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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
March 17, 2000
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Date of Report (Date of Earliest Event Reported)
EQUITY INNS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Tennessee 01-12073 62-1550848
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(State or Other Jurisdiction (Commission File No.) (I.R.S. Employer
of Incorporation) Identification No.)
7700 Wolf River Boulevard
Germantown, Tennessee 38138
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(Address of Principal Executive Offices) (Zip Code)
(901) 754-7774
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS.
Disclosure of Risk Factors
Equity Inns, Inc. is filing this Current Report on Form 8-K to describe various
material risk factors that may affect our business, financial condition and
operations.
Some of the information you will find in our Securities Exchange Act of 1934
filings and our prospectuses or any prospectus supplements may contain
"forward-looking" statements. Also, documents subsequently filed by our company
with the Securities and Exchange Commission may contain similar forward-looking
statements. You can identify these types of statements by their use of
forward-looking words such as "may," "will," "should," "could," "plans,"
"intends," "expects," "anticipates," "estimates," "projects," "continues" or
other similar words. These types of statements discuss future events or
expectations or contain projections or estimates.
When considering these forward-looking statements, you should keep in mind the
following risk factors. These risk factors could cause our actual financial and
operating results to differ materially and adversely from those contained in or
implied by any forward-looking statement.
The following risk factors are not necessarily exhaustive, particularly as to
possible future events, and new risk factors may emerge periodically. Many
things can happen that can cause our actual financial and operating results to
be very different than those described by us in our SEC filings. Any statements
made by us that are not historical facts should be considered to be
forward-looking statements. We make no promise to update any of our
forward-looking statements, or to publicly release the results if we revise any
of them.
RISK FACTORS
Our ability to maintain our historic rate of distributions to our shareholders
is subject to fluctuations in our financial performance, operating results and
capital improvements requirements.
As a REIT, we are required to distribute at least 95% of our taxable income each
year to our shareholders. To date, since our inception in 1994, we have not
reduced our rate of distributions to our shareholders. In the event of downturns
in our operating results and financial performance, or unanticipated capital
improvements to our hotels, including capital improvements which may be required
by our franchisors, we may need to reduce our rate of distributions to our
shareholders. The amount of distributions are in the sole discretion of our
Board of Directors. We cannot assure you either that we will continue to
generate sufficient cash in order to fund distributions at the same rate as our
current rate, or that our Board will continue to maintain our distribution rate
at the same levels as we have in the past.
Among the factors which could adversely affect our results of operations and
decrease our distributions to shareholders are decreased rent from the lessees
of our hotels; increased debt service requirements, including those resulting
from higher interest rates on our variable rate indebtedness; and capital
expenditures at our hotels, including capital expenditures required by the
franchisors of our hotels. Among the factors which could reduce the rent we
receive from our lessees are decreases in hotel revenues (since the rent paid by
each lessee depends, in part, on the revenues from the hotels). Hotel revenue
can decrease for a number of reasons, including increased competition from new
supply of hotel rooms and decreased demand for hotel rooms. These factors can
reduce both occupancy and room rates at our hotel. In 1999, the revenue per
available room ("REVPAR") for our hotels declined from REVPAR for 1998.
Many of the following factors described in this Form 8-K can affect adversely
the rent we receive from our lessees, our operating expenses and our ability to
make distributions to our shareholders.
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Our inability to participate in operating decisions regarding our hotels may
adversely affect our revenues.
In order for us to continue to qualify as a real estate investment trust, or
"REIT," we need to lease substantially all of our hotels to third parties. Under
the terms of the leases, our ability to participate in operating decisions
regarding the hotels is very limited. Subsidiaries of Interstate Hotels Company
currently lease 78 of our hotels, and a subsidiary of Prime Hospitality Corp.
currently leases 19 of our hotels. These lessees presently control the daily
operations of our hotels. We must depend on lease payments from our lessees for
substantially all of our revenues. Even if we believe that our hotels are being
operated inefficiently or in a manner that does not result in satisfactory rent
payments to us or Equity Inns Partnership, L.P., under some circumstances, we
may not be able to require a lessee to change the way our hotels are operated.
Also, in the event that any of our lessees should become insolvent, our lease
payments would be jeopardized, as would also be our ability to make
distributions to our shareholders.
Our inability to obtain financing could limit our growth.
