SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----
X Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 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 May 4, 2000 was 36,669,252.
1 of 20
<PAGE>
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2000
(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations
(unaudited) - For the three months ended March 31, 2000
and the three months ended March 31, 1999 (actual and
proforma) 4
Condensed Consolidated Statements of Cash Flows
(unaudited) - For the three months ended March 31, 2000
and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $799,784,813 $814,536,595
Cash and cash equivalents 303,202 361,142
Due from Lessees 6,983,641 5,123,598
Note receivable 3,407,889 3,313,477
Deferred expenses, net 6,592,963 7,019,382
Deposits and other assets 2,040,428 1,764,596
------------ ------------
Total assets $819,112,936 $832,118,790
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $380,330,562 $381,174,628
Accounts payable and accrued expenses 13,845,911 13,755,097
Distributions payable 12,853,360 12,928,464
Deferred lease revenue (Note 2) 6,750,412
Minority interest in Partnership 11,393,669 12,008,383
------------ ------------
Total liabilities 425,173,914 419,866,572
------------ ------------
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, 37,414,652 and 37,308,523
shares issued and outstanding 374,147 373,085
Additional paid-in capital 417,046,194 416,355,731
Treasury stock, at cost, 747,600 and 557,300 shares,
respectively (5,173,111) (3,882,768)
Unearned directors' and officers' compensation (2,543,598) (2,375,434)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (83,250,723) (65,704,509)
------------ ------------
Total shareholders' equity 393,939,022 412,252,218
------------ ------------
Total liabilities and shareholders' equity $819,112,936 $832,118,790
============ ============
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
3
<PAGE>
EQUITY INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------------------
Proforma
2000 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue
Percentage lease revenues (Note 2) $19,995,634 $25,860,068 $18,506,489
Gain (loss) on sale of hotel properties (368,507)
Other income 336,618 215,923 215,923
----------- ----------- -----------
Total revenue 19,963,745 26,075,991 18,722,412
----------- ----------- -----------
Expenses
Real estate and personal property taxes 4,138,587 3,499,898 3,499,898
Depreciation and amortization 9,929,377 8,742,545 8,742,545
Amortization of loan costs 375,211 207,954 207,954
Interest 7,988,441 6,051,972 6,051,972
General and administrative 1,762,915 2,067,286 2,067,286
Lease expense 532,511 354,817 354,817
----------- ----------- -----------
Total expenses 24,727,042 20,924,472 20,924,472
----------- ----------- -----------
Loss before minority interest and change
in accounting (4,763,297) 5,151,519 (2,202,060)
Minority interest (216,434) 126,168 (137,505)
----------- ----------- -----------
Loss before change in accounting (4,546,863) 5,025,351 (2,064,555)
Change in accounting for corporate
organizational costs 133,193 133,193
----------- ----------- -----------
Net loss (4,546,863) 4,892,158 (2,197,748)
Preferred stock dividends 1,632,813 1,632,813 1,632,813
----------- ----------- -----------
Net loss applicable to common shareholders $(6,179,676) $ 3,259,345 $(3,830,561)
=========== =========== ===========
Net loss per common share - basic
and diluted $ (.17) $ .09 $ (.10)
=========== =========== ===========
Weighted average number of common shares
and units outstanding - diluted 37,968,264 38,553,428 38,553,428
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
4
<PAGE>
EQUITY INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
Proforma
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,546,863) $(2,197,748)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on sale of hotel properties 368,507
Depreciation and amortization 9,929,377 8,742,545
Amortization of loan costs 375,211 207,954
Change in accounting for corporate organizational costs 133,193
Amortization of unearned directors' compensation 237,527 211,059
Directors' compensation 19,985 18,727
Minority interest (216,434) (137,505)
Changes in assets and liabilities:
Due from Lessees (1,860,043) (1,609,665)
Notes receivable (94,412)
Deferred expenses (25,001)
Deposits and other assets (275,832) (544,905)
Accounts payable and accrued expenses 356,663 848,548
Deferred lease revenue 6,750,412 7,353,579
----------- -----------
Net cash provided by operating activities 11,044,098 13,000,781
----------- -----------
Cash flows from investing activities:
Improvements and additions to hotel properties (5,054,820) (8,216,048)
Payments received on note receivable 250,000
Cash paid for franchise applications (50,000)
Proceeds from sale of hotel properties 9,620,384
----------- -----------
Net cash provided by ( used in) investing activities 4,515,564 (7,966,048)
----------- -----------
Cash flows from financing activities:
Purchase of Treasury stock (1,290,343)
Distributions paid (13,472,735) (13,522,999)
Borrowings under revolving credit facilities 7,000,000 26,700,000
Payments on revolving credit facilities (4,000,000) (17,425,000)
Payments on CMBS credit facility (3,473,622) (572,658)
Payments on GMAC Term Loan (301,490)
Payments on debt assumed (68,954) (62,775)
Cash paid for loan costs (10,458) (368,614)
Payments on capital lease obligations (1,384)
----------- -----------
Net cash used in financing activities (15,617,602) (5,253,430)
----------- -----------
Net increase (decrease) in cash and cash equivalents (57,940) (218,697)
Cash and cash equivalents at beginning of period 361,142 399,952
----------- -----------
Cash and cash equivalents at end of period $ 303,202 $ 181,255
=========== ===========
</TABLE>
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.
