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, 2000 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 November 7, 2000 was 36,750,151.
1 of 24
<PAGE>
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations (unaudited) - For
the three months and nine months ended September 30, 2000
and the three months ended September 30, 1999 (actual and
proforma) 4
Consolidated Statements of Cash Flows (unaudited) - For the
three months and nine months ended September 30, 2000 and
1999 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 21
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $780,316,947 $814,536,595
Cash and cash equivalents 525,687 361,142
Due from Lessees 12,278,372 5,123,598
Note receivable 3,407,889 3,313,477
Deferred expenses, net 6,508,977 7,019,382
Deposits and other assets 2,710,678 1,764,596
------------ ------------
Total assets $805,748,550 $832,118,790
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $375,148,119 $381,174,628
Accounts payable and accrued expenses 15,668,324 13,755,097
Distributions payable 10,578,031 12,928,464
Deferred lease revenue 20,581,823
Minority interest in Partnership 9,991,435 12,008,383
------------ ------------
Total liabilities 431,967,732 419,866,572
------------ ------------
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, 37,495,487 and 37,308,523 shares
issued and outstanding 374,955 373,085
Additional paid-in capital 417,760,980 416,355,731
Treasury stock, at cost, 747,600 and 557,300
shares, respectively (5,173,110) (3,882,768)
Unearned directors' and officers' compensation (2,084,032) (2,375,434)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (104,584,088) (65,704,509)
------------ ------------
Total shareholders' equity 373,780,818 412,252,218
------------ ------------
Total liabilities and shareholders' equity $805,748,550 $832,118,790
============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
3
<PAGE>
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------- ---------------------------------------
Proforma Proforma
2000 1999 1999 2000 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Percentage lease revenues $29,270,526 $33,892,541 $30,165,309 $69,824,187 $91,248,792 $68,589,713
Gain (loss) on sale of hotel properties (3,316,251) 269,211 269,211
Other income 159,201 292,950 292,950 696,684 687,224 687,224
----------- ----------- ----------- ----------- ----------- -----------
Total revenue 29,429,727 34,185,491 30,458,259 67,204,620 92,205,227 69,546,148
----------- ----------- ----------- ----------- ----------- -----------
Expenses
Real estate and personal property taxes 3,713,418 3,152,300 3,152,300 11,002,146 9,971,706 9,971,706
Depreciation and amortization 10,281,400 9,828,522 9,828,522 30,029,866 28,046,955 28,046,955
Amortization of loan costs 437,743 369,456 369,456 1,188,165 785,367 785,367
Interest 8,018,423 7,646,625 7,646,625 23,999,485 20,058,476 20,058,476
General and administrative 1,376,258 1,095,416 1,095,416 4,375,617 4,504,612 4,504,612
Lease expense 324,875 317,883 317,883 1,188,537 985,484 985,484
----------- ----------- ----------- ----------- ----------- -----------
Total expenses 24,152,117 22,410,202 22,410,202 71,783,816 64,352,600 64,352,600
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before minority interest and
change in accounting 5,277,610 11,775,289 8,048,057 (4,579,196) 27,852,627 5,193,548
Minority interest 124,816 354,578 228,698 (319,306) 797,971 1,010
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before change in accounting 5,152,794 11,420,711 7,819,359 (4,259,890) 27,054,656 5,192,538
Change in accounting for corporate
organizational costs 133,193 133,193
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) 5,152,794 11,420,711 7,819,359 (4,259,890) 26,921,463 5,059,345
Preferred stock dividends 1,632,812 1,632,813 1,632,813 4,898,438 4,898,439 4,898,439
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
shareholders $ 3,519,982 $ 9,787,898 $ 6,186,546 $(9,158,328) $22,023,024 $ 160,906
=========== =========== =========== =========== =========== ===========
Net income (loss) per common share -
basic and diluted $ .10 $ .26 $ .17 $ (.25) $ .59 $ .00
