<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File Number 0-24568
INNKEEPERS USA TRUST
(Exact name of registrant as specified in its charter)
Maryland 65-0503831
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
306 Royal Poinciana Way (407) 835-1800
Palm Beach, FL 33480 (Registrant's telephone number
(Address of principal executive offices) including area code)
(zip code)
N/A
(former name)
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 short period that the Registrant was
required to file such report), and (ii) has been subject to such filing
requirements for the past 90 days.
X Yes No
------ ------
The number of shares of Common Stock, $.01 par value, outstanding on November 7,
1996 was 22,322,498.
<PAGE> 2
INNKEEPERS USA TRUST
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
PART I. Financial Information
<S> <C> <C>
INNKEEPERS USA TRUST
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1996 (Unaudited) and December 31, 1995 1
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 1996 (unaudited)
and September 30, 1995 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 (unaudited)
and September 30, 1995 (unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's discussion and analysis of
financial condition and results of operations 14
JF HOTEL, INC. AND JF HOTEL II, INC.
Item 1. Financial Statements
Condensed Combined Balance Sheets at September 30,
1996 (Unaudited) and December 31, 1995 24
Condensed Combined Statements of Income for the
three and nine months ended September 30, 1996 (unaudited)
and September 30, 1995 (unaudited) 25
Condensed Combined Statements of Cash Flows for
the nine months ended September 30, 1996 (unaudited)
and September 30, 1995 (unaudited) 26
Notes to Condensed Combined Financial Statements 27
Item 2. Management's discussion and analysis of financial
condition and results of operations 29
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 34
</TABLE>
<PAGE> 3
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited)
<S> <C> <C>
Investment in hotel properties, at cost:
Land $ 20,025 $ 17,380
Buildings and improvements 142,736 112,899
Furniture and equipment 21,170 16,245
--------- ---------
183,931 146,524
Accumulated depreciation (14,886) (10,137)
--------- ---------
Net investment in hotel properties 169,045 136,387
Cash and cash equivalents 5,715 2,093
Due from Lessee 3,523 2,048
Deferred expenses, net 2,680 2,300
Other assets 508 511
--------- ---------
Total assets $ 181,471 $ 143,339
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 84,703 $ 45,636
Accrued expenses - public offering 0 415
Accounts payable and other accrued expenses 774 431
Distributions payable 2,603 2,487
Minority interest in Partnership 6,070 6,124
--------- ---------
Total liabilities 94,150 55,093
--------- ---------
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred Shares, $.01 par value, 20,000,000 shares
authorized, no shares issued or outstanding 0 0
Common Shares, $.01 par value, 100,000,000 shares
authorized, 10,822,257 and 10,817,883 shares
issued and outstanding at September 30, 1996 and
December 31, 1995, respectively 108 108
Additional paid-in capital 90,628 90,659
Unearned trustees' compensation (149) (185)
Distributions in excess of net earnings (3,266) (2,336)
--------- ---------
Total shareholders' equity 87,321 88,246
--------- ---------
Total liabilities and shareholders' equity $ 181,471 $ 143,339
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 4
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, 1996 September 30, 1996 September 30, 1995 September 30, 1995
------------------ ------------------ ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Percentage lease revenue $ 6,882 $ 18,932 $ 2,364 $ 6,882
Other revenue 117 364 54 137
---------- ---------- --------- ---------
Total revenue 6,999 19,296 2,418 7,019
---------- ---------- --------- ---------
Expenses:
Depreciation and amortization 1,760 4,804 679 1,819
Ground rent 94 265 85 251
Interest expense 1,563 4,005 519 1,095
Amortization of loan origination
fees 244 620 136 291
Real estate and personal
property taxes and property
insurance 698 1,851 228 618
General and administrative 278 889 93 388
Amortization of unearned trustees'
compensation 12 36 10 30
---------- ---------- --------- ---------
Total expenses 4,649 12,470 1,750 4,492
---------- ---------- --------- ---------
Income before minority interest 2,350 6,826 668 2,527
Minority interest in income (153) (444) (82) (311)
---------- ---------- --------- ---------
Net income $ 2,197 $ 6,382 $ 586 $ 2,216
========== ========== ========= =========
Net income per common share $ .20 $ .59 $ .12 $ .47
========== ========== ========= =========
Weighted average number of
common shares and common
share equivalents (units) outstanding 11,569,095 11,568,715 5,376,600 5,376,600
========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE> 5
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except supplemental non-cash financing activities)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,382 $ 2,216
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,840 1,849
Amortization of loan origination fees 620 291
Minority interest in Partnership 444 311
Change in operating assets and liabilities:
(Increase) decrease in:
Due from Lessee (1,475) (164)
Deferred expenses, net (119) (1,002)
Other assets 3 16
Increase (decrease) in:
Accounts payable and other accrued expenses 343 (783)
--------- ---------
Net cash provided by operating activities 11,038 2,734
--------- ---------
Cash flows from investing activities:
Investment in hotel properties (31,732) (19,813)
Payments for franchise fees (188) (154)
Deposit on Acquisition Hotels (5,675) (750)
Payments for deferred acquisition costs (127) 0
--------- ---------
Net cash used in investing activities (37,722) (20,717)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 43,342 23,842
Payments on long-term debt (4,275) (806)
Payments for dividend reinvestment plan (55) 0
Proceeds from issuance of common shares 5 0
Payments on accrued expenses-public offering (397) (4)
Payments for deferred offering costs (55) 0
Distributions paid (7,693) (3,244)
Loan origination fees paid (566) (1,040)
--------- ---------
Net cash provided by financing activities 30,306 18,748
--------- ---------
Net increase in cash and cash equivalents 3,622 765
Cash and cash equivalents at beginning of period 2,093 1,455
--------- ---------
Cash and cash equivalents at end of period $ 5,715 $ 2,220
========= =========
Supplemental cash flow information:
Interest paid $ 4,005 $ 1,066
========= =========
</TABLE>
Supplemental non-cash financing activities:
The Company (and the Partnership) declared a quarterly distribution of
$.19375, $.215, and $.215 per common share and common share equivalent
(units) outstanding for the quarters ending March 31, June 30, and September
30, 1995, respectively. The Company declared a quarterly distribution of
$.225 per common share and common share equivalent (units) outstanding for
the quarters ending March 31, June 30, and September 30, 1996, respectively.