Additionally, during the quarter ended March 31, 2000, the Company issued 2,220
shares of common stock at $6.75 per share and 800 shares of common stock at
$6.25 per share to its independent directors in lieu of cash as compensation.
At March 31, 2000, $11,764,818 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on May 1,
2000. At December 31, 1999, $11,839,922 in distributions to shareholders and
limited partners had been declared but not paid.
At March 31, 1999, $11,960,116 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on May 3,
1999. At December 31, 1998, $11,890,186 in distributions to shareholders and
limited partners had been declared but not paid.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
5
<PAGE>
EQUITY INNS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------------------
1. Organization and Basis of Presentation
Equity Inns, Inc. (the "Company") was incorporated on November 24, 1993.
The Company is a self-administered real estate investment trust ("REIT")
for federal income tax purposes. The Company, through its wholly-owned
subsidiary, Equity Inns Trust (the "Trust"), is the sole general partner
of Equity Inns Partnership, L.P. (the "Partnership") and at March 31,
2000 owned an approximate 96.6% interest in the Partnership. The Company
was formed to acquire equity interests in hotel properties and at March
31, 2000 owned, through the Partnership, 97 hotel properties with a total
of 12,409 rooms in 34 states.
At March 31, 2000, the Partnership or its affiliates, under operating
leases providing for the payment of percentage rent (the "Percentage
Leases"), leased 76 of the Company's hotels to affiliates of Interstate
Hotels Corporation (formerly named Interstate Hotels Management, Inc.)
("IHC"), which was divested in 1999 from Wyndham International, formerly
known 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"). 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 condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and should be read in conjunction with the
financial statements and notes thereto of the Company included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1999. The accompanying condensed consolidated financial statements
reflect, in the opinion of management, all adjustments necessary for a
fair presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature.
6
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. 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-month period ended March 31, 1999. The effect of
the change on the three months ended March 31, 2000 was to decrease lease
revenues by $6,750,412 and, therefore, net income applicable to common
shareholders by $6,521,989 ($.18 per share-basic and diluted) to a loss
of $6,179,676 [$(.17) per share-basic and diluted]. The proforma effect
of the change on the three months ended March 31, 1999 was to decrease
lease revenues by $7,353,579 and, therefore, net income applicable to
common shareholders by $7,089,906 ($.19 per share-basic and diluted] to a
loss of $3,830,561 [$(.10) per share-basic and diluted).
The Company's 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 Lessee
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.
At March 31, 2000, deferred revenue of $6,750,412 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
third and fourth quarters of 2000. The Company's quarterly distributions
to shareholders generally are based on Percentage Rents collected or due
from 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.
7
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
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 months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
2000 1999
-------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss - basic $(6,179,676) 36,683,413 $(.17) $(3,830,561) 37,171,182 $(.10)
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest (216,434) 1,284,851 (137,505) 1,382,246
Dilutive effect of stock
options outstanding
using the treasury
stock method
----------- ---------- ----- ----------- ---------- -----
Net loss-diluted $(6,396,110) 37,968,264 $(.17) $(3,968,066) 38,553,428 $(.10)
=========== ========== ===== =========== ========== =====
</TABLE>
4. Debt
Debt is comprised of the following at March 31, 2000:
Commercial Mortgage Bonds $ 78,263,921
GMAC Term Loan 96,259,106
Unsecured Lines of Credit 195,500,000
Other 10,307,535
------------
$380,330,562
============
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
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
4. Debt, Continued
Percentage is reviewed quarterly, and the interest rate is adjusted as
necessary. At March 31, 2000, the interest rate on the Bank One Line was
LIBOR (6.13% at March 31, 2000) plus 2.50%. The Bank One Line expires in
October 2000.