=========== =========== =========== =========== =========== ===========
Weighted average number of common shares
and units outstanding - diluted 37,957,095 38,584,014 38,584,014 37,959,755 38,573,440 38,573,440
=========== =========== ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
4
<PAGE>
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,259,890) $26,921,463
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
(Gain) loss on sale of hotel properties 3,316,251 (269,211)
Depreciation and amortization 30,029,866 28,046,955
Amortization of loan costs 1,188,165 785,367
Change in accounting for corporate organizational costs 133,193
Amortization of unearned directors' compensation 697,092 655,239
Directors' compensation 59,930 54,915
Minority interest (319,306) 797,971
Changes in assets and liabilities:
Due from Lessees (7,154,774) (6,441,642)
Notes receivable (94,412)
Deferred expenses (25,000)
Deposits and other assets (946,082) (1,910,563)
Accounts payable and accrued expenses 2,179,076 2,898,216
Deferred lease revenue 20,581,823
----------- -----------
Net cash provided by operating activities 45,277,739 51,646,903
----------- -----------
Cash flows from investing activities:
Investment in hotel properties (57,540,471)
Improvements and additions to hotel properties (11,099,999) (28,033,632)
Payments received on note receivable 250,000
Cash paid for franchise applications (50,000) (211,725)
Proceeds from sale of hotel properties 12,234,067 21,501,725
----------- -----------
Net cash provided by (used in) investing activities 1,084,068 (64,034,103)
----------- -----------
Cash flows from financing activities:
Purchase of Treasury Stock (1,290,342)
Distributions paid (37,992,114) (40,709,485)
Borrowings under revolving credit facilities 45,525,000 148,175,000
Payments on revolving credit facilities (41,825,000) (187,950,000)
Payments on CMBS credit facility (8,635,353) (1,747,963)
Borrowings under GMAC Term Loan 97,020,000
Payments on GMAC Term Loan (879,342) (163,852)
Payments on debt assumed (211,814) (192,831)
Cash paid for loan costs (888,297) (2,270,608)
Payments on capital lease obligations (3,726)
----------- -----------
Net cash provided by (used in) financing activities (46,197,262) 12,156,535
----------- -----------
Net increase (decrease) in cash and cash equivalents 164,545 (230,665)
Cash and cash equivalents at beginning of period 361,142 399,952
----------- -----------
Cash and cash equivalents at end of period $ 525,687 $ 169,287
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
5
<PAGE>
Supplemental disclosure of noncash investing and financing activities:
During January 2000, the Company issued to certain officers, 38,669 shares of
common stock at $6.88 per share under the 1994 Stock Incentive Plan in lieu of
cash as a performance bonus; and 71,450 shares of restricted common stock,
valued at $6.75 per share, with restriction periods tied to employment ranging
from three to five years.
During September 2000, 74,703 units of limited partnership interest in the
partnership ("Units") were exchanged for shares of common stock by certain
limited partners.
Additionally, during the nine months ended September 30, 2000, the Company
issued 2,220 shares of common stock at $6.75 per share, 800 shares of common
stock at $6.25 per share, 2,200 shares of common stock at $6.81 per share, 724
shares of common stock at $6.88 per share, 2,448 shares of common stock at $6.12
per share and 760 shares of common stock at $6.56 per share to its independent
directors in lieu of cash as compensation.
At September 30, 2000, $9,489,490 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on November
1, 2000. At December 31, 1999, $11,839,922 in distributions to shareholders and
limited partners had been declared but not paid.
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.
6
<PAGE>
EQUITY INNS, INC.
NOTES TO 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,
2000 owned an approximate 96.8% interest in the Partnership. The Company
was formed to acquire equity interests in hotel properties and at
September 30, 2000 owned, through the Partnership, 96 hotel properties
with a total of 12,284 rooms in 34 states.