The aggregate amount of distributions paid for each such quarter was
approximately $1,042,000, $1,156,000, $1,156,000, $2,603,000, $2,603,000, and
$2,603,000, respectively, and is to be treated as ordinary income and return
on capital for income tax purposes on the part of the recipient.
The Company reversed $18,000 of accrued expenses-public offering which was
recorded in additional paid in capital for the period January 1, 1996 through
September 30, 1996.
The accompany notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 6
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Innkeepers USA Trust (including its wholly owned subsidiaries, the
"Company") commenced operations on September 30, 1994 and owns 22
hotels in eleven states at September 30, 1996. On September 30, 1994,
the Company sold 4,690,000 common shares of beneficial interest, par
value $.01 per share ("Common Shares"), in a public offering (the
"IPO") and used substantially all of the net proceeds of the IPO to
acquire an approximate 87.7% equity interest in Innkeepers USA Limited
Partnership (with its subsidiary partnerships, the "Partnership"). The
Partnership used substantially all of such proceeds to purchase seven
existing hotels (the "Initial Hotels"). From the IPO through September
30, 1996, the Partnership has acquired fifteen hotels (the "Acquired
Hotels" and together with the Initial Hotels, the "Hotels"). On October
6, 1995, the Company sold 6,100,000 Common Shares in a secondary
offering (the "Secondary Offering"), contributed substantially all of
the net proceeds to the Partnership and after such contribution owned
an approximate 93.5% equity interest in the Partnership. The
Partnership used proceeds of the Secondary Offering and a $30 million
Term Loan incurred in October 1995 ("Term Loan") to purchase eight of
the Acquired Hotels.
The Partnership leases the Hotels to JF Hotel, Inc. or JF Hotel II,
Inc. (collectively, with their affiliates, the "Lessee") pursuant to
leases which provide for rent based, in substantial part, on the room
revenues of the Hotels ("Percentage Leases").
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all adjustments, which consist only of
normal and recurring adjustments, necessary for a fair presentation of
results for the periods indicated. The results of any interim period
are not necessarily indicative of results for the full year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These unaudited condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes thereto for the
year ended December 31, 1995. The December 31, 1995 condensed
consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
2. RESTRICTED CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of approximately $4.0 million that is
required to be held in escrow accounts as specified by the terms of the
Company's $70 million line of credit ("Line of Credit") and the Term
Loan. The restricted cash and cash equivalents
4
<PAGE> 7
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
RESTRICTED CASH AND CASH EQUIVALENTS, CONTINUED
are to be used to pay for insurance, taxes, furniture, fixtures and
equipment and capital expenditures pertaining to the thirteen Hotels
that collateralize the Line of Credit and the eight Hotels that
collateralize the Term Loan.
3. DEFERRED ACQUISITION AND OFFERING COSTS
Deferred acquisition and offering costs consist of a $5,675,000 deposit
relating to the acquisition of two Acquisition Hotels (as defined
below), $127,000 in deferred acquisition costs relating to the
acquisition of ten additional hotels (the "Acquisition Hotels") and
$55,000 in public offering costs relating to the Company's third public
offering of Common Shares which was consummated in October 1996 (the
"Follow-On Offering"). The deferred acquisition and offering costs are
included in deferred expenses, and the deposit is included in
investment in hotel properties, at cost.
4. LONG-TERM DEBT
Long-term debt consists of a mortgage note collateralized by one Hotel,
outstanding borrowings under the Line of Credit and the Term Loan.
The mortgage note is payable in monthly installments of $23,526
including interest at 5.0% through January 2002. The outstanding
principal balance on the mortgage note was approximately $3.6 million
at September 30, 1996.
Outstanding borrowings under the Line of Credit bear interest at the 30
day LIBOR rate plus 175 basis points. The average interest rate on
borrowings under the Line of Credit for the nine months ended September
30, 1996 was 7.3% and the Line of Credit expires March 1998. The
outstanding principal balance on the Line of Credit was approximately
$51.1 million at September 30, 1996.
The Term Loan matures in twenty years and bears interest at a 8.17%
fixed annual rate. The Term Loan has scheduled principal amortization
based on a twenty-year term commencing on the second year anniversary
of the Term Loan. Interest on the outstanding principal balance of the
Term Loan will accrue at 13.17% if the outstanding principal balance is
not paid in full by the twelfth year of the Term Loan. The outstanding
principal balance on the Term Loan was $30.0 million at September 30,
1996.
Substantially all of the Company's assets at September 30, 1996, other
than the Hotel securing the mortgage note, are pledged as collateral on
the Line of Credit and Term Loan.