We are required to distribute at least 95% of our taxable income to our
shareholders each year in order to continue to qualify as a REIT. As a result,
our ability to fund capital expenditures, acquisitions or hotel development
through retained earnings is very limited. Our ability to grow through
acquisitions or development of hotels will be limited if we cannot obtain debt
or equity financing. In the current capital market environment, we believe it
would be difficult to obtain equity capital on reasonable terms.
Neither our Charter nor our bylaws limits the amount of debt that we can incur.
Our Board of Directors has adopted a current policy that limits our outstanding
indebtedness to approximately 45% of our investment in hotel properties at cost.
Our Board can modify this debt limitation policy without shareholder approval.
We cannot assure you that we will be able to obtain additional equity financing
or debt financing or that we will be able to obtain it on favorable terms.
Our debt service obligations could adversely affect our overall operating
results, may require us to liquidate our properties, and may jeopardize our tax
status as a REIT.
Without additional equity financing, as of December 31, 1999, we had the
capacity to borrow up to an additional $56.5 million under our Board's current
debt limitation policy, assuming all borrowings are used to fund additional
investments in hotels. Although we are conservatively leveraged, to the extent
we cannot meet our debt service obligations, we risk losing some or all of our
assets to foreclosure. Also, covenants applicable to our debt could impair our
planned strategies and, if violated, result in a default of our debt
obligations. Adverse economic conditions could result in higher interest rates.
Higher interest rates could increase debt service requirements on floating rate
debt and could reduce the amounts available for distribution to our
shareholders. We have obtained, and may obtain in the future, one or more forms
of interest rate protection--in the form of swap agreements, interest rate caps
contracts, or similar agreements--to "hedge" against the possible negative
effects of interest rate fluctuations. However, we cannot assure you that any
hedging will relieve the adverse effects of interest rate fluctuations. Adverse
economic conditions could cause the terms on which we borrow to be unfavorable.
We could be required to liquidate one or more of our hotel investments at times
which may not permit us to get a maximum return on our investments in order to
meet our debt service obligations.
Our current $219.5 million unsecured line of credit, which is administered by
Bank One, has a three-year term which expires in October 2000, so we will be
required before the fourth quarter of 2000 to obtain a new line of credit. We
cannot assure you either that we will be able to obtain a new credit facility on
the expiration of our current line of credit, or that the terms we obtain for a
new credit facility will be as favorable to us as the terms of our existing line
of credit.
In February 1997, EQI Financing Partnership I, L.P., our indirect subsidiary,
issued $88 million of fixed-rate, collateralized bonds in three classes. We
expect to repay Class A of these bonds on November 20, 2006, Class B on February
20, 2007 and Class C on February 20, 2007. When the Class A bonds mature, we
must use substantially all of our cash flow to amortize the remaining
outstanding principal amount of the bonds. In addition, in June 1999, EQI
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Financing Partnership II, L.P., another of our indirect subsidiaries, financed
approximately $97 million with GMAC Commercial Mortgage Company, which loan is
amortized over 25 years and is collateralized by 19 of our hotels.
Our ability to make distributions to our shareholders may be affected by factors
in the hotel industry that are beyond our control.
Operating Risks
Our hotels are subject to various operating risks found throughout the hotel
industry. Many of these risks are beyond our control. These include, among other
things, the following:
competition from other hotels. Our hotels compete with other hotel properties
in their respective geographic markets. Many of our competitors have
substantially greater marketing and financial resources than do our lessees;
over-building in our markets, which adversely affects occupancy and revenues
at our hotels;
dependence on business and commercial travelers and tourism;
increases in energy costs and other expenses affecting travel, which may
affect travel patterns and reduce the number of business and commercial
travelers and tourists; and
adverse effects of general, regional and local economic conditions.
These factors could adversely affect the amount of rent we receive and our
lessees' ability to make lease payments, which in turn could adversely affect
our ability to make distributions to our shareholders. Decreases in room
revenues of our hotels will result in decreased lease revenues to our company
under our system of leases, called Percentage Leases, which provide for annual
rent equal to the greater of either (a) a fixed annual base rent or (b)
percentage rent which is based on each hotel's revenues.
Competition for Acquisitions
We compete for investment opportunities with entities that have substantially
greater financial resources than we do. These entities generally may be able to
accept more risk than we can manage wisely. This competition may generally limit
the number of suitable investment opportunities offered to us. This competition
may also increase the bargaining power of property owners seeking to sell to us,
making it more difficult for us to acquire new properties on attractive terms.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, occupancy rates and hotel
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in our lease revenues. Our quarterly earnings may be adversely
affected by factors outside our control, including bad weather conditions and
poor economic factors. As a result, we may have to enter into short-term
borrowing in our first and fourth quarters in order to offset these fluctuations
in revenues and to make distributions to our shareholders.
