Directors has adopted a debt limitation policy currently limiting aggregate
indebtedness to 45% of the Company's investment in hotel properties at its cost.
The Board of Directors can amend, modify or terminate the debt limitation policy
at any time without shareholder approval.
At March 31, 1999, the Company had outstanding debt of approximately $340
million, including $245.9 million under its combined lines of credit, and $83.5
million under the Commercial Mortgage Bonds (the "Bonds"), leaving approximately
$28.5 million available under the combined lines of credit, after consideration
of outstanding letters of credit. Additionally, the Company had $10.6 million of
mortgage notes payable assumed in connection with the purchase of two hotels in
1998. The Company's consolidated indebtedness was 39.2% of its investments in
hotels, at cost, at March 31, 1999.
In December 1997, the Company arranged an interest rate swap on a notional
amount of $75 million with The First National Bank of Chicago as a hedge against
the floating rate. At March 31, 1999, the swap resulted in a fixed interest rate
of 7.65% on the notional amount. The swap agreement will expire in October 2000.
The Company currently plans to refinance $100 million of borrowings outstanding
under the Bank One Line with a new 10-year secured term loan (the "Term Loan")
which it expects to complete during the second quarter of 1999. The Company has
incurred approximately $500,000 in costs associated with this loan through April
1999 and expects to incur approximately $1 million in additional costs at
completion of the loan. The Term Loan will be secured by approximately 20 of the
hotels. There can be no assurance that the Term Loan will be consummated.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
During the three months ended March 31, 1999, the Company invested approximately
$8.2 million to fund capital improvements to its hotels, including replacement
of carpets, drapes, renovation of common areas and improvement of hotel
exteriors. In addition, the Company has committed to fund approximately $14
million during the remainder of 1999 for capital improvements.
The Company intends to fund such improvements out of future cash from
operations, present cash balances and borrowings under its combined lines of
credit. Under the Bank One Line, the NationsBank Line and the Bonds, the
Partnership is obligated to fund 4% of room revenues per quarter on a cumulative
basis, to a separate room renovation account 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 improvement anticipated.
Recurring repairs and maintenance are performed by the Lessees.
The Company has entered into agreements to purchase three hotels at a total cost
of approximately $86 million. The hotels are currently in various stages of
development, with projected openings between May 1999 and September 1999.
Additionally, the Company is currently holding land for possible use in the
development of an Embassy Suites hotel in Salt Lake City, Utah. Funds needed to
complete these projects will be obtained from borrowings under its combined
lines of credit and other sources of debt or equity financing.
During the three months ended March 31, 1999, the Partnership declared
distributions in the aggregate of $11,960,116 to its partners, including the
Trust, of $.31 per Unit, and the Company declared distributions in the aggregate
of $11,543,459, or $.31 per share to its shareholders, with such distributions
being payable on May 3, 1999.
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 borrowing 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 to preferred and common
shareholders 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 borrowing, the issuance of additional equity securities of the
Company, or, in connection with acquisitions of hotel properties, issuance of
Units in the Partnership. Pursuant to the Partnership Agreement for the
Partnership, holders of Units have the right to require the Partnership to
redeem their Units. During the three months ended March 31, 1999, 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
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
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 Lessees and any third-party manager retained
by the Lessees, 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 Lessees and any third-party manager retained by the Lessees to
raise room rates in response to inflation.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
containing the words "believes", "anticipate", "expects" and words of similar
import. Such forward-looking statements relate to future events and the future
financial performance of the Company, and involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from the results or
achievement expressed or implied by such forward-looking statements. Risk
factors relating to such forward-looking statements are contained in the
Company's Current Report on Form 8-K dated March 23, 1999 and filed under the
Securities Exchange Act of 1934, as amended. The Company is not obligated to
update any such factors.
YEAR 2000 COMPLIANCE
Many existing computer programs have been designed to use only two digits to
identify a year in the date field, without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000. The Company's
assessment of its Year 2000 compliance is not complete. The Company has used its
hardware and software contractors to implement a compliance program to address
the challenges the Year 2000 may present to the Company's corporate systems and
applications. This program includes an analysis of computer systems and
applications operated by the Company and computer systems of third parties upon
whose data or services the Company relies (including the Lessees).
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
YEAR 2000 COMPLIANCE, Continued
The Company's management, as a result of discussions with its hardware and
software contractors, has modified its systems, and is scheduled to complete
remaining software conversions by mid-1999. As part of its compliance program,
the Company has also surveyed its customers, franchisors, vendors, and the
Lessees, whose failure to timely convert their systems could have an impact on
the Company's operations. Although the Company does not believe the Year 2000
issue will materially affect its business, financial conditions and results of
operations, there can be no assurance that its Year 2000 remediation efforts
will be fully effective to prevent problems that could affect the Company's
business. In addition, although the Company has no reasons to believe that the
Lessees will not be in compliance by the Year 2000, the Company is unable to
determine the extent to which the Year 2000 will affect the operations of the
hotels. The Company continues to discuss with the Lessees the need for
implementing adequate procedures, including contingency plans, to address this
issue and has been assured that each Lessee is on schedule to complete these
compliance issues by mid-1999.
Management does not consider the incurred or estimated costs of the Company's
compliance program to be material.
SEASONALITY
The hotel industry is seasonal in nature. The hotels' 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 of the
distributions for such quarter, the Company may maintain the annual distribution
rate by funding seasonal-related shortfalls with available cash or borrowing
under its lines of credit.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to the General Instructions to Rule 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.
17
<PAGE>
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 Securities
and Exchange Commission).
(b) Reports on Form 8-K -- The Company filed the following Current Report
on Form 8-K during the period covered by this Quarterly Report on Form
10-Q:
(1) Current Report on Form 8-K dated March 23, 1999 and filed on March
23, 1999, disclosing the Company's updated material risk factors in
"plain English" format (no financial information required).
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equity Inns, Inc.
May 11, 1999 By: /s/Donald H. Dempsey
- ---------------------- --------------------------------------
Date Donald H. Dempsey
Executive Vice President, Secretary,
Treasurer, and 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 three months ended March
31, 1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 181,255
<SECURITIES> 0
<RECEIVABLES> 10,532,119
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 789,679,227
<DEPRECIATION> 0
<TOTAL-ASSETS> 808,234,410
<CURRENT-LIABILITIES> 0
<BONDS> 340,032,005
0
68,750,000
<COMMON> 372,369
<OTHER-SE> 360,774,267
<TOTAL-LIABILITY-AND-EQUITY> 808,234,410
<SALES> 26,075,991
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,924,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,051,972
<INCOME-PRETAX> 5,151,519
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 133,193
<CHANGES> 0
<NET-INCOME> 4,892,158
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>