The Company's $25 million unsecured line of credit with Bank of America,
formerly NationsBank, (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 March 31, 2000, the interest rate on the Bank
of America Line was LIBOR (6.13% at March 31, 2000) plus 2.50%. The Bank
of America Line expires in October 2000.
5. Subsequent Events
The Company holds a note receivable from a subsidiary of Hudson Hotels
Corporation ("Hudson") acquired in August 1997 at an original principal
amount of $3.9 million as part of the payment on the purchase price of
nine hotels sold to Hudson. On April 14, 2000, the Company, in connection
with Hudson's overall financial restructuring, modified the repayment
terms of the note and extended the term to mature on April 1, 2006. The
promissory note is in the amount of $2,634,052 and continues to bear
interest at an annual rate of 10%.
On April 8, 2000, the Company accepted a contract for the sale of a
Hampton Inn hotel in Garland, Texas for $2,750,000. The sale was
completed on April 28, 2000, resulting in a loss of approximately $3
million.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
BACKGROUND
The Company commenced operations on March 1, 1994 upon completion of 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 March 31, 2000:
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
<S> <C> <C>
Premium Limited Service Hotels:
Hampton Inn 49 6,155
Hampton Inn & Suites 1 125
Comfort Inn 2 245
-- ------
Sub-total 52 6,525
-- ------
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 97 12,409
== ======
</TABLE>
The Partnership leases 95 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.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
Proforma
2000 1999
----------- -----------
<S> <C> <C>
Lease revenue $19,995,634 $18,506,489
Add:
Deferred lease revenue 6,750,412 7,353,579
------------ ------------
Percentage rents collected or
due from Lessees $26,746,046 $25,860,068
=========== ===========
</TABLE>
Deferred lease revenue at March 31, 2000 of $6,750,412 represents first quarter
Percentage Lease revenues collected or due from the Lessees which management
expects the Company to recognize as revenue in the third and fourth quarters of
2000. After considering such amounts included in deferred revenue at March 31,
2000, Percentage Lease revenues collected or due from the Lessees under the
terms of the leases during the three months ended March 31, 2000 were
$26,746,046 compared to $25,860,068 for the three months ended March 31, 1999.
The increase in Percentage Lease revenue is the result of (1) Percentage Lease
revenue from two large all-suite hotels purchased by the Company in the second
quarter of 1999 decreased by (2) Percentage Lease revenue lost by the sale of
seven limited service hotels since the first quarter of 1999, and (3) a decrease
in revenue per available room ("REVPAR"). On a same store and comparable basis,
REVPAR for hotels owned by the Company throughout both periods decreased by 1.2%
from $49.05 to $48.47.
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 seven 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 administrative expenses decreased over the comparable period in 1999
due primarily to decreases in legal and professional fees.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Interest expense increased $1,936,469 in the three months ended March 31, 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 $336 million for the
three months ended March 31, 1999 to $384 million for the three months ended
March 31, 2000 and an increase in average interest rates from 7.4% for the
quarter ended March 31, 1999 to 8.3% for the quarter ended March 31, 2000.
Funds From Operations
Funds From Operations (as defined below) were $10,593,885 or $0.28 per share for
the three months ended March 31, 2000, compared to $12,187,683 or $0.32 per
share for the three months ended March 31, 1999. The decrease is due primarily
to increases in average outstanding debt and 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.
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 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 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.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
The following is a reconciliation of net loss to Funds From Operations:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
Proforma
2000 1999
----------- -----------
<S> <C> <C>
Net loss $(4,546,863) $(2,197,748)
Less:
Preferred stock dividends (1,632,813) (1,632,813)
Add:
Minority interest (216,434) (137,505)
Depreciation of buildings, furniture
and equipment 9,871,076 8,668,977
Deferred lease revenue 6,750,412 7,353,579
Change in accounting for corporate
organizational costs 133,193
Loss on sale of hotel properties 368,507
----------- -----------
Funds From Operations $10,593,885 $12,187,683
=========== ===========
Weighted average number of outstanding shares of
Common Stock and Units of the Partnership 37,968,264 38,553,428
=========== ===========
Funds From Operations per Share and Unit $ .28 $ .32
=========== ===========
</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.