At September 30, 2000, the Partnership or its affiliates, under operating
leases providing for the payment of percentage rent (the "Percentage
Leases"), leased 75 of the Company's hotels to affiliates of Interstate
Hotels Corporation ("IHC"), which was divested in 1999 from Wyndham
International ("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). At September 30,
2000, the Partnership leased 19 hotels to wholly-owned subsidiaries of
Prime Hospitality Corporation (collectively, the "Prime Lessee"). All
payments due under these Percentage Leases are guaranteed by Prime
Hospitality Corporation. 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 hotel ("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.
These unaudited 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
Annual Report on Form 10-K for the year ended December 31, 1999. The
accompanying 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.
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. Change in Accounting Principle
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides that a lessor shall defer
recognition of contingent rental income in interim periods until
specified targets that trigger the contingent income are met. The Company
has reviewed the terms of its percentage leases and has determined that
the provisions of SAB 101 will significantly impact the Company's current
revenue recognition on an interim basis, but will have no impact on the
Company's annual percentage lease revenue, funds from operations or
interim cash flow from its third party Lessees. The Company has adopted
the provisions of SAB 101 and elected to implement these provisions as a
change in accounting principle effective January 1, 2000. For comparative
purposes, the Company has elected to illustrate the proforma effect of
SAB 101 for the three- and nine-month periods ended September 30, 1999.
The effect of the change on the three months ended September 30, 2000 was
to decrease lease revenues by $3,240,111 and, therefore, net income
applicable to common shareholders by $3,133,621 ($.08 per share-basic and
diluted) to 3,519,982 ($.10 per share-basic and diluted). The proforma
effect of the change on the three months ended September 30, 1999 was to
decrease lease revenues by $3,727,232 and, therefore, net income
applicable to common shareholders by $3,601,352 ($.09 per share- basic
and diluted) to $6,186,546 ($.17 per share-basic and diluted). The effect
of the change on the nine months ended September 30, 2000 was to decrease
lease revenues by $20,581,823 and, therefore, net income applicable to
common shareholders by $19,884,412 ($.54 per share- basic and diluted) to
a loss of $9,158,328 [$(.25) per share-basic and diluted]. The proforma
effect of the change on the nine months ended September 30, 1999 was to
decrease lease revenues by $22,659,079 and, therefore, net income
applicable to common shareholders by $21,862,118 ($.59 per share-basic
and diluted) to $160,906 ($.00 per share-basic and diluted).
The Percentage Leases provide for the greater of (i) annual fixed Base
Rent or (ii) Percentage Rent to be remitted to the Company annually. The
leases contain annual room revenue thresholds used to calculate two tiers
of Percentage Rent which are applied to annualized room revenues on a
quarterly basis to determine quarterly Percentage Rent payments. The
provisions of SAB 101 call for straight-line recognition of the annual
Base Rent throughout the year and for the deferral of any additional
Percentage Rent collected or due from the Lessees until such amounts
exceed the annual fixed Base Rent. This will generally result in Base
Rent being recognized in the first and second quarters and Percentage
Rents collected or due from the Lessees in the first and second quarters
being deferred and then recognized in the third and fourth quarters due
to the structure of the Company's Percentage Leases and the seasonality
of the hotel operations. Historically, the Company has recorded lease
revenue in interim periods on a basis similar to that used to determine
quarterly Lessee Percentage Rent payments, resulting in the second and
third quarters being the strongest quarters.
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. Change in Accounting Principle, Continued
At September 30, 2000, deferred revenue of $20,581,823 represents
Percentage Rent collected or due from the Lessees under the terms of the
Percentage Leases, which the Company expects to recognize as lease
revenue in the fourth quarter of 2000. The Company's quarterly
distributions to shareholders generally are based on Percentage Rents
collected or due from its Lessees as opposed to Percentage Lease revenue
recognized. Management expects its hotel portfolio to yield substantial
Percentage Rent annually, based on its cash flow analyses of the hotels
prior to their acquisition and based on the negotiated terms of the
related leases.
