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 June 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 August 2, 2000 was 36,672,424.
1 of 23
<PAGE>
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations (unaudited) - For
the three months and six months ended June 30, 2000 and
the three months ended June 30, 1999 (actual and proforma) 4
Consolidated Statements of Cash Flows (unaudited) - For
the three months and six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
Conditionand Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
2
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
EQUITY INNS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net $787,756,985 $814,536,595
Cash and cash equivalents 160,234 361,142
Due from Lessees 10,944,654 5,123,598
Notes receivable 3,407,889 3,313,477
Deferred expenses, net 6,152,907 7,019,382
Deposits and other assets 2,123,585 1,764,596
------------ ------------
Total assets $810,546,254 $832,118,790
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $379,373,776 $381,174,628
Accounts payable and accrued expenses 13,886,355 13,755,097
Distributions payable 10,577,229 12,928,464
Deferred lease revenue 17,341,712
Minority interest in Partnership 10,844,787 12,008,383
------------- ------------
Total liabilities 432,023,859 419,866,572
------------ ------------
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, 37,417,576 and 37,308,523 shares
issued and outstanding 374,176 373,085
Additional paid-in capital 417,066,130 416,355,731
Treasury stock, at cost, 747,600 and 557,300
shares, respectively (5,173,110) (3,882,768)
Unearned directors' and officers' compensation (2,313,815) (2,375,434)
Predecessor basis assumed (1,263,887) (1,263,887)
Distributions in excess of net earnings (98,917,099) (65,704,509)
------------ ------------
Total shareholders' equity 378,522,395 412,252,218
------------ ------------
Total liabilities and shareholders' equity $810,546,254 $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 Six Months Ended
June 30, June 30,
-------------------------------------- -----------------------------------------
Proforma Proforma
2000 1999 1999 2000 1999 1999
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Percentage lease revenues $20,558,027 $31,496,183 $19,917,915 $ 40,553,661 $57,356,251 $38,424,404
Gain (loss) on sale of hotel properties (2,947,744) 269,211 269,211 (3,316,251) 269,211 269,211
Other income 200,865 178,351 178,351 537,483 394,274 394,274
----------- ----------- ----------- ------------ ----------- -----------
Total revenue 17,811,148 31,943,745 20,365,477 37,774,893 58,019,736 39,087,889
----------- ----------- ----------- ------------ ----------- -----------
Expenses
Real estate and personal property taxes 3,150,141 3,319,508 3,319,508 7,288,728 6,819,406 6,819,406
Depreciation and amortization 9,819,089 9,475,888 9,475,888 19,748,466 18,218,433 18,218,433
Amortization of loan costs 375,211 207,952 207,952 750,422 415,906 415,906
Interest 7,992,621 6,359,879 6,359,879 15,981,062 12,411,851 12,411,851
General and administrative 1,236,444 1,341,915 1,341,915 2,999,359 3,409,201 3,409,201
Lease expense 331,151 312,784 312,784 863,662 667,601 667,601
----------- ----------- ----------- ------------ ----------- -----------
Total expenses 22,904,657 21,017,926 21,017,926 47,631,699 41,942,398 41,942,398
----------- ----------- ----------- ------------ ----------- -----------
Income (loss) before minority interest and (5,093,509) 10,925,819 (652,449) (9,856,806) 16,077,338 (2,854,509)
change in accounting
Minority interest (227,688) 317,225 (88,215) (444,122) 443,393 (225,720)
----------- ----------- ----------- ------------ ------------ -----------
Income (loss) before change in accounting (4,865,821) 10,608,594 (564,234) (9,412,684) 15,633,945 (2,628,789)
Change in accounting for corporate
organizational costs 133,193 133,193
----------- ------------ ----------- ------------ ----------- -----------
Net income (loss) (4,865,821) 10,608,594 (564,234) (9,412,684) 15,500,752 (2,761,982)
Preferred stock dividends 1,632,813 1,632,813 1,632,813 3,265,626 3,265,626 3,265,626
----------- ----------- ----------- ------------ ----------- -----------
Net income (loss) applicable to common
shareholders $(6,498,634) $ 8,975,781 $(2,197,047) $(12,678,310) $12,235,126 $(6,027,608)
=========== =========== =========== ============ =========== ===========
Net income (loss) per common share -
basic and diluted $ (.18) $ .24 $ (.06) $ (.35) $ .33 $ (.16)
=========== =========== =========== ============= =========== ===========
Weighted average number of common shares
and units outstanding - diluted 37,953,935 38,582,543 38,582,543 37,961,100 38,568,066 38,568,066