Investment Concentration in Particular Segments of Single Industry
Our entire business is hotel-related. Our investment strategy in the past has
been to acquire interests in midscale limited service, upscale all-suite and
extended stay hotel properties. Our current strategy is to reposition our hotel
portfolio with a larger representation of upscale hotels. Therefore, a downturn
in the hotel industry, in general, and the segments in which we operate, in
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particular, will have a material adverse effect on our lease revenues and
amounts available for distribution to our shareholders.
Capital Expenditures
Our hotels have an ongoing need for renovations and other capital improvements,
including replacements, from time to time, of furniture, fixtures and equipment.
The franchisors of our hotels also require periodic capital improvements as a
condition of keeping the franchise licenses. The costs of all of these capital
improvements could adversely affect our financial condition and amounts
available for distribution to our shareholders. These renovations may give rise
to the following risks:
possible environmental problems;
construction cost overruns and delays;
a possible shortage of available cash to fund renovations and the related
possibility that financing for these renovations may not be available to us
on affordable terms; and
uncertainties as to market demand or a loss of market demand after renovations
have begun.
For the year ended December 31, 1999, we spent approximately $32.8 million for
capital improvements to our hotels, including approximately $10.4 million in
franchisor-required renovations. In 2000, we expect to spend approximately $11.5
million for capital improvements to our hotels.
Investment risks in the real estate industry generally may adversely affect our
ability to make distributions to our shareholders.
General Risks of Investing in Real Estate
Our investments in hotels are subject to varying degrees of risk that generally
arise from the ownership of real property. The underlying value of our real
estate investments and our income and ability to make distributions to our
shareholders depend upon the ability of our lessees to operate our hotels so as
to maintain or increase room revenues and generate enough income in excess of
operating expenses to make rent payments under the Percentage Leases. Both
income from our hotels and our ability to make distributions to our shareholders
may be adversely affected by changes beyond our control and our lessees'
control, including the following:
adverse changes in national and local economic and market conditions;
changes in interest rates and in the availability, cost and terms of debt
financing;
changes in governmental laws and regulations, fiscal policies and zoning
ordinances and the related costs of compliance with laws and regulations,
fiscal policies and ordinances;
the ongoing need for capital improvements, particularly in older structures;
changes in real property tax rates and other operating expenses;
civil unrest, acts of God, including earthquakes, floods and other natural
disasters, which may result in uninsured losses, and acts of war; and
the relative illiquidity of real estate investments.
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Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be maintained on each
of our hotels, including liability, fire and extended coverage. We believe this
specified coverage is of the type and amount customarily obtained for or by
hotel owners. However, various types of catastrophic losses, like earthquakes
and floods, may not be insurable or may not be economically insurable. In the
event of a substantial loss, our insurance coverage may not be able to cover the
full current market value or replacement cost of our lost investment. Inflation,
changes in building codes and ordinances, environmental considerations and other
factors might also keep us from using insurance proceeds to replace or renovate
a hotel after it has been damaged or destroyed. Under those circumstances, the
insurance proceeds we receive might be inadequate to restore our economic
position on the damaged or destroyed property.
Noncompliance with governmental regulations could adversely affect our operating
results.
Environmental Matters
Our hotel properties are subject to various federal, state and local
environmental laws. Under these laws, courts and government agencies have the
authority to require the owner of a contaminated property to clean up the
property, even if the owner did not know of or was not responsible for the
contamination. These laws also apply to persons who owned a property at the time
it became contaminated. In addition to the costs of cleanup, contamination can
affect the value of a property and, therefore, an owner's ability to borrow
funds using the property as collateral. Under the environmental laws, courts and
government agencies also have the authority to require that a person who sent
waste to a waste disposal facility, like a landfill or an incinerator, pay for
the clean-up of that facility if it becomes contaminated and threatens human
health or the environment. Furthermore, decisions by courts have established
that third parties may recover damages for injury caused by property
contamination. For instance, a person exposed to asbestos while staying in a
hotel may seek to recover damages if he suffers injury from the asbestos.
Lastly, some of these environmental laws restrict the use of a property or place
conditions on various activities. One example is laws that require a business
using chemicals to manage them carefully and to notify local officials that the
chemicals are being used.