3. Net Income Per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
requires the presentation of basic and diluted earnings per share,
replacing primary and fully diluted earnings per share previously
required.
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, 2000 and 1999.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
2000 1999 (Proforma)
----------------------------------------- -----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income applicable to
common shareholders -
basic $3,519,982 36,689,873 $.10 $6,186,546 37,239,958 $.17
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest 124,816 1,267,222 228,698 1,344,056
Dilutive effect of stock
options outstanding
using the treasury
stock method
---------- ---------- ---- ---------- ---------- ----
Net income applicable to
common shareholders -
- diluted $3,644,798 37,957,095 $.10 $6,415,244 38,584,014 $.17
========== ========== ==== ========== ========== ====
</TABLE>
9
<PAGE>
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
3. Net Income Per Common Share, Continued
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
2000 1999 (Proforma)
----------------------------------------- -----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) applicable
to common shareholders -
basic $(9,158,328) 36,680,875 $(.25) $160,906 37,216,794 $.00
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest (319,306) 1,278,880 1,010 1,356,646
Dilutive effect of stock
options outstanding
using the treasury
stock method
----------- ---------- ----- -------- ---------- ----
Net income (loss) applicable
to common shareholders -
diluted $(9,477,634) 37,959,755 $(.25) $161,916 38,573,440 $.00
=========== ========== ===== ======== ========== ====
</TABLE>
4. Debt
Debt is comprised of the following at September 30, 2000:
Commercial Mortgage Bonds $ 73,102,190
GMAC Term Loan 95,681,255
Unsecured Lines of Credit 196,200,000
Other 10,164,674
------------
$375,148,119
============
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 1.50%,
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, 2000, the interest rate on the Bank One Line
was LIBOR (6.62% at September 30, 2000) plus 2.50%. The Bank One Line
expires in October 2000.
10
<PAGE>
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
4. Debt, Continued
The Company's $25 million unsecured line of credit with Bank of America
(the "Bank of America Line") bears interest at a variable rate of LIBOR
plus 1.50%, 1.75%, 2.00%, 2.25% or 2,50% 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, 2000, the interest rate on the Bank of America Line was
LIBOR (6.62% at September 30, 2000) plus 2.50%. The Bank of America Line
expires in October 2000.
The Company's $10,000,000 line of credit with the National Bank of
Commerce (the "NBC Credit Line") bears interest at the bank's prime rate
(9.50% at September 30, 2000) and is unsecured. The NBC Credit Line has a
three-year term, expiring in October 2000.
5. Subsequent Events
On October 9, 2000, the $25 million Bank of America Line expired.
On October 10, 2000, the Company extended its $219.5 million unsecured
Bank One Line for an additional thirty days. At that time, certain
participant banks elected to reduce their exposure to lodging REITs
resulting in the Bank One Line being reduced to $204.5 million. On
October 10, the Company also extended its $10 million NBC Credit Line for
an additional thirty days. Both the Bank One Line and the NBC Credit Line
will expire on November 9, 2000.
On October 20, 2000, the Company financed $36,000,000 with GMAC
Commercial Mortgage Company (the "GMAC Term Loan #2") at a fixed annual
interest rate of 8.25%. The principal amount of the loan is amortized
over 25 years, with the unpaid balance due and payable in November 2010.
Proceeds from the completion of this loan were used to repay existing
debt under the Bank One Line. In connection with this transaction, eight
of the Company's hotel properties with a carrying value of approximately
$62 million collateralize the loan.
On November 6, 2000, the Company financed $3,135,000 with National Bank
of Commerce (the "NBC Term Loan") at a fixed annual interest rate of
8.50%. The principal amount of the loan is amortized over 20 years, with
the unpaid balance due and payable in November 2005. Proceeds from the
completion of this loan were used to repay existing debt under the Bank
One Line. In connection with this transaction, one of the Company's hotel
properties with a carrying value of approximately $7 million
collateralizes the loan.