=========== =========== ============ ============ =========== ===========
</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 Six Months Ended
June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(9,412,684) $15,500,752
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 19,748,466 18,218,433
Amortization of loan costs 750,422 415,906
Change in accounting for corporate organizational costs 133,193
Amortization of unearned directors' compensation 467,309 422,118
Directors' compensation 39,950 36,213
Minority interest (444,122) 443,393
Changes in assets and liabilities:
Due from Lessees (5,821,056) (5,628,813)
Notes receivable (94,412)
Deferred expenses (15,354) (25,000)
Deposits and other assets (358,989) (2,719,514)
Accounts payable and accrued expenses 397,109 3,957,643
Deferred lease revenue 17,341,712
----------- -----------
Net cash provided by operating activities 25,914,602 30,485,113
----------- -----------
Cash flows from investing activities:
Investment in hotel properties (55,950,134)
Improvements and additions to hotel properties (8,315,205) (18,105,557)
Payments received on note receivable 250,000
Cash paid for franchise applications (50,000) (166,725)
Proceeds from sale of hotel properties 12,234,067 21,318,262
----------- -----------
Net cash provided by (used in) investing activities 3,868,862 (52,654,154)
----------- -----------
Cash flows from financing activities:
Purchase of Treasury Stock (1,290,342)
Distributions paid (26,870,614) (27,115,927)
Borrowings under revolving credit facilities 30,825,000 114,775,000
Payments on revolving credit facilities (23,675,000) (159,475,000)
Payments on CMBS credit facility (8,224,059) (1,155,255)
Borrowings under GMAC Term Loan 97,020,000
Payments on GMAC Term Loan (587,248)
Payments on debt assumed (139,545) (127,039)
Cash paid for loan costs (22,564) (2,060,952)
Payments on capital lease obligations (2,783)
----------- -----------
Net cash provided by (used in) financing activities (29,984,372) 21,858,044
----------- -----------
Net decrease in cash and cash equivalents (200,908) (310,997)
Cash and cash equivalents at beginning of period 361,142 399,952
----------- -----------
Cash and cash equivalents at end of period $ 160,234 $ 88,955
=========== ===========
</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.
Additionally, during the six months ended June 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 and 724 shares
of common stock at $6.88 per share to its independent directors in lieu of cash
as compensation.
At June 30, 2000, $9,488,688 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on August
1, 2000. At December 31, 1999, $11,839,922 in distributions to shareholders and
limited partners had been declared but not paid.
At June 30, 1999, $11,960,745 in distributions to shareholders and limited
partners had been declared but not paid. The distributions were paid on August
2, 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 consolidated financial statements.
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 June 30, 2000
owned an approximate 96.6% interest in the Partnership. The Company was
formed to acquire equity interests in hotel properties and at June 30,
2000 owned, through the Partnership, 96 hotel properties with a total of
12,284 rooms in 34 states.
At June 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 (formerly named Interstate Hotels Management, Inc.)
("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 June 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 six-month periods ended June 30, 1999. The
effect of the change on the three months ended June 30, 2000 was to
decrease lease revenues by $10,591,300 and, therefore, net income
applicable to common shareholders by $10,232,802 ($.28 per share-basic
and diluted) to a loss of $6,498,634 [$(.18) per share-basic and
diluted]. The proforma effect of the change on the three months ended
June 30, 1999 was to decrease lease revenues by $11,578,268 and,
therefore, net income applicable to common shareholders by $11,172,828
($.30 per share-basic and diluted] to a loss of $2,197,047 [$(.06) per
share-basic and diluted). The effect of the change on the six months
ended June 30, 2000 was to decrease lease revenues by $17,341,712 and,
therefore, net income applicable to common shareholders by $16,754,791
($.46 per share- basic and diluted) to a loss of $12,678,310 [$(.35) per
share-basic and diluted]. The proforma effect of the change on the six
months ended June 30, 1999 was to decrease lease revenues by $18,931,847
and, therefore, net income applicable to common shareholders by
$18,262,734 ($.49 per share-basic and diluted) to a loss of $6,027,608
[$(.16) 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.
