<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
September 30, 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: (1) 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 November 5, 1999 was 37,243,449.
1 of 22
<PAGE>
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited) -
For the three months and nine months ended September 30,
1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
For the three months and nine months ended September 30,
1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $ 826,804,257 $ 790,132,156
Cash and cash equivalents 169,287 399,952
Due from Lessees 12,730,044 6,288,402
Note receivable 2,634,052 2,884,052
Deferred expenses, net 7,523,800 6,312,495
Deposits and other assets 2,916,071 1,005,508
------------- -------------
Total assets $ 852,777,511 $ 807,022,565
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 386,530,452 $ 331,393,822
Accounts payable and accrued expenses 14,225,742 12,315,770
Distributions payable 13,049,923 12,978,727
Minority interest in Partnership 12,919,522 19,070,568
------------- -------------
Total liabilities 426,725,639 375,758,887
------------- -------------
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, 37,241,045 and 36,438,535 shares issued
and outstanding 372,410 364,385
Additional paid-in capital 415,784,289 407,833,313
Unearned directors' and officers' compensation (2,568,003) (2,006,442)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (55,022,937) (42,413,691)
------------- -------------
Total shareholders' equity 426,051,872 431,263,678
------------- -------------
Total liabilities and shareholders' equity $ 852,777,511 $ 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>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Percentage lease revenue $ 33,892,541 $ 32,919,517 $ 91,248,792 $ 82,377,119
Gain (loss) on sale of hotel properties (693,801) 269,211 (693,801)
Other income 292,950 254,815 687,224 611,394
------------ ------------ ------------ ------------
Total revenue 34,185,491 32,480,531 92,205,227 82,294,712
------------ ------------ ------------ ------------
Expenses
Real estate and personal property taxes 3,152,300 3,106,366 9,971,706 8,462,300
Depreciation and amortization 9,828,522 8,655,204 28,046,955 22,624,334
Amortization of loan costs 369,456 201,005 785,367 624,203
Interest 7,646,625 6,204,676 20,058,476 15,522,439
General and administrative 1,413,299 1,438,009 5,490,096 4,709,362
Merger expenses 2,197,301 2,197,301
------------ ------------ ------------ ------------
Total expenses 22,410,202 21,802,561 64,352,600 54,139,939
------------ ------------ ------------ ------------
Income before minority interest and
change in accounting 11,775,289 10,677,970 27,852,627 28,154,773
Minority interest 354,578 454,707 797,971 1,327,572
------------ ------------ ------------ ------------
Income before change in accounting 11,420,711 10,223,263 27,054,656 26,827,201
Change in accounting for corporate
organizational costs 133,193
------------ ------------ ------------ ------------
Net income 11,420,711 10,223,263 26,921,463 26,827,201
Preferred stock dividends 1,632,813 1,632,803 4,898,439 1,741,657
------------ ------------ ------------ ------------
Net income applicable to
common shareholders $ 9,787,898 $ 8,590,460 $ 22,023,024 $ 25,085,544
============ ============ ============ ============
Net income per common
share-basic and diluted $ .26 $ .24 $ .59 $ .70
============ ============ ============ ============
Weighted average number of
common shares and units
outstanding-diluted 38,584,000 38,311,000 38,573,000 37,909,000
============ ============ ============ ============
</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 Nine Months Ended
September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,921,463 $ 26,827,201
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on sale of hotel properties (269,211) 693,801
Depreciation and amortization 28,046,955 22,624,334
Amortization of loan costs 785,367 624,203
Change in accounting for corporate organizational costs 133,193
Amortization of unearned directors' compensation 655,239 191,867
Directors' compensation 54,915 42,420
Minority interest 797,971 1,327,572
Changes in assets and liabilities:
Due from Lessees (6,441,642) (8,699,556)
Deferred expenses (25,000) (3,589)
Deposits and other assets (1,910,563) 86,995
Accounts payable and accrued expenses 2,898,216 2,608,535
------------- -------------
Net cash provided by operating activities 51,646,903 46,323,783
------------- -------------
Cash flows from investing activities:
Investment in hotel properties (57,540,471) (167,583,927)
Improvements and additions to hotel properties (28,033,632) (25,879,535)
Payments received on note receivable 250,000
Proceeds from sale of hotel properties 21,501,725 7,940,368
Cash paid for franchise applications (211,725) (214,537)
------------- -------------
Net cash used in investing activities (64,034,103) (185,737,631)
------------- -------------
Cash flows from financing activities:
Gross proceeds from public offering of common stock 20,144,615
Gross proceeds from public offering of preferred stock 68,750,000
Payment of offering expenses (3,745,480)
Proceeds from exercise of stock options 112,500
Distributions paid (40,709,485) (34,087,772)
Borrowings under revolving credit facilities 148,175,000 161,275,000
Payments on revolving credit facilities (187,950,000) (63,800,000)
Payments on CMBS credit facility (1,747,963) (1,631,705)
Borrowings under GMAC Term Loan 97,020,000