5
<PAGE> 8
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
LONG-TERM DEBT, CONTINUED
The scheduled principal payments to be made in future years are as
follows (in thousands):
1996 $ 26
1997 51,350
1998 745
1999 805
2000 870
Thereafter 30,907
---------
$ 84,703
=========
5. SHARE OPTION PLAN
The Company has adopted a share option plan which covers employees and
officers of the Company. The Company has reserved 800,000 Common Shares
for issuance upon the exercise of options under the plan. The plan
provides for the granting of incentive share options and non-qualified
options. The option price of share options may not be less than the
fair market value of the Common Shares at the date of grant. The
Company has granted 110,000 incentive share options and 140,000
non-qualified options to an officer of the Company, who is also a
trustee, at an exercise price of $10.00 per share. In February 1996,
the Company granted an additional 156,000 non-qualified options to the
officer at an exercise price of $9.75. Additionally, the Company has
granted an aggregate of 15,000 non-qualified options to three of its
non-employee trustees at an exercise price of $10.00 per share. The
incentive share options vest over a ten year period and the
non-qualified options vest over a five year period, except for the
156,000 non-qualified options granted in February 1996, of which 32,000
vest in each of 1996, 1997, and 1998, and 60,000 vest in 1999. The
Company has also granted 20,000 incentive share options to an officer
of the Company at an exercise price of $8.875, which vest over a three
year period. No options were exercised as of September 30, 1996.
6. ACQUISITIONS
In February 1996, the Partnership acquired an existing hotel from an
unaffiliated party for approximately $7,000,000 in cash.
In May 1996, the Partnership acquired two existing hotels from an
unaffiliated party for approximately $16,800,000 in cash.
In August 1996, the Partnership acquired an existing hotel from an
unaffiliated party for approximately $3,000,000 in cash.
6
<PAGE> 9
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
7. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Pursuant to the Partnership's Partnership Agreement, limited partners
who hold common units of limited partnership interest in the
Partnership ("Common Units") at September 30, 1996 have redemption
rights ("Redemption Rights") which enable them to redeem their Common
Units in exchange for Common Shares on a one-for-one basis or, at the
Company's option, an equivalent amount of cash at any time after
September 30, 1995 or, in the case of 91,991 Common Units, October 7,
1997. The aggregate number of Common Shares issuable upon exercise of
such redemption rights is 746,897 at September 30, 1996. For the nine
months ended September 30, 1996, 3,811 Common Units were redeemed for
3,811 Common Shares.
The Hotels are operated under franchise agreements and are licensed as
Hampton Inn, Residence Inn, Sheraton Inn, Holiday Inn Express or
Comfort Inn hotels. The Partnership has paid the cost of obtaining or
transferring franchise license agreements to the Lessee. The franchise
agreements require the payment of fees based on a percentage of hotel
room revenue. These fees are paid by the Lessee, which holds the
franchise licenses.
The Partnership earned Percentage Lease revenue of $18,932,000 and
$6,882,000 for the nine months ended September 30, 1996 and September
30, 1995, respectively. At September 30, 1996, the Lessee owed the
Company approximately $3,561,000 in Percentage Lease revenue under the
Percentage Leases. The Company evaluated the creditworthiness of the
Lessee and has determined that an allowance for doubtful accounts is
not warranted. The Company has not incurred any losses pertaining to
Percentage Lease receivables for the nine months ended September 30,
1996.
The Lessee has future minimum base lease commitments under the
Percentage Lease agreements to the Partnership through the year 2006.
Minimum future base lease revenue, under the Percentage Lease
agreements, are as follows (in thousands):
1996 $ 2,994
1997 11,975
1998 11,975
1999 11,975
2000 11,975
Thereafter 54,500
7
<PAGE> 10
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
COMMITMENTS AND RELATED PARTY TRANSACTIONS, CONTINUED
The Lessee's net income and gross room revenue were approximately
$1,076,000 and $39,758,000, respectively, for the nine months ended
September 30, 1996 and $189,000 and $14,645,000, respectively, for the
nine months ended September 30, 1995, and are derived solely from the
operations of the Company's hotels.
At September 30, 1996, the Company's Declaration of Trust limited the
consolidated indebtedness of the Company to 50.0% of the Company's
investment in hotels, at cost, after giving effect to the Company's use
of proceeds from any indebtedness. The Company's consolidated
indebtedness is 46% of its investment in hotels, at cost, at September
30, 1996.
8. DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
In March 1996, the Company established a dividend reinvestment and
share purchase ("Plan") for its shareholders. For the nine months ended
September 30, 1996, 563 common shares were issued under the Plan.
9. SUBSEQUENT EVENTS
Common Share Offering
In October 1996, the Company completed the 11,500,000 Common Share
Follow-On Offering, raising gross proceeds of approximately
$125,000,000. The net proceeds of the Follow-On Offering were used to
acquire the Acquisition Hotels, partially reduce the Company's Line of
Credit and for general corporate purposes (including future hotel
acquisitions).
The Company contributed substantially all of the net proceeds from the
Follow-On Offering to the Partnership and currently has an approximate
81.9% interest in the Partnership. As of November 13, 1996, the Company
has 22,322,498 Common Shares issued and outstanding, and limited
partners of the Partnership own 866,370 Common Units and 4,063,329
preferred units of limited partnership interest in the Partnership
("Preferred Units" and collectively with Common Units, "Units").
8
<PAGE> 11
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
SUBSEQUENT EVENTS, CONTINUED
Acquisitions
In October 1996, the Partnership, through two newly-formed
subsidiaries, acquired two newly-constructed Acquisition Hotels - a
150-room Hampton Inn in Norcross, Georgia and a 160-room Residence Inn
by Marriott in Atlanta, Georgia - from an unaffiliated party for an
aggregate of approximately $27,800,000 in cash, which was funded from
the proceeds of the Follow-on Offering.
In November 1996, the Partnership, through a newly-formed subsidiary,
acquired the newly-constructed 78-room Residence Inn by Marriott -
Portland, Maine Acquisition Hotel from an unaffiliated party for
approximately $5,300,000 in cash, which was funded from the proceeds of
the Follow-On Offering, and $859,000 in Common Units (75,517 Common
Units).