8
<PAGE>
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
2. Change in Accounting Principle, Continued
At June 30, 2000, deferred revenue of $17,341,712 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 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 six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
For the Three Months Ended June 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 loss applicable to
common shareholders -
basic $(6,498,634) 36,669,161 $(.18) $(2,197,047) 37,238,487 $(.06)
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest (227,688) 1,284,774 (88,215) 1,344,056
Dilutive effect of stock
options outstanding
using the treasury
stock method
----------- ---------- ----- ----------- ---------- -----
Net loss applicable to
common shareholders -
- diluted $(6,726,322) 37,953,935 $(.18) $(2,285,262) 38,582,543 $(.06)
=========== ========== ===== =========== ========== =====
</TABLE>
9
<PAGE>
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
--------------------
3. Net Income Per Common Share, Continued
<TABLE>
<CAPTION>
For the Six Months Ended June 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 loss applicable to
common shareholders -
basic $(12,678,310) 36,676,326 $(.35) $(6,027,608) 37,205,020 $(.16)
Dilutive effect of
potential conversion
or partnership units
and elimination of
minority interest (444,122) 1,284,774 (225,720) 1,363,046
Dilutive effect of stock
options outstanding
using the treasury
stock method
------------ ---------- ----- ----------- ---------- -----
Net loss applicable to
common shareholders -
diluted $(13,122,432) 37,961,100 $(.35) $(6,253,328) 38,568,066 $(.16)
============ ========== ===== =========== ========== =====
</TABLE>
In June 2000, the Company's Board of Directors lowered the quarterly
dividend payable on August 1, 2000 to $.25 per share, down from $.31 paid
in the prior quarter.
4. Debt
Debt is comprised of the following at June 30, 2000:
Commercial Mortgage Bonds $ 73,513,484
GMAC Term Loan 95,973,349
Unsecured Lines of Credit 199,650,000
Other 10,236,943
------------
$379,373,776
============
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 June 30, 2000, the interest rate on the Bank One Line was
LIBOR (6.64% at June 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
June 30, 2000, the interest rate on the Bank of America Line was LIBOR
(6.64% at June 30, 2000) plus 2.50%. The Bank of America Line expires in
October 2000.
5. Subsequent Events
The Company has received a commitment for a three-year secured $125
million line of credit at interest rates ranging from LIBOR plus 150 to
275 basis points, depending on the level of indebtedness. The Company
anticipates that it will close on the new line of credit in the third
quarter of 2000. Additionally, the Company is negotiating to obtain a
$120 million, 10-year secured facility. These new debt instruments would
replace the Company's existing lines of credit which expire in October
2000.
On July 21, 2000, the Company signed an agreement with its primary
Lessee, IHC, to acquire all 75 of its leases on January 1, 2001. No
remuneration is being exchanged for the leases. This action was
precipitated by the recent enactment of the REIT Modernization Act, which
enables REITs such as the Company to gain greater control of their
properties by establishing taxable subsidiaries to function as lessees,
with hotel management provided by independent companies. On January 1,
2001, 54 of the leases with the Interstate Lessee will be converted to
management contracts with IHC, which later will expire on a staggered
basis, beginning January 1, 2001 through 2005. The Company is currently
considering a number of alternatives for management of the 21 hotels that
will not be managed by IHC. At this time, the Company has no plans to
acquire the leases held by the Prime Lessee on 19 hotels.
11
<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 June 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 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.
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lease revenue $20,558,027 $19,917,915 $40,553,661 $38,424,404
Add:
Deferred lease revenue 10,591,300 11,578,268 17,341,712 18,931,847
----------- ----------- ----------- -----------
Percentage rents collected or
due from Lessees $31,149,327 $31,496,183 $57,895,373 $57,356,251
=========== =========== =========== ===========
</TABLE>
Three Months Ended June 30, 2000 and 1999
Deferred lease revenue for the three months ended June 30, 2000 of $10,591,300
represents second 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 June 30, 2000, Percentage Lease revenues collected or due
from the Lessees under the terms of the Percentage Leases during the three
months ended June 30, 2000 were $31,149,327 compared to $31,496,183 for the
three months ended June 30, 1999. The decrease in Percentage Lease revenue
resulted primarily from the receipt in 1999 of one time incentive rent of
$660,000 as a part of an overall settlement with a former lessee. On a same
store and comparable basis, revenue per available room ("REVPAR") for hotels
owned by the Company throughout both periods increased by .5% from $56.79 to
$57.10.
Real estate and personal property taxes decreased from the comparable period in
1999 due primarily to the sale of eight limited service hotels subsequent to the
first quarter of 1999 and due to refunds resulting from successful appeals on
taxes paid in 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.