Payments on GMAC Term Loan (163,852)
Payments on debt assumed (192,831) (99,055)
Cash paid for loan costs (2,270,608) (49,579)
Payments on capital lease obligations (3,726) (3,025)
------------- -------------
Net cash provided by financing activities 12,156,535 146,865,499
------------- -------------
Net increase (decrease) in cash and cash equivalents (230,665) 7,451,651
Cash and cash equivalents at beginning of period 399,952 190,458
------------- -------------
Cash and cash equivalents at end of period $ 169,287 $ 7,642,109
============= =============
</TABLE>
5
<PAGE>
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, during the nine months ended September 30,
1999, the Company issued 1,556 shares of common stock at $9.63 per share, 536
shares of common stock at $9.31 per share, 1,764 shares of common stock at $8.50
per share, 396 shares of common stock at $9.44 per share, 1,215 shares of common
stock at $9.25 per share and 572 shares of common stock at $8.69 per share to
the independent directors of the Company in lieu of cash as compensation.
During January 1999, 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 a limited partner.
At September 30, 1999, $11,961,381 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on November
1,1999. At December 31, 1998, $11,890,186 in distributions to shareholders and
limited partners had been declared but not paid.
At September 30, 1998, $11,888,294 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on November
2, 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.
6
<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,
1999 owned an approximate 96.5% interest in the Partnership. The Company
was formed to acquire equity interests in hotel properties and at
September 30, 1999 owned, through the Partnership, 100 hotel properties
with a total of 12,745 rooms in 35 states.
At September 30, 1999, the Partnership or its affiliates, under operating
leases providing for the payment of percentage rent (the "Percentage
Leases"), leased 79 of the Company's hotels to affiliates of Interstate
Hotels Corporation (formerly named Interstate Hotels Management, Inc.)
("IHC"), which was recently divested from Wyndham International, formerly
know as Patriot American Hospitality, Inc. ("Wyndham"). IHC is referred
to herein as the "Interstate Lessee." All payments due under these
Percentage Leases are guaranteed by Interstate Hotels, L.L.C., a
subsidiary of IHC, and IHC (except for three hotels where Wyndham rather
than IHC is the guarantor). The Partnership leased 19 hotels to
wholly-owned subsidiaries of Prime Hospitality Corporation (collectively,
the "Prime Lessee"). The Prime Lessee is required, under the terms of its
master lease agreements, to maintain cash or marketable securities equal
to at least 20% of the expected annual percentage rents. The IHC 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 and its affiliates pursuant to the
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 two hotels
are operated pursuant to management agreements, one of which is operated
by a subsidiary of IHC and one of which is operated by a wholly-owned
subsidiary of MeriStar Hotels & Resorts, Inc.
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.
In April 1999, the Company reached an agreement with Wyndham and IHC,
amending all leases to include performance standards based upon hotel
revenues and minimum expenditures for marketing and maintenance. As a
part of the agreement, the Company also received $2 million of additional
incentive rent for 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
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
1. Organization and Basis of Presentation (Continued)
the Company's Annual Report on Form 10-K for the year ended December 31,
1998. 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. Net Income Per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), requires the presentation of basic and diluted earnings per
share. 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 and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
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 $ 9,787,898 37,239,958 $.26 $ 8,590,460 36,384,908 $.24
Dilutive effect of
potential conversion
of partnership units
and elimination of
minority interest 354,578 1,344,056 454,707 1,925,915
Dilutive effect of stock
options outstanding
using the treasury
stock method 386
----------- ---------- ---- ----------- ---------- ----
Net income-diluted $10,142,476 38,584,014 $.26 $ 9,045,167 38,311,209 $.24
=========== ========== ==== =========== ========== ====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
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 $22,023,024 37,216,794 $.59 $25,085,544 35,951,937 $.70
Dilutive effect of
potential conversion
of partnership units
and elimination of
minority interest 797,971 1,356,646 1,327,572 1,902,796
Dilutive effect of stock
options outstanding
using the treasury
stock method 54,523
----------- ----------- ------------- ----------- ------------ ----
Net income-diluted $22,820,995 38,573,440 $.59 $26,413,116 37,909,256 $.70
=========== =========== ============= =========== ============ ====
</TABLE>
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. Net Income Per Common Share (Continued)
For the three and nine months ended September 30, 1999, the Company had
approximately 570,000 shares of Common Stock subject to outstanding stock
options that were not included in the calculation of dilutive common
shares because they were anti-dilutive.