11
<PAGE>
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
5. Subsequent Events, Continued
On November 9, 2000, the Company financed $69,653,100 with General
Electric Credit Corporation (the "GECC Term Loan") at a fixed annual
interest rate of 8.25%. The principal amount of the loan is amortized
over 25 years, with the unpaid balance due and payable in December 2010.
Proceeds from the completion of this loan were used to repay existing
debt under the Bank One Line. In connection with this transaction,
sixteen of the Company's hotel properties with a carrying value of
approximately $111 million collateralize the loan.
On November 9, 2000, the Company repaid the then outstanding balance
under the Bank One Line with borrowings under a new $125 million secured
line of credit (the "Bank One Secured Line of Credit"). The Bank One
Secured Line of Credit bears interest at a variable rate of LIBOR plus
1.5%, 1.75%, 2.0%, 2.25%, 2.5% or 2.75% as determined by the Company's
percentage of total debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA"), as defined in the loan agreement (the
"Percentage"). The Percentage is reviewed quarterly and the interest rate
is adjusted as necessary. Currently, the interest rate on the Bank One
Secured Line of Credit is LIBOR plus 2.50%. The Bank One Secured Line of
Credit has a three-year term, expiring on October 26, 2003.
The Bank One Secured Line of Credit had a balance of approximately $105.6
million at November 9, 2000. In connection with this transaction,
twenty-eight of the Company's hotel properties with a carrying value of
approximately $266 million collateralize the loan.
12
<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, 2000:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Premium Limited Service Hotels:
Hampton Inn 48 6,030
Hampton Inn & Suites 1 125
Comfort Inn 2 245
-- ------
Sub-total 51 6,400
-- ------
All-Suite Hotels:
AmeriSuites 19 2,403
Premium Extended Stay Hotels:
Residence Inn 11 1,351
Homewood Suites 9 1,295
-- ------
Sub-total 20 2,646
-- ------
Full Service Hotels:
Holiday Inn 4 557
Comfort Inn 1 177
-- ------
Sub-total 5 734
-- ------
Independent Hotels: 1 101
-- ------
Total 96 12,284
== ======
</TABLE>
The Partnership currently leases 94 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.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
Under the REIT Modernization Act (the "RMA"), which becomes effective January 1,
2001, the Company is permitted to lease its hotels to wholly owned taxable REIT
subsidiaries ("TRS Lessees") of the Company. The Company has entered into an
agreement with Interstate and its affiliated Lessees to terminate all of the
existing leases with the Interstate Lessees effective January 1, 2001 at which
time the Company will enter into leases with newly formed TRS Lessees of the
Company. Under the RMA, the TRS Lessees are required to enter into management
agreements with "eligible independent contractors" which will manage the hotels.