Cash and cash equivalents as of March 31, 2000 were $303,202, compared to
$361,142 at December 31, 1999. Additionally, all of the March 31, 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
three months ended March 31, 2000 was $11,044,098.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
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 March 31, 2000, the Company had outstanding debt of approximately $380.3
million, including $195.5 million under its combined lines of credit, $78.3
million under the Company's Commercial Mortgage Bonds (the "Bonds") and $96.2
million under its GMAC term loan (the "GMAC Term Loan"), leaving approximately
$53.5 million available under the combined lines of credit, after consideration
of outstanding letters of credit. Additionally, the Company had $10.3 million of
mortgage notes payable assumed in connection with the purchase of two hotels in
1998. The Company's consolidated indebtedness was 42.4% of its investments in
hotels, at cost, at March 31, 2000.
In December 1997, the Company arranged an interest rate swap on a notional
amount of $75 million with Bank One as a hedge against the floating rate debt.
At March 31, 2000, the swap resulted in a fixed interest rate of 8.40% on the
notional amount. In May 1999, the Company entered into a second interest rate
swap on a notional amount of $40 million with Bank One. At March 31, 2000, the
swap resulted in a fixed interest rate of 7.74% on the notional amount. The swap
agreements will expire in October 2000.
During the three months ended March 31, 2000, the Company invested approximately
$5 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 $5.5 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 combined lines of
credit. Under the Bank One Line, the Bank of America 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.
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
During the three months ended March 31, 2000, the Partnership declared
distributions in the aggregate of $11,764,818 to its partners, including the
Trust, of $.31 per unit of limited partnership interest ("Unit"), and the
Company declared distributions in the aggregate of $11,366,538, or $.31 per
share to its shareholders, with such distributions being paid on May 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
and unsecured borrowing, 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 three months ended March 31, 2000, no Units were tendered for redemption.
Pursuant to the Partnership Agreement, the Company has the option to redeem
Units tendered for redemption on a one-for-one basis for shares of Common Stock
or for an equivalent amount of cash. The Company anticipates that it will
acquire any Units tendered for redemption in the foreseeable future in exchange
for shares of Common Stock and has agreed to register such shares so as to be
freely tradeable by the recipient.
INFLATION
Operators of hotels, including the 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,
15
<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 sufficient 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 the Unsecured Line of Credit.
16
<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 March 31, 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 $195.5
million at March 31, 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 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 $40 million, which effectively fixes the interest rate on
floating rate debt at a rate of 5.24% plus the Percentage. Thus, at March 31,
2000, the Company had $80.5 million of variable rate debt outstanding under the
Facilities that was exposed 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 $51,000, based on balances outstanding during
the quarter ended March 31, 2000.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -- The following exhibit is filed in this Quarterly Report on
Form 10-Q:
27 Financial Data Schedule (filed only electronically with the Securities
and Exchange Commission).
(b) Reports on Form 8-K -- During the period covered by this Quarterly
Report on Form 10-Q, the Company filed one Current Report on Form 8-K
dated March 17, 2000 and filed on March 21, 2000, reporting the
Company's risk factors for the year 2000 (no financial information
required).
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equity Inns, Inc.
May 5, 2000 By: /s/Donald H. Dempsey
- ----------------------- -------------------------
Date Donald H. Dempsey
Executive Vice President, Secretary, Treasurer,
and Chief Financial Officer (Principal Financial
and Accounting Officer)
19
<PAGE>
EXHIBITS
Exhibit
Number Description
27 Financial Data Schedule (filed only electronically with the SEC)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Equity Inns, Inc. for the three months ended March 31,
2000, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<CASH> 303,202
<SECURITIES> 0
<RECEIVABLES> 10,391,530
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 799,784,813
<DEPRECIATION> 0
<TOTAL-ASSETS> 819,112,936
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
68,750,000
<COMMON> 374,147
<OTHER-SE> 324,814,875
<TOTAL-LIABILITY-AND-EQUITY> 819,112,936
<SALES> 0
<TOTAL-REVENUES> 19,963,745
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,727,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,988,441
<INCOME-PRETAX> (4,763,297)
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<NET-INCOME> (6,179,676)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
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