3. Debt
Debt is comprised of the following at September 30, 1999:
<TABLE>
<S> <C>
Commercial Mortgage Bonds $ 82,340,538
GMAC Term Loan 96,856,148
Unsecured Lines of Credit 196,825,000
Other 10,508,766
------------
$386,530,452
============
</TABLE>
The Company's $219.5 million unsecured line of credit with Bank One (the
"Bank One Line") bears interest at a variable rate of LIBOR plus 1.5%,
1.75%, 2.00%, 2.25% or 2.50% 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. At September 30, 1999, the interest rate on the Bank One Line
was LIBOR (5.40% at September 30, 1999) plus 2.50%. The Bank One Line
expires in October 2000.
In March 1999, the Company obtained an additional $25 million unsecured
line of credit from Bank of America, formerly NationsBank (the "Bank of
America Line"). The Bank of America 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 September 30, 1999, the interest rate on the Bank of
America Line was LIBOR (5.40% at September 30, 1999) plus 2.25%.
The Bank of America Line expires in October 2000.
4. Subsequent Events
On October 31, 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. This is the third principal payment under this
promissory note under which Hudson has defaulted in 1999. The unpaid
principal balance on the note is approximately $2.6 million. The Company
has accelerated the full loan amount upon
9
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
4. Subsequent Events (Continued)
such default in accordance with the terms of the note, but has agreed not
to exercise any remedies with respect to such default until the Company
gives Hudson one day written notice thereof. The Company may modify the
payment terms with respect to principal. Hudson continues to pay interest
at the regular interest rate. The promissory note is secured by a pledge
of two million shares of Hudson's common stock.
On October 22, 1999, the Company's Board of Directors approved a stock
repurchase program to buy back up to $25 million of common stock on the
open market over the next eighteen months, subject to certain market
conditions and other factors.
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 its initial
public offering (the "IPO") and the simultaneous acquisition of eight Hampton
Inn hotels 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 September 30, 1999:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Premium Limited Service Hotels:
Hampton Inn 52 6,552
Hampton Inn & Suites 1 125
Comfort Inn 1 104
--- ------
Sub-total 54 6,781
--- ------
All-Suite Hotels:
AmeriSuites 19 2,403
Premium Extended Stay Hotels:
Residence Inn 12 1,431
Homewood Suites 9 1,295
--- ------
Sub-total 21 2,726
--- ------
Full Service Hotels:
Holiday Inn 3 397
Comfort Inn 1 177
--- ------
Sub-total 4 574
--- ------
Independent Hotels: 2 261
--- ------
Total 100 12,745
=== ======
</TABLE>
The Partnership leases 98 of the hotels to the Lessees pursuant to the
Percentage Leases. The remaining two 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.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998
For the three months ended September 30, 1999 and 1998, the Company had revenues
of $34,185,491 and $32,480,531, respectively, consisting of Percentage Lease
revenue of $33,892,541 and $32,919,517. The increase in Percentage Lease revenue
for the three months ended September 30, 1999 over the comparable period last
year resulted from a net gain in Percentage Lease revenue from (1) two hotels
purchased by the Company in the second quarter of 1999 and (2) the recognition
of $1,013,000 in special Percentage Lease revenue applicable to the amendment of
its leases with the Interstate Lessee, offset by (3) Percentage Lease revenue
lost by the sale of four hotels in the second quarter of 1999, and (4) a
decrease in revenue per available room ("REVPAR"). On a same store basis,
revenue per available room for hotels owned by the Company throughout both
periods decreased by 1.2% from $57.62 to $56.91. In addition, for hotels, on a
comparable hotel basis, which were in operation for the full quarter in both
1999 and 1998 with the same or comparable brand affiliation, regardless of
ownership last year, REVPAR (on a pro forma basis) decreased from $57.64 to
$57.49, a decrease of .3%.
Real estate and personal property taxes increased over the comparable period in
1998 due primarily to increases in assessed values of certain hotels for real
estate tax purposes.