In connection with terminating the Percentage Leases with the Interstate
Lessees, the TRS Lessees have agreed to enter into management agreements with a
wholly-owned subsidiary of Interstate which will manage 55 of the hotels
currently leased to the Interstate Lessees. The remaining 20 hotels currently
subject to leases with the Interstate Lessees will be managed by other
management companies, not yet determined. The management agreements with
Interstate expire with respect to 12 hotels on December 31, 2001, 13 hotels on
December 31, 2002, 12 hotels on December 31, 2003, 11 hotels on December 31,
2004 and 7 hotels on December 31, 2005. The TRS Lessees will pay rent to the
Company and will pay management fees to the managers of the hotels. The TRS
Lessees will be subject to taxation at regular C corporation tax rates on their
net taxable income.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lease revenue $29,270,526 $30,165,309 $69,824,187 $68,589,713
Add:
Deferred lease revenue 3,240,111 3,727,232 20,581,823 22,659,079
----------- ----------- ----------- -----------
Percentage rents collected or
due from Lessees $32,510,637 $33,892,541 $90,406,010 $91,248,792
=========== =========== =========== ===========
</TABLE>
Three Months Ended September 30, 2000 and 1999
Deferred lease revenue for the three months ended September 30, 2000 of
$3,240,111 represents third quarter Percentage Lease revenues collected or due
from the Lessees which management expects the Company to recognize as revenue in
the fourth quarter of 2000. After considering such amounts included in deferred
revenue at September 30, 2000, Percentage Lease revenues collected or due from
the Lessees under the terms of the Percentage Leases during the three months
ended September 30, 2000 were $32,510,637 compared to $33,892,541 for the three
months ended September 30, 1999. The decrease in Percentage Lease revenue
resulted primarily from the receipt in 1999 of one time incentive rent of
$1,013,000 as a part of an overall settlement with a former lessee and
Percentage Lease revenue lost from the sale of four limited service hotels since
the end of
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Three Months Ended September 30, 2000 and 1999, Continued
the third quarter of 1999. On a comparable basis, revenue per available room
("REVPAR") for hotels owned by the Company throughout both periods increased by
3.1% from $57.89 to $59.66.
Real estate and personal property taxes increased from the comparable period in
1999 due primarily to taxes on two large extended stay hotels purchased in mid
1999 that were not assessed at full value until 2000.
Depreciation and amortization increased over the comparable period in 1999 due
primarily to capitalized renovation costs at certain hotels.
General and administrative expenses increased over the comparable period in 1999
due primarily to increases in legal and professional fees and wages and
salaries.
Interest expense increased $371,798 in the three months ended September 30, 2000
over the comparable period in 1999. The increase was due to an increase in the
average outstanding balance of the Company's debt from $376 million for the
three months ended September 30, 1999 to $383 million for the three months ended
September 30, 2000 and an increase in average interest rates from 8.0% for the
quarter ended September 30, 1999 to 8.4% for the nine months ended September 30,
2000.
Nine Months Ended September 30, 2000 and 1999
Deferred lease revenue for the nine months ended September 30, 2000 of
$20,581,823 represents first, second and third quarter Percentage Lease revenues
collected or due from the Lessees which management expects the Company to
recognize as revenue in the fourth quarter of 2000. After considering such
amounts included in deferred revenue at September 30, 2000, Percentage Lease
revenues collected or due from the Lessees under the terms of the Percentage
Leases during the nine months ended September 30, 2000 were $90,406,010 compared
to $91,248,792 for the nine months ended September 30, 1999. The decrease in
Percentage Lease revenue is the result of a full nine months of Percentage Lease
revenue from two large all-suite hotels purchased by the Company in the second
quarter of 1999 and an increase in REVPAR partially offset by (1) Percentage
Lease revenue lost by the sale of eight limited service hotels subsequent to the
first quarter of 1999 and (2) loss of one-time incentive rent of $1,673,000 as a
part of an overall settlement with a former lessee in 1999, offset by an
increase in REVPAR. On a same store and comparable basis, REVPAR for hotels
owned by the Company throughout both periods increased by .1% from $54.65 to
$54.72.
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Nine Months Ended September 30, 2000 and 1999, Continued
Real estate and personal property taxes increased over the comparable period in
1999 due primarily to the purchase of two large all-suite hotels by the Company
in the second quarter of 1999 and due to increases in assessed values of certain
hotels, offset partially by the sale of eight limited service hotels subsequent
to the first quarter of 1999.
Depreciation and amortization increased over the comparable period in 1999 due
primarily to capitalized renovation costs at certain hotels and the purchase of
two large all-suite hotels in the second quarter of 1999.
General and administration expenses decreased slightly over the comparable
period in 1999 due primarily to decreases in franchise taxes.