Our company could be responsible for the costs discussed above, if it found
itself in one or more of these situations. The costs to clean up a contaminated
property, to defend against a claim, or to comply with environmental laws could
be material and could affect the funds available for distribution to our
shareholders. To determine whether any costs of this nature might be required,
we commissioned studies--called "Phase I environmental site assessments," or
"ESAs"--before we acquired our hotels. We obtained the ESAs to help us identify
whether we might be responsible for cleanup costs or other costs in connection
with our hotels. The ESAs on our hotels did not reveal any environmental costs
that might have a material adverse effect on our business, assets, results of
operations or liquidity. However, ESAs do not always identify all potential
problems and sometimes do not identify all potential environmental liabilities.
Consequently, we may have material environmental liabilities of which we are
unaware.
Americans with Disabilities Act and Other Changes in Governmental Rules and
Regulations
Under the Americans with Disabilities Act of 1990, or the "ADA," all public
accommodations must meet various federal requirements related to access and use
by disabled persons. Compliance with the ADA's requirements could require
removal of access barriers, and non-compliance could result in the U.S.
government imposing fines or in private litigants winning damages. If we are
required to make substantial modifications to our hotels, whether to comply with
the ADA or other changes in governmental rules and regulations, our ability to
make distributions to our shareholders could be adversely affected.
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Fluctuations in our property taxes can adversely affect our ability to make
distributions to our shareholders.
Each of our hotels is subject to real and personal property taxes. These taxes
on our hotel properties may increase or decrease as tax rates change and as the
properties are assessed or reassessed by taxing authorities. If property taxes
increase, our ability to make distributions to our shareholders could be
adversely affected.
Operating our hotels under franchise agreements could adversely affect our
distributions to our shareholders.
Substantially all of our hotels operate under franchise agreements, and we are
subject to the risks that are found in concentrating our hotel investments in
several franchise brands. These risks include reductions in business following
negative publicity related to one of our particular brands. This could adversely
affect our lease revenues and the amounts available for distribution to our
shareholders.
The maintenance of the franchise licenses for our hotels is subject to our
franchisors' operating standards and other terms and conditions. Our franchisors
periodically inspect our hotels to ensure that we and our lessees follow their
standards. Failure by our company or one of our lessees to maintain these
standards or other terms and conditions could result in a franchise license
being canceled. As a condition of our continued holding of a franchise license,
a franchisor could also possibly require us to make capital expenditures, even
if we do not believe the capital improvements are necessary or desirable or will
result in an acceptable return on our investment. Nonetheless, we may risk
losing a franchise license if we do not make franchisor-required capital
expenditures.
If a franchisor terminates the franchise license, we may try either to obtain a
suitable replacement franchise or to operate the hotel without a franchise
license. The loss of a franchise license could materially and adversely affect
the operations or the underlying value of the hotel because of the loss of
associated name recognition, marketing support and centralized reservation
systems provided by the franchisor. Although the Percentage Leases require our
lessees to maintain the franchise licenses for each of our hotels, a lessee's
loss of a franchise license for one or more hotels could materially and
adversely affect our revenues. This loss of revenues could, therefore, also
adversely effect our cash available for distribution to shareholders.
The ability of our Board of Directors to change our major policies may not be in
your interest.
Our major corporate policies, including our debt, acquisition, financing,
growth, operations and distribution policies, are determined by our Board. The
Board may amend or revise these and other policies from time to time without the
vote or consent of our shareholders.
Provisions of our Charter and Tennessee law may limit the ability of a third
party to acquire control of our company.
Ownership Limitation
Our Charter provides that no person may directly or indirectly own more than
9.9% of our common stock or any series of our preferred stock. We refer to this
limitation as the "Ownership Limitation." This may prevent an acquisition of
control of our company by a third party without our Board's approval, even if
our shareholders believe the change of control is in their interest.
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Staggered Board of Directors
Under our Charter, our Board has three classes of directors. Directors for each
class are elected for a three-year term. The staggered terms of our directors
may affect the ability to change control of our company, even if shareholders
believe a change of control is in their interest. This staggered-board feature
may also discourage offers or other bids being made for our capital stock at a
premium over the market price.
Authority to Issue Preferred Stock
Our Charter authorizes our Board to issue up to 10,000,000 shares of preferred
stock and to establish the preferences and rights of any shares issued. The
issuance of shares of preferred stock may have the effect of delaying or
preventing a change in control of our company, including transactions at a
premium over the market price of our capital stock, even if shareholders believe
that a change of control is in their interest.