Depreciation and amortization increased over the comparable period in 1998 due
primarily to capitalized renovation costs at certain hotels.
Interest expense increased $1,441,949 in the three months ended September 30,
1999 over the comparable period in 1998. The increase was due to an increase in
the average outstanding balance of the Company's debt from $331 million for the
three months ended September 30, 1998 to $383 million for the three months ended
September 30, 1999 and an increase in average interest rates from 7.4% for the
quarter ended September 30, 1998 to 7.9% for the quarter ended September 30,
1999.
Funds From Operations (as defined below) were $19,936,074 or $0.52 per share for
the three months ended September 30, 1999, compared to $20,516,357 or $0.54 per
share for the three months ended September 30, 1998. The decrease is due
primarily to the decrease in Percentage Lease revenue resulting from the
decrease in REVPAR and increases in interest rates as compared to the same
period last year. 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.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Nine Months Ended September 30, 1999 and 1998
For the nine months ended September 30, 1999 and 1998, the Company had revenues
of $92,205,227 and $82,294,712, respectively, consisting of Percentage Lease
revenue of $91,248,792 and $82,377,119. The increase is the result of an
increase in the number of hotels owned the entire nine month period of 1999 over
1998 from 82 to 100 and the recognition of $1,673,000 in special Percentage
Lease revenue applicable to the amendment of its leases with the Interstate
Lessee, which is being recognized in a manner that best reflects the weighting
of Percentage Lease revenue over the remainder of 1999, in accordance with the
amendment. On a same store basis, REVPAR for hotels owned by the Company
throughout both periods decreased by 2.0% from $53.32 to $52.23. In addition,
for hotels, on a comparable hotel basis, which were in operation for the full
quarter in both 1999 and 1998 with the same or comparable brand affiliation,
regardless of ownership last year, REVPAR (on a pro forma basis) decreased from
$54.75 to $53.81, a decrease of 1.7%.
Real estate and personal property taxes and depreciation and amortization
increased over the comparable period in 1998 due primarily to the increase in
the number of hotel properties owned by the Company for the entire nine month
period in 1998 and 1999 from 82 properties to 100 properties.
General and administrative expenses increased primarily as a result of (i)
increased legal and professional fees and shareholder expenses, resulting from
the Company's growth and (ii) increased corporate staff and related expenses.
Interest expense increased $4,536,037 in the nine months ended September 30,
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 $279
million for the nine months ended September 30, 1998 to $355 million for the
nine months ended September 30, 1999. Average interest rates increased slightly
from 7.5% for the quarter ended September 30, 1999 to 7.6% for the quarter ended
September 30, 1999.
Funds From Operations (as defined below) were $50,509,365 or $1.31 per share for
the nine months ended September 30, 1999, compared to $51,708,800 of $1.36 per
share for the nine months ended September 30, 1998. The decrease is due
primarily to the decrease in Percentage Lease revenue resulting from the
decrease in REVPAR as compared to the same period last year.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
Funds From Operations
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, the write-off of
non-recurring merger expenses and the 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.
FFO presented herein is not necessarily comparable to FFO presented by other
real estate companies due to the fact that not all real estate companies use the
same definition. However, the Company's FFO is comparable to the FFO of many
real estate companies.
The following is a reconciliation of income before minority interest to Funds
From Operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before minority interest and
change in accounting $11,775,289 $10,677,970 $27,852,627 $28,154,773
Less:
Preferred stock dividends (1,632,813) (1,632,803) (4,898,439) (1,741,657)
Gain on sale of hotel properties (269,211)
Add:
Depreciation of buildings, furniture
and equipment 9,793,598 8,580,088 27,824,388 22,404,582
Loss on sale of hotel properties 693,801 693,801
Merger expenses 2,197,301 2,197,301
----------- ----------- ----------- -----------
Funds From Operations $19,936,074 $20,516,357 $50,509,365 $51,708,800
=========== =========== =========== ===========
Weighted average number of
common shares and units
outstanding -- diluted 38,584,014 38,311,209 38,573,440 37,909,256
============ =========== =========== ===========
Funds From Operations per share
and unit $ .52 $ .54 $ 1.31 $ 1.36
=========== =========== =========== ===========
</TABLE>
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
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 Interstate Lessee's lease
obligations are guaranteed by Interstate except for three hotels where Wyndham
is the guarantor. The Prime Lessee 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 September 30, 1999 were $169,287, compared to
$399,952 at December 31, 1998. Additionally, all of the September 30, 1999
receivables due from the Lessees were received prior to the filing of this
Quarterly Report on Form 10-Q. Net cash provided by operating activities for the
nine months ended September 30, 1999 was $51,646,903.