In November 1996, the Partnership, through newly-formed subsidiaries,
acquired in a single transaction seven existing Residence Inn by
Marriott Hotels with an aggregate of 1,013 rooms from seven separate
sellers which were unaffiliated from the Company but are affiliated
with each other for a purchase price of $108,500,000. The purchase
price consisted of approximately $38,207,000 in cash, which was funded
from the proceeds of the Follow-On Offering, the assumption of
approximately $25,096,000 in indebtedness and the issuance of
approximately $44,697,000 of Preferred Units (4,063,329 Preferred
Units) and $500,000 in Common Units (43,956 Common Units).
All of the Acquisition Hotels are leased to the Lessee pursuant to
Percentage Leases.
Commitments and Related Party Transactions
The 4,182,802 Units issued in connection with the acquisition of the
Acquisition Hotels have Redemption Rights which enable the holders to
redeem their Units in exchange for Common Shares on a one-for-one basis
or, at the election of the Company, for cash. The 4,063,329 Preferred
Units issued as a portion of the consideration for the Acquisition
Hotels were deemed to have a value of $11 per Preferred Unit.
Generally, the Redemption Rights for Preferred Units and Common Units
issued in connection with the acquisition of the Acquisition Hotels may
not be exercised until November 1998, and October 1997, respectively.
Annual preferred dividends of $1.10 are payable on each Preferred Unit,
which may increase up to $1.155 for each Preferred Unit, based on
increases in dividends payable on the Common Shares.
9
<PAGE> 12
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
SUBSEQUENT EVENTS, CONTINUED
Dividend Reinvestment and Share Purchase Plan
In October 1996, 241 common shares were issued under the Plan.
10. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma condensed consolidated balance sheet is
presented as if the Acquisition Hotels and the consummation of the
Follow-On Offering and the application of the net proceeds of the
Follow-On Offering had occurred on September 30, 1996. Such pro forma
information is based in part upon the consolidated balance sheets of
the Company.
The unaudited pro forma consolidated statement of income of the Company
is presented as if the acquisition of the Hotels and the Acquisition
Hotels (collectively, the "Thirty-Two Hotels") had occurred on January
1, 1996 and the Thirty-Two Hotels had been leased to the Lessee
pursuant to Percentage Leases throughout the periods presented.
The unaudited pro forma condensed consolidated balance sheet and
statement of income of the Company for the periods presented are not
necessarily indicative of what the financial position and results of
operations of the Company would have been assuming such transactions
had been completed as of such dates presented, nor does it purport to
represent the results of operations for future periods.
10
<PAGE> 13
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
PRO FORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(UNAUDITED, AMOUNTS IN THOUSANDS)
ASSETS
<S> <C> <C> <C>
Investments in hotels properties, at cost ...... $ 183,931 $ 143,951(A) $ 327,882
Accumulated depreciation ....................... (14,886) (14,886)
--------- --------- ---------
169,045 143,951 312,996
Cash and cash equivalents ...................... 5,715 34,251(B) 39,966
Due from Lessee ................................ 3,523 3,523
Deferred expenses, net ......................... 2,680 440(C) 3,120
Other assets ................................... 508 508
--------- --------- ---------
Total assets ................................ $ 181,471 $ 178,642 $ 360,113
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt ................................. $ 84,703 $ 16,002(D) $ 100,705
Accounts payable and accrued expenses .......... 774 774
Distributions payable .......................... 2,603 2,603
Minority interest in partnership ............... 6,070 40,220(E) 46,290
--------- --------- ---------
Total liabilities ........................... 94,150 56,222 150,372
Shareholders' equity:
Common shares ................................. 108 115(F) 223
Additional paid in capital .................... 90,628 122,305(G) 212,933
Unearned trustees' compensation ............... (149) (149)
Distributions in excess of net earnings ....... (3,266) (3,266)
--------- --------- ---------
Total shareholders' equity .................. 87,321 122,420 209,741
--------- --------- ---------
Total liabilities and shareholders' equity .. $ 181,471 $ 178,642 $ 360,113
========= ========= =========
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
11
<PAGE> 14
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
PRO FORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED
Notes to Pro Forma Condensed Consolidated Balance Sheet
(A) Increase represents the purchase price of the Acquisition
Hotels ($142,300,000) less deposits made on the Acquisition
Hotels ($5,760,000), plus closing costs ($2,411,000) of the
Acquisition Hotels, and renovations of the Acquisition Hotels
($5,000,000).
(B) Represents net proceeds from the Follow-On Offering
($117,100,000) less cash paid for the Acquisition Hotels
($73,315,000), less cash paid for Franchise Fees ($440,000)
and reduction of the Line of Credit ($9,094,000).
(C) Represents the capitalization of Franchise Fees on the
Acquisition Hotels.
(D) Represents assumption of Long-Term Debt ($25,096,000) less
reduction on the line of credit ($9,094,000).
(E) Represents the value assigned to the issuance of units and
preferred units to the sellers of certain Acquisition Hotels
($45,541,549) less the dilution to the minority interest as a
result of the Follow-On Offering ($5,322,000).
(F) Reflects the par value of the Common Shares sold in the
Follow-On Offering.
(G) Net increase reflects the gross proceeds from the Follow-On
Offering ($125,063,000), less estimated underwriting and other
expenses of the Offering ($7,965,000), less the par value of
the common shares issued ($115,000) plus the allocation of
equity from minority interest ($5,322,000).