Interest expense increased $3,941,009 in the nine months ended September 30,
2000 over the comparable period in 1999. The increase was due to an increase in
the average outstanding balance of the Company's debt from $355 million for the
nine months ended September 30, 1999 to $380 million for the nine months ended
September 30, 2000 and an increase in average interest rates from 7.6% for the
nine months ended September 30, 1999 to 8.4% for the nine months ended September
30, 2000.
Funds From Operations
Funds From Operations ("FFO") (as defined below) were $44,278,614 for the nine
months ended September 30, 2000, compared to $50,509,365 for the nine months
ended September 30, 1999. The decrease is due primarily to decreases in
Percentage Lease revenue and from increases in interest expense resulting from
an increase in average outstanding debt and in interest rates 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.
Industry analysts generally consider 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
sales of property, plus depreciation, and certain amortization. For the periods
presented, deferred lease revenue, losses from sales of property, depreciation,
minority interest and the charge from write-off of deferred organizational costs
were the only adjustments to net income for the determination of FFO. The
Company's computation of FFO may not be comparable to FFO reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Funds From Operations, Continued
interpret the current NAREIT definition differently from the Company. 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.
The following is a reconciliation of net income (loss) to FFO:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
Proforma Proforma
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,152,794 $ 7,819,359 $(4,259,890) $ 5,059,345
Less:
Preferred stock dividends (1,632,812) (1,632,813) (4,898,438) (4,898,439)
Gain on sale of hotel properties (269,211)
Add:
Minority interest 124,816 228,698 (319,306) 1,010
Depreciation of buildings, furniture and
equipment 10,224,832 9,793,598 29,858,174 27,824,388
Deferred lease revenue 3,240,111 3,727,232 20,581,823 22,659,079
Change in accounting for corporate
organizational costs 133,193
Loss on sale of hotel properties 3,316,251
----------- ----------- ----------- -----------
Funds From Operations $17,109,741 $19,936,074 $44,278,614 $50,509,365
=========== =========== =========== ===========
Weighted average number of outstanding shares
of Common Stock and Units of Partnership 37,957,095 38,584,014 37,959,755 38,573,440
=========== =========== =========== ===========
</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.
17
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
Cash and cash equivalents as of September 30, 2000 were $525,687, compared to
$361,142 at December 31, 1999. Additionally, all of the September 30, 2000
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, 2000 was $45,277,739.
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 may
seek to sell selected hotels in its current portfolio.
At September 30, 2000, the Company had outstanding debt of approximately $375.1
million, including $196.2 million under its combined lines of credit, $73.1
million under the Company's Commercial Mortgage Bonds (the "Bonds") and $95.7
million under its GMAC term loan (the "GMAC Term Loan"), leaving approximately
$52.8 million available under the combined lines of credit, after consideration
of outstanding letters of credit. Additionally, the Company had $10.2 million of
mortgage notes payable assumed in connection with the purchase of two hotels in
1998. The Company's consolidated indebtedness was 41.3% of its investments in
hotels, at cost, at September 30, 2000.
At November 9, 2000, after the completion of the refinancing of its unsecured
debt described in Note 5 of this Form 10-Q, the Company had approximately $13.9
million available under its Bank One Secured Line of Credit.
During the nine months ended September 30, 2000, the Company invested
approximately $11.1 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 $1.0 million during the remainder of 2000 for capital
improvements.
The Company intends to fund such improvements out of future cash from
operations, present cash balances and borrowings under its line of credit. Under
the Unsecured Bank One Line of Credit, the GMAC Term Loan, the GMAC Term Loan
#2, the GECC 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.
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
During the three months ended September 30, 2000, the Partnership declared
distributions in the aggregate of $9,489,490 to its partners, including the
Trust, of $.25 per unit of limited partnership interest ("Unit"), and the
Company declared distributions in the aggregate of $9,186,972, or $.25 per share
to its shareholders, with such distributions being paid on November 1, 2000.