The Company intends to make additional investments in hotel properties over time
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. The Company also
intends to continue to sell selected hotels in its current portfolio.
At September 30, 1999, the Company had outstanding debt of approximately $386.5
million, including $196.8 million under its combined lines of credit, $82.3
million under the Commercial Mortgage Bonds (the "Bonds") and $96.9 million
under its GMAC term loan, leaving approximately $49.4 million available under
the combined lines of credit, after consideration of outstanding letters of
credit. Additionally, the Company had $10.5 million of mortgage notes payable
assumed in connection with the purchase of two hotels in 1998. The Company's
consolidated indebtedness was 42.0% of its investments in hotels, at cost, at
September 30, 1999.
In December 1997, the Company arranged an interest rate swap on a notional
amount of $75 million with Bank One as a hedge against floating rate debt, which
resulted in a fixed interest rate of 8.15% on the notional amount. On May 3,
1999, the Company entered into a second interest rate swap on a notional amount
of $40 million with Bank One, which resulted in a fixed interest rate of 7.49%
on the notional amount. These swap agreements will expire in October 2000.
15
<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, 1999, the Company invested
approximately $28 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
$2.9 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, the GMAC Term Loan 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.
Recurring repairs and maintenance are performed by the Lessees.
The Company has entered into an agreement to purchase a hotel for approximately
$33 million; however, the seller has elected to keep the hotel with the
Company's consent, subject to obtaining permanent financing. A financing
commitment has been executed by the seller; however, the Company will not be
released from the contractual obligations until finalization of funding by the
sellers lender. Additionally, the Company owns land for the possible development
of an Embassy Suites hotel in Salt Lake City, Utah. Funds needed to acquire and
complete these projects, if needed, may be obtained from borrowings under its
combined lines of credit and other sources of debt or equity financing.
During the nine months ended September 30, 1999, the Partnership declared
distributions in the aggregate of $11,961,381 to its partners, including the
Trust, of $.31 per unit of limited partnership interest ("Unit"), and the
Company declared distributions in the aggregate of $11,544,724, or $.31 per
share to its shareholders, with such distributions being payable on November 1,
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 lines 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 that
are necessary to maintain the Company's REIT status based on current IRS
requirements.
The Company expects to meet its long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowings, the issuance of additional equity securities of the
Company, or, in connection with acquisitions of hotel properties, issuance of
Units in the Partnership. Pursuant to the Partnership Agreement for the
Partnership, holders of Units have the right to require the Partnership to
redeem their Units. During the nine months ended September 30, 1999, 572,847
Units were tendered for redemption. Pursuant to the
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
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 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
engaged 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.
17
<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, modified its corporate systems and applications, and is
now in compliance with Year 2000 issues. The Company also has surveyed its
customers, franchisors, vendors, and the Lessees, whose failure to convert their
systems in a timely fashion 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 fully prevent problems
that could affect the Company's business or that any third party upon whose data
or services the Company relies will be fully in compliance.
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 issue 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 by each Lessee that it is on schedule to complete
these compliance issues before the end of the year.
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.
18
<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.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -- The following exhibits are 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:
(1) Current Report on Form 8-K dated June 30, 1999 reporting the
Company's current Percentage Lease terms for its hotels (no financial
information required).
20
<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.
November 8, 1999 By: /s/Donald H. Dempsey
- ---------------- ---------------------------------------------------
Date Donald H. Dempsey
Executive Vice President, Secretary, Treasurer, and
Chief Financial Officer (Principal Financial and
Accounting Officer)
21
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule (filed only electronically with the SEC)
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Equity Inns, Inc. for the six months ended September
30, 1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 169,287
<SECURITIES> 0
<RECEIVABLES> 15,364,096
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 826,804,257
<DEPRECIATION> 0
<TOTAL-ASSETS> 852,777,511
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
68,750,000
<COMMON> 372,410
<OTHER-SE> 356,929,462
<TOTAL-LIABILITY-AND-EQUITY> 852,777,511
<SALES> 0
<TOTAL-REVENUES> 92,205,227
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 64,352,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,058,476
<INCOME-PRETAX> 0
<INCOME-TAX> 27,852,627
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,023,024
<EPS-BASIC> .59
<EPS-DILUTED> .59
</TABLE>