12
<PAGE> 15
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
PRO FORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30, 1996
------------------
(A) (B) (C) TOTAL
CURRENT OPERATING OTHER THIRTY-TWO
HOTELS HOTELS HOTELS HOTELS
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Data:
Percentage Lease Revenue.............................. $20,000 $10,700 $ 1,800(D) $32,500
Other revenue......................................... 450 -- -- 450
------- ------- ------- -------
Total Revenue...................................... 20,450 10,700 1,800 32,950
------- ------- ------- -------
Depreciation and amortization......................... 5,400 3,500 1,100 10,000
Ground rent........................................... 300 300
Interest expense...................................... 4,400 1,600 6,000
Amortization of loan origination fees................. 600 600
Real estate and personal property taxes
and property insurance.............................. 1,900 900 250 3,050
General and administrative............................ 900 60 20 980
Amortization of unearned Trustees'
compensation........................................ 40 -- -- 40
------- ------- ------- -------
Total expenses...................................... 13,540 6,060 1,370 20,970
------- ------- ------- -------
Income before minority interest....................... $ 6,910 $ 4,640 $ 430 11,980
======= ======= =======
Minority interest in income........................... (2,168)
-------
Net income.......................................... $ 9,812
=======
Preferred Unit Distributions ....................... 3,352
Net income per common share........................... $ .37
=======
Weighted average number of common
shares and common share equivalents
(units) outstanding................................. $23,200
=======
</TABLE>
(A) Twenty-two hotels owned by the Company at September 30, 1996
(B) Seven existing Acquisition Hotels acquired November 1996
(C) Three newly-constructed Acquisition Hotels acquired October and November
1996
(D) Includes only Base Rent payable under the Percentage Leases for these
Hotels, which had no significant operating histories.
Percentage Rent is, however, payable under the Percentage Leases for these
Hotels in the future based on actual room revenues.
13
<PAGE> 16
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes thereto.
GENERAL
Innkeepers USA Trust (including its subsidiaries, the "Company") commenced
operations on September 30, 1994 and owns 22 hotels in eleven states at
September 30, 1996. On September 30, 1994, the Company sold 4,690,000 common
shares of beneficial interest, par value $.01 per share ("Common Shares"), in a
public offering (the "IPO") and used substantially all of the net proceeds of
the IPO to acquire an approximate 87.7% equity interest in Innkeepers USA
Limited Partnership (with its subsidiary partnerships, the "Partnership"). The
Partnership used substantially all of such proceeds to purchase seven existing
hotels (the "Initial Hotels"). From the IPO through September 30, 1996, the
Partnership has acquired fifteen hotels (the "Acquired Hotels" and together with
the Initial Hotels, the "Hotels"). On October 6, 1995, the Company sold
6,100,000 Common Shares in a secondary offering (the "Secondary Offering"),
contributed substantially all of the net proceeds to the Partnership and after
such contribution owned an approximate 93.5% equity interest in the Partnership.
The Partnership used proceeds of the Secondary Offering and a $30 million term
loan incurred in October 1995 ("Term Loan") to purchase eight of the Acquired
Hotels.
The Partnership leases the Hotels to JF Hotel, Inc. or JF Hotel II, Inc.
(collectively, with their affiliates, the "Lessee") pursuant to leases which
provide for rent based, in substantial part, on the room revenues of the Hotels
("Percentage Leases"). The Lessee operates 17 of the Hotels and an unaffiliated
party manages five of the Hotels under management agreements with the Lessee.
Each of the Hotels operates under a franchise license held by the Lessee, the
cost of obtaining which was paid for by the Partnership. Continuing franchise
fees are paid by the Lessee.
During the nine months ended September 30, 1996, the Partnership acquired a
164-room Holiday Inn Express in Lexington, Massachusetts, a 96-suite Residence
Inn in Cherry Hill, New Jersey, a 80-suite Residence Inn in Harrisburg,
Pennsylvania, and a 100-room Comfort Inn (to be reflagged as a Hampton Inn after
the completion of renovations) in Woburn, Massachusetts.
14
<PAGE> 17
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
HOTELS
The following chart summarizes information regarding the Hotels at September 30,
1996.
<TABLE>
<CAPTION>
Franchise Affiliation Number of Hotel Properties Number of Rooms
--------------------- -------------------------- ---------------
<S> <C> <C>
Extended stay hotels:
Residence Inn 11 1,072
-- -----
Limited service hotels:
Hampton Inn 7 909
Comfort Inn 2 227
Holiday Inn Express 1 164
-- -----
10 1,200
-- -----
Full service hotels:
Sheraton Inn 1 139
-- -----
Total 22 2,511
== =====
</TABLE>
Pro forma Revenue Per Available Room ("REVPAR") for the Hotels, presented as if
the acquisition of the Hotels had occurred at the beginning of the periods
presented, increased for the three and nine months ended September 30, 1996 as
compared to the three and nine months ended September 30, 1995. Management
believes the growth in REVPAR at the Hotels reflects the [results of the
Company's focused acquisition strategy], the continued implementation of
professional management techniques by the Lessee and improving industry
conditions. The following table sets forth information with respect to
occupancy, Average Daily Rate ("ADR") and REVPAR for the three and nine months
ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995. For the three months ended September 30, 1996, occupancy,
ADR and REVPAR results exclude certain room nights due to renovation. No
assurance can be given that the trends reflected in the following table will
continue or that occupancy, ADR and REVPAR will not decrease due to changes in
national or local economic, hospitality or other industry conditions.
15
<PAGE> 18
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
For the Three Months For the Three Months Percentage
Hotels Ended September 30, 1996 Ended September 30, 1995 Change
- ------ ------------------------ ------------------------ ------
<S> <C> <C> <C>
Occupancy 84.5% 80.7% 4.7%
ADR $77.38 $73.93 4.7%
REVPAR $65.39 $59.69 9.6%
<CAPTION>
For the Nine Months For the Nine Months Percentage
Hotels Ended September 30, 1996 Ended September 30, 1995 Change
- ------ ------------------------ ------------------------ ------
<S> <C> <C> <C>
Occupancy 81.4% 77.6% 4.9%
ADR $76.62 $73.60 4.1%
REVPAR $62.37 $57.10 9.2%
</TABLE>
RESULTS OF OPERATIONS
The Company - Actual
Three months ended September 30, 1996
The Company had revenues of $6,999,000, consisting of $6,882,000 of Percentage
Lease revenue from the Lessee and $117,000 of other revenue. Depreciation and
amortization, amortization of loan origination fees, and amortization of
unearned trustees' compensation ("depreciation and amortization") were
$2,016,000 in the aggregate. Real estate and personal property taxes and
property insurance were $698,000. Interest expense of $1,563,000 primarily
consisted of interest incurred on borrowings outstanding under the Line of
Credit and Term Loan. Net income before minority interest was $2,350,000 or
$0.20 per share. Funds from Operations (income before minority interest and
depreciation) was $4,080,000 or $0.35 per share.