Interest expense increased $1,632,742 in the three months ended June 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 $346 million for the
three months ended June 30, 1999 to $379 million for the three months ended June
30, 2000 and an increase in average interest rates from 7.4% for the quarter
ended June 30, 1999 to 8.4% for the quarter ended June 30, 2000.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Six Months Ended June 30, 2000 and 1999
Deferred lease revenue for the six months ended June 30, 2000 of $17,341,712
represents first and second 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 June 30, 2000, Percentage Lease revenues collected or due
from the Lessees under the terms of the Percentage Leases during the six months
ended June 30, 2000 were $57,895,373 compared to $57,356,251 for the six months
ended June 30, 1999. The increase in Percentage Lease revenue is the result of a
full six months of Percentage Lease revenue from two large all-suite hotels
purchased by the Company in the second quarter of 1999 partially offset by (1)
Percentage Lease revenue lost by the sale of eight limited service hotels
subsequent to the first quarter of 1999, (2) loss of one-time incentive rent of
$660,000 as a part of an overall settlement with a former lessee in 1999, and
(3) a decrease in REVPAR. On a same store and comparable basis, REVPAR for
hotels owned by the Company throughout both periods decreased by .3% from $53.10
to $52.94.
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 over the comparable period in 1999
due primarily to decreases in legal and professional fees.
Interest expense increased $3,569,211 in the six months ended June 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 $341 million for the six
months ended June 30, 1999 to $382 million for the six months ended June 30,
2000 and an increase in average interest rates from 7.4% for the six months
ended June 30, 1999 to 8.4% for the quarter ended June 30, 2000.
Funds From Operations
Funds From Operations (as defined below) were $27,168,873 for the six months
ended June 30, 2000, compared to $30,573,291 for the six months ended June 30,
1999. The decrease is due primarily to 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 Funds From
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Funds From Operations, Continued
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.
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
The following is a reconciliation of loss to FFO:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
Proforma Proforma
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(4,865,821) $ (564,234) $(9,412,684) $(2,761,982)
Less:
Preferred stock dividends (1,632,813) (1,632,813) (3,265,626) (3,265,626)
Gain on sale of hotel properties (269,211) (269,211)
Add:
Minority interest (227,688) (88,215) (444,122) (225,720)
Depreciation of buildings, furniture and
equipment 9,762,266 9,361,813 19,633,342 18,030,790
Deferred lease revenue 10,591,300 11,578,268 17,341,712 18,931,847
Change in accounting for corporate
organizational costs 133,193
Loss on sale of hotel properties 2,947,744 3,316,251
----------- ----------- ----------- -----------
Funds From Operations $16,574,988 $18,385,608 $27,168,873 $30,573,291
=========== =========== =========== ===========
Weighted average number of outstanding shares
of Common Stock and Units of Partnership 37,953,935 38,582,543 37,961,100 38,568,066
=========== =========== =========== ===========
</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 June 30, 2000 were $160,234, compared to
$361,142 at December 31, 1999. Additionally, all of the June 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
six months ended June 30, 2000 was $25,914,602.
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
16
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
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 June 30, 2000, the Company had outstanding debt of approximately $379.4
million, including $199.7 million under its combined lines of credit, $73.5
million under the Company's Commercial Mortgage Bonds (the "Bonds") and $96.0
million under its GMAC term loan (the "GMAC Term Loan"), leaving approximately
$49.4 million available under the combined lines of credit, after consideration
of outstanding letters of credit. Additionally, the Company had $10.2 million of
mortgage notes payable assumed in connection with the purchase of two hotels in
1998. The Company's consolidated indebtedness was 41.9% of its investments in
hotels, at cost, at June 30, 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 June 30, 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 June 30, 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 six months ended June 30, 2000, the Company invested approximately
$8.3 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 $3.5
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.
During the six months ended June 30, 2000, the Partnership declared
distributions in the aggregate of $9,488,688 to its partners, including the
Trust, of $.25 per unit of limited partnership interest ("Unit"), and the
Company declared distributions in the aggregate of $9,167,494, or $.25 per share
to its shareholders, with such distributions being paid on August 1, 2000.
17
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
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 six months ended June 30, 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, 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
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
FORWARD-LOOKING STATEMENTS, Continued
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 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.
19
<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 June 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 $199.7
million at June 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 $40 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 June 30, 2000, the Company had $84.7 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 $106,000, based on balances outstanding during
the six months ended June 30, 2000.
20
<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 the following Current Reports on Form 8-K:
(a) Current Report on Form 8-K dated May 11, 2000 and filed on May
26, 2000, reporting the results of the Company's annual meeting
of shareholders on May 11, 2000 (no financial information
required); and
(b) Current Report on Form 8-K dated May 31, 2000 and filed on June
20, 2000, reporting the Company's current Percentage Lease terms
for its hotels (no financial information required).
21
<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.
August 9, 2000 By: /s/Donald H. Dempsey
-------------------------- -------------------------
Date Donald H. Dempsey
Executive Vice President, Secretary,
Treasurer, and Chief Financial Officer
(Principal Financial and Accounting
Officer)
22
<PAGE>
EXHIBITS
Exhibit
Number Description
------ -----------
27 Financial Data Schedule (filed only electronically with the SEC)
23