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
borrowings, proceeds from the sale of certain of its hotel properties, 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, 2000, 74,703 Units were tendered for redemption. Pursuant to
the Partnership Agreement, the Company has the option to redeem Units tendered
for redemption on a one-for-one basis for shares of Common Stock or for an
equivalent amount of cash. The Company anticipates that it will acquire any
Units tendered for redemption in the foreseeable future in exchange for shares
of Common Stock and has agreed to register such shares so as to be freely
tradeable by the recipient.
INFLATION
Operators of hotels, including the 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,
19
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
FORWARD-LOOKING STATEMENTS, Continued
without limitation, statements containing the words "believes", "estimates",
"projects", "anticipates", "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 17, 2000 and filed under the
Securities Exchange Act of 1934, as amended. The Company is not obligated to
update any such forward- looking statements or risk factors.
SEASONALITY
The hotel industry is seasonal in nature. The hotels' operations historically
reflect higher occupancy rates and ADR during the second and third quarters. The
provisions of SAB 101 call for straight-line recognition of the annual base rent
throughout the year and for the deferral of any Percentage Rent amounts
collected or due from the Lessees until such amounts exceed the annual fixed
base rent. This will generally result in base rent being recognized in the first
and second quarters and Percentage Rents collected or due from the Lessees being
deferred and then recognized in the third and fourth quarters due to the
structure of the Company's percentage leases and the seasonality of the hotel
operations. Historically, the Company has recorded lease revenue in interim
periods on a basis similar to that used to determine quarterly Lessee Percentage
Rent payments, resulting in the second and third quarters being the strongest
quarters. To the extent that cash flow from operating activities from the Hotels
for a quarter is insufficient 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 Bank One
Secured Line of Credit.
20
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain financial market risks, the most predominant
of which is the fluctuation in interest rates. At September 30, 2000, the
Company's exposure to market risk for a change in interest rates is related
solely to its debt outstanding under its $219.5 million Bank One Line, its $25
million Bank of America Line and its $10 million NBC Credit Line (collectively
referred to as the "Facilities"). Total debt outstanding under the Facilities
totaled $196.2 million at September 30, 2000. In December 1997, the Company
entered into an interest rate swap agreement, expiring in October 2000, with a
financial institution on a notional principal amount of $75 million. The
agreement effectively fixes the interest rate on the notional amount of floating
rate debt at a rate of 5.90% plus 1.50%, 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 investments in hotel properties, as defined in the Company's Bank One
Line and Bank of America Line loan agreements (the "Percentage"). In May 1999,
the Company entered into a second interest rate swap agreement, expiring in
October 2000, on a notional principal amount of $50 million, which effectively
fixes the interest rate on the notional amount of floating rate debt at a rate
of 5.24% plus the Percentage. Thus, at September 30, 2000 the Company had $81.2
million of variable rate debt outstanding under the Facilities that was exposed
to fluctuations in the market rate of interest.
On October 9, 2000, both of the Company's interest rate swap agreements expired,
resulting in the exposure of all amounts owed under the Facilities, as extended,
as of this date and subsequently borrowed under the Secured Bank One Line of
Credit to fluctuations in the market rate of interest.
The Company's operating results are affected by changes in interest rates,
primarily as a result of borrowing under the Facilities. If interest rates
increased by 25 basis points, the Company's quarterly interest expense would
have increased by approximately $245,250, based on balances outstanding during
the three months ended September 30, 2000.
21
<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)
Reports on Form 8-K -- During the period covered by this Quarterly Report on
Form 10-Q, the Company filed no Current Reports on Form 8-K.
22
<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 10 , 2000 By: /s/Donald H. Dempsey
-------------------- ------------------------------------------------
Date Donald H. Dempsey
Executive Vice President, Secretary, Treasurer,
and Chief Financial Officer (Principal Financial
and Accounting Officer)
23
<PAGE>
EXHIBITS
Exhibit
Number Description
------ -----------
27 Financial Data Schedule (filed only electronically with the SEC)
24