Three months ended September 30, 1995
The Company had revenues of $2,418,000, consisting of $2,364,000 of Percentage
Lease revenue from the Lessee and $54,000 of other revenue. Depreciation and
amortization were $825,000 in the aggregate. Real estate and personal property
taxes and property insurance were $228,000. Interest expense of $519,000
primarily consisted of interest incurred on borrowings outstanding under the
Line of Credit (as defined below) and Mortgage Note (as defined below).
16
<PAGE> 19
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Net income before minority interest was $668,000 or $0.12 per share. Funds from
Operations (income before minority interest and depreciation) was $1,340,000 or
$0.25 per share.
Percentage Lease revenue, depreciation and amortization, interest expense and
real estate and personal property taxes and property insurance increased for the
three months ended September 30, 1996 over the three months ended September 30,
1995 primarily due to the number of hotels owned increasing from 7 at January 1,
1995 to 18 at January 1, 1996 and to 22 at September 30, 1996.
Nine months ended September 30, 1996
The Company had revenues of $19,296,000, consisting of $18,932,000 of Percentage
Lease revenue from the Lessee and $364,000 of other revenue. Depreciation and
amortization were $5,460,000 in the aggregate. Real estate and personal property
taxes and property insurance were $1,851,000. Interest expense of $4,005,000
primarily consisted of interest incurred on borrowings outstanding under the
Line of Credit and Term Loan (as defined below). Net income before minority
interest was $6,826,000 or $0.59 per share. Funds from Operations was
$11,574,000 or $1.00 per share.
Nine months ended September 30, 1995
The Company had revenues of $7,019,000, consisting of $6,882,000 of Percentage
Lease revenue from the Lessee and $137,000 of other revenue. Depreciation and
amortization were $2,140,000 in the aggregate. Real estate and personal property
taxes and property insurance were $618,000. Interest expense of $1,095,000
primarily consisted of interest incurred on borrowings outstanding under the
Line of Credit and Mortgage Note. Net income before minority interest was
$2,527,000 or $0.47 per share. Funds from Operations was $4,330,000 or $0.81 per
share.
Percentage Lease revenue, depreciation and amortization, interest expense and
real estate and personal property taxes and property insurance increased for the
nine months ended September 30, 1996 over the nine months ended September 30,
1995 primarily due to the number of hotels owned increasing from 7 at January 1,
1995 to 18 at January 1, 1996 and to 22 at September 30, 1996.
The Company - Pro Forma
The following pro forma information is presented as if the acquisition of the
Hotels had occurred at the beginning of the periods presented.
17
<PAGE> 20
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Nine months ended September 30, 1996 compared to the
nine months ended September 30, 1995
Pro forma Percentage Lease revenue increased by approximately $2,500,000 or 14%,
from approximately $17,500,000 for the nine months ended September 30, 1995 to
approximately $20,000,000 for the nine months ended September 30, 1996. The
increase was primarily due to a 4.1% increase in ADR and a 4.9% increase in
occupancy at the Hotels, which resulted in increased Percentage Lease revenue.
As a percentage of total revenue, total pro forma expenses decreased from 75%
for the nine months ended September 30, 1995 to 66% for the nine months ended
September 30, 1996 as a result of expenses remaining relatively constant while
pro forma total revenue increased.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of September 30, 1996 were $5,715,000, including
approximately $247,000 which the Partnership is required, under the Percentage
Leases, to make available to the Lessee for the replacement and refurbishment of
furniture, fixtures and equipment. Additionally, cash and cash equivalents
includes approximately $3,792,000 that is held in escrow to pay for insurance,
taxes, and capital expenditures pertaining to the thirteen Hotels that
collateralize the Line of Credit and the eight Hotels that collateralize the
Term Loan.
Net cash provided by operating activities for the nine months ended September
30, 1996 was $11,038,000.
Net cash used in investing activities was $37,722,000 for the nine months ended
September 30, 1996. This was comprised primarily of the Company acquiring a
Holiday Inn Express Hotel in Lexington, Massachusetts for $7,000,000, Residence
Inn Hotels in Cherry Hill, New Jersey and Harrisburg, Pennsylvania for an
aggregate of $16,800,000 in cash, a Comfort Inn (to be reflagged as a Hampton
Inn after the completion of renovations) in Woburn, Massachusetts for $3,000,000
and deposits of $5,675,000 applied toward the purchase of two additional hotel
properties. The Company's purchase price for the two additional hotel properties
is approximately $27.8 million.
Net cash provided by financing activities was $30,306,000 for the nine months
ended September 30, 1996, reflecting proceeds from long term debt of
$43,342,000, including $32,475,000 in borrowings under the Line of Credit to
purchase four Acquired Hotels and make deposits toward the purchase of two
additional hotel properties. The Company (and the Partnership) paid an aggregate
of $7,693,000 in distributions to holders of Common Shares and
18
<PAGE> 21
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Common Units of limited partnership interest in the Partnership ("Common Units")
during the nine-month period ended September 30, 1996.
The Company intends to make additional investments in hotel properties 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 Code to the
extent that working capital and cash flow from the Company's investments are
insufficient to make such distributions. The Company's Declaration of Trust
limits aggregate indebtedness to 50% of the Company's investment in hotel
properties, at cost, after giving effect to the Company's use of proceeds from
any indebtedness ("Debt Limitation"). The Company's consolidated indebtedness is
46% of its investment in hotels, at cost, at September 30, 1996. At September
30, 1996, the Company had outstanding indebtedness of approximately $84,703,000.