Tennessee Anti-Takeover Statutes
As a Tennessee corporation, we are subject to various anti-takeover laws found
in Chapter 103 of Title 48 of the Tennessee Code. These laws place restrictions
and require compliance with various procedures designed to protect the
shareholders of Tennessee corporations against unfair or coercive mergers and
acquisitions. These restrictions and procedural requirements may discourage
takeover offers for, or changes in control of our company, including
transactions at a premium over the market price of our capital stock, even if
shareholders believe that a change of control is in their interest.
Our failure to qualify as a REIT under the federal tax laws will result in
adverse tax consequences.
REIT Minimum Distribution Requirements
In order to qualify as a REIT, among other requirements, each year we must
distribute to our shareholders at least 95% of our taxable income (other than
any net capital gain). In addition, we will incur a 4% nondeductible excise tax
if the actual amount we pay out to our shareholders in a calendar year is less
than a minimum amount specified under the federal income tax laws. We have
distributed and intend to continue to distribute our income to our shareholders
so that we will satisfy the 95% test and avoid the 4% excise tax. However,
because the hotel industry is seasonal, we could be required to include earnings
in our taxable income for tax purposes before we actually receive the related
cash. That timing difference could require us to borrow funds to meet the 95%
test and avoid corporate income tax and the 4% excise tax in a taxable year.
Failure to Qualify as a REIT
We have operated and intend to continue to operate in a manner so as to qualify
as a REIT for federal income tax purposes. If we fail to qualify as a REIT in
any taxable year, we would be required to pay federal income tax on our taxable
income. We might need to borrow money or sell assets in order to pay the tax.
Our payment of income tax likely would substantially decrease the amounts
available to be paid out to our shareholders. In addition, we no longer would be
required to distribute substantially all of our taxable income to our
shareholders. Unless our failure to qualify as a REIT is excused under the
federal income tax laws, we could not re-elect REIT status until the fifth
calendar year following the year in which we fail to qualify. Further, any
foreclosure on any of our Percentage Leases in the event of a default under
those leases could trigger taxable income, as to which we could be required to
pay federal income taxes.
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Our ownership limitation may prevent you from engaging in certain transfers of
our common stock.
In order to maintain our REIT qualification, no more than 50% in value of our
outstanding stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the federal income tax laws to include various kinds
of entities) during the last half of any taxable year. In addition, if any
shareholder or group of related or affiliated shareholders of a lessee owns,
actually or constructively, 10% or more of our stock, we likely would lose our
REIT status. Our Charter contains the Ownership Limitation, which prohibits both
direct and indirect ownership of more than 9.9% of the outstanding shares of our
common stock or any series of our preferred stock by any person, subject to
several exceptions. Generally, any shares of our capital stock owned by
affiliated owners will be added together for purposes of the Ownership
Limitation.
If anyone transfers shares in a way that would violate the Ownership Limitation
or prevent us from continuing to qualify as a REIT under the federal income tax
laws, we will consider the transfer to be null and void from the outset, and the
intended transferee of those shares will be deemed never to have owned the
shares. Those shares instead will be transferred to a trust for the benefit of a
charitable beneficiary and will be either redeemed by our company or sold to a
person whose ownership of the shares will not violate the Ownership Limitation.
Anyone who acquires shares in violation of the Ownership Limitation or the other
restrictions on transfer in our Charter, bears the risk that he will suffer a
financial loss when the shares are redeemed or sold if the market price of our
stock falls between the date of purchase and the date of redemption or sale.
The market price of our equity securities may vary substantially.
The trading prices of equity securities issued by REITs have historically been
affected by changes in market interest rates. An increase in market interest
rates may lead prospective purchasers of our shares to demand a higher annual
yield, which could reduce the market price of our equity securities. Other
factors that could affect the market price of our equity securities include: (1)
differences between our actual financial results or operations and those
expected by investors and analysts; (2) changes in analysts' recommendations or
projections; (3) changes in general economic or market conditions; and (4) broad
market fluctuations.
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SIGNATURE
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 hereunto duly authorized.
EQUITY INNS, INC.
March 17, 2000 /s/ Donald H. Dempsey
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Donald H. Dempsey
Executive Vice President, Secretary,
Treasurer, and Chief Financial Officer