The Company's long-term debt at September 30, 1996 consists of a mortgage note
collateralized by one hotel property (the "Mortgage Note"), outstanding
borrowings under a $70 million revolving line of credit (the "Line of Credit"),
and the $30 million Term Loan.
The Mortgage Note is payable in monthly installments of $23,526 including
interest at 5.0% through January 2002. The outstanding principal balance on the
Mortgage Note was approximately $3.6 million at September 30, 1996. The Mortgage
Note is secured by one Hotel.
In March 1995, the Company, through the Partnership, obtained a $40 million Line
of Credit to fund future hotel acquisitions and provide working capital. In
October 1995, the Line of Credit was increased to $50 million and in March 1996,
the Line of Credit was increased to $70 million. The outstanding principal
balance on the Line of Credit was approximately $51.1 million at September 30,
1996. The Line of Credit is collateralized by thirteen Hotels and will be
further collateralized by any hotels acquired in the future with proceeds from
the Line of Credit. Outstanding borrowings under the Line of Credit bear
interest at the 30-day LIBOR rate plus 175 basis points. The average interest
rate on borrowings under the Line of Credit for the nine-months ended September
30, 1996 was 7.3% and the line of credit expires March 1998.
The Term Loan matures in twenty years and bears interest at a 8.17% fixed annual
rate. The Term Loan has scheduled principal amortization based on a twenty-year
term commencing on the second year anniversary of the Term Loan (October 1997).
Interest on the outstanding principal balance of the Term Loan will accrue at
13.17% if the outstanding principal balance is not paid in full by the twelfth
year of the Term Loan. The outstanding principal balance on the Term Loan was
$30.0 million at September 30, 1996. The Term Loan is collateralized by eight
Hotels.
19
<PAGE> 22
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The Company in the future may seek to increase the amount of its credit
facilities, negotiate additional credit facilities, or issue corporate debt
instruments, all in compliance with the Debt Limitation. Any debt incurred or
issued by the Company may be secured or unsecured, long-term, fixed or variable
interest rate and may be subject to such other terms as the Board of Trustees of
the Company deems prudent.
Under federal income tax law provisions applicable to a REIT, the Company is
required to distribute at least 95% of its taxable income to maintain its status
as a REIT. The Company believes that its net cash provided by operations will be
adequate to fund both operating requirements and the payment of distributions by
the Company in accordance with the requirements to maintain its status as a
REIT.
The Percentage Leases require the Partnership to make available to the Lessee an
amount equal to 4.0% of room revenues from all of the Hotels, per quarter, on a
cumulative basis, for the periodic replacement or refurbishment of furniture,
fixtures and equipment at the Hotels. The Partnership has made available to the
Lessee approximately $2,850,000 for hotel renovations since September 30, 1994.
The Company intends to cause the expenditure of amounts in excess of such
obligated amounts if necessary to comply with the reasonable requirements of any
franchise agreement and otherwise to the extent that the Company deems such
expenditures to be in the best interests of the Company.
Management believes that the amounts required to be made available to the Lessee
will be sufficient to meet required expenditures for furniture, fixtures and
equipment during the terms of the Percentage Leases. The Company currently
intends to pay for the cost of capital improvements and any additional
furniture, fixture and equipment requirements from undistributed cash or, to the
extent that undistributed cash is insufficient to pay such costs, the Line of
Credit. Provisions comparable to those described above in the Percentage Leases
for the Hotels, are expected to be included in the Percentage Lease for any
other hotel in which the Company invests.
In January 1996, the Company completed certain renovations to convert its
Germantown, Maryland hotel to a Hampton Inn.
SEASONALITY OF HOTEL BUSINESS
The hotel industry is seasonal in nature. The Hotels' operations historically
reflect higher occupancy rates and ADR during the second and third quarters for
the 17 Hotels located outside of Florida and higher occupancy rates and ADR
during the first and fourth quarters for three of
20
<PAGE> 23
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
the four Hotels located in Florida. To the extent that cash flow from operating
activities from the Hotels for a quarter is insufficient to generate Percentage
Lease revenue necessary to fund all of the distributions for such quarter, the
Company may maintain the annual distribution rate by funding seasonal-related
shortfalls with available cash or borrowings under the Line of Credit.
INFLATION
Operators of hotels, including the Lessee and any third-party manager retained
by the Lessee, 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 Lessee and any third-party manager retained by the Lessee to
raise room rates in response to inflation.
SUBSEQUENT EVENTS
Common Share Offering
In October 1996, the Company completed a 11,500,000 Common Share offering (the
"Follow-On Offering"), raising gross proceeds of approximately $125,000,000. The
net proceeds of the Follow-On Offering were used to acquire the 10 Acquisition
Hotels (defined below), partially reduce the Company's Line of Credit and for
general corporate purposes (including future hotel acquisitions).
The Company contributed substantially all of the net proceeds from the Follow-On
Offering to the Partnership and currently has an approximate 81.9% interest in
the Partnership. As of November 13, 1996, the Company has 22,322,498 Common
Shares issued and outstanding, and limited partners of the Partnership own
866,370 Common Units and 4,063,329 preferred units of limited partnership
interest in the Partnership ("Preferred Units" and, collectively with the Common
Units, "Units").
Acquisitions
In October 1996, the Partnership, through two newly-formed subsidiaries,
acquired two newly-constructed Acquisition Hotels - a 150-room Hampton Inn in
Norcross, Georgia and a 160-room Residence Inn by Marriott in Atlanta, Georgia -
from an unaffiliated party for an aggregate of approximately $27,800,000 in
cash, which was funded from the proceeds of the Follow-on Offering.
21
<PAGE> 24
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Acquisitions, Continued
In November 1996, the Partnership, through a newly-formed subsidiary, acquired
the newly-constructed 78-room Residence Inn by Marriott - Portland, Maine
Acquisition Hotel from an unaffiliated party for approximately $5,300,000 in
cash, which was funded from the proceeds of the Follow-On Offering, and $859,000
in Common Units (75,517 Common Units).
In November 1996, the Partnership, through newly-formed subsidiaries, acquired
in a single transaction seven existing Residence Inn by Marriott Hotels with an
aggregate of 1,013 rooms from seven separate sellers which were unaffiliated
from the Company but are affiliated with each other for a purchase price of
$108,500,000. The purchase price consisted of approximately $38,207,000 in cash,
which was funded from the proceeds of the Follow-On Offering, the assumption of
approximately $25,096,000 in indebtedness and the issuance of approximately
$44,697,000 of Preferred Units (4,063,329 Preferred Units) and $500,000 in
Common Units (43,956 Common Units).
The Acquisition Hotels include a 159-suite Residence Inn hotel in San Mateo,
California; a 231-suite Residence Inn hotel in Silicon Valley I, California; a
247-suite Residence Inn hotel in Silicon Valley II, California; a 156-suite
Residence Inn hotel in Denver (Downtown), Colorado; a 160-suite Residence Inn
hotel in Atlanta (Downtown), Georgia; a 64-suite Residence Inn hotel in Wichita
East, Kansas; a 78-suite Residence Inn hotel in Portland, Maine; a 60-suite
Residence Inn hotel in East Lansing, Michigan; a 96-suite Residence Inn hotel in
Grand Rapids, Michigan; and a 150-room Hampton Inn hotel in Norcross, Georgia.
The Company currently owns 32 hotels in 14 states, including 20 Residence Inn
hotels, eight Hampton Inn hotels, two Comfort Inn hotels (one of which will be
reflagged as a Hampton Inn hotel upon the completion of renovations), one
Sheraton Inn hotel, and one Holiday Inn Express hotel. All of the Acquisition
Hotels are leased to the Lessee under Percentage Leases. The Lessee operates the
Hampton Inn Acquisition Hotel and holds the related franchise agreement. The
remaining nine (Residence Inn) Acquisition Hotels are operated by Residence Inn
by Marriott, Inc. under separate management agreements with the Lessee. There
are no separate franchise agreements for eight of such Acquisition Hotels and
the Lessee holds the franchise license for the remaining Acquisition Hotel.
Commitments and Related Party Transactions
The 4,182,802 Units issued in connection with the acquisition of the Acquisition
Hotels have Redemption Rights which enable the holders to redeem their Units in
exchange for Common Shares on a one-for-one basis or, at the election of the
Company, for cash. The 4,063,329
22
<PAGE> 25
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Preferred Units issued as a portion of the consideration for the Acquisition
Hotels were deemed to have a value of $11 per Preferred Unit. Generally, the
Redemption Rights for Preferred Units and Common Units issued in connection with
the acquisition of the Acquisition Hotels may not be exercised until November
1998, and October 1997, respectively. Annual preferred dividends of $1.10 are
payable on each Preferred Unit, which may increase up to $1.155 for each
Preferred Unit, based on increases in dividends payable on the Common Shares.
Dividend Reinvestment and Share Purchase Plan
In March 1996, the Company established a dividend reinvestment and share
purchase plan ("Plan") for its shareholders. In October 1996, 241 common shares
were issued under the Plan.
23
<PAGE> 26
JF HOTEL, INC. AND JF HOTEL II, INC.
CONDENSED COMBINED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 3,703 $ 2,894
Marketable securities 779 260
Accounts receivable 2,001 1,540
Due from shareholders 0 41
Inventory 48 27
Prepaid expenses 224 219
Other assets 208 154
-------- --------
Total assets $ 6,963 $ 5,135
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Accounts payable $ 1,730 $ 2,023
Accrued expenses 1,248 1,062
Due to partnership 3,523 2,048
-------- --------
Total liabilities 6,501 $ 5,133
-------- --------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common shares, $1 par value, 2,000 shares
authorized issued and outstanding 2 2
Retained earnings 460 0
-------- --------
Total shareholders' equity 462 2
-------- --------
Total liabilities and shareholders' equity $ 6,963 $ 5,135
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed combined
financial statements.
24
<PAGE> 27
JF HOTEL, INC. AND JF HOTEL II, INC.
CONDENSED COMBINED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
(JF Hotel, Inc. and (JF Hotel, Inc. and
JF Hotel II, Inc.) JF Hotel II, Inc.) (JF Hotel, Inc.) (JF Hotel, Inc.)
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996 September 30, 1995 September 30, 1995
------------------ ------------------ ------------------ ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross operating revenue:
Rooms $14,425 $39,758 $ 5,132 $14,645
Food and beverage 49 490 174 444
Telephone 613 1,498 124 389
Other 299 866 48 274
------- ------- ------- -------
Gross operating revenue $15,386 $42,612 $ 5,478 $15,752
======= ======= ======= =======
Departmental Profit:
Rooms $11,345 $31,509 $ 3,996 $11,671
Food and beverage 8 61 0 22
Telephone 310 888 31 151
Other 186 613 18 180
------- ------- ------- -------
Total departmental profit 11,849 33,071 4,045 12,024
------- ------- ------- -------
Unallocated operating expenses:
General and administrative 920 2,417 329 876
Franchise fees 1,088 3,010 425 1,183
Advertising and promotions 525 1,499 181 477
Utilities 779 2,245 336 869
Repairs and maintenance 753 2,020 271 671
Management fees 55 160 0 0
------- ------- ------- -------
Total unallocated operating
expenses 4,120 11,351 1,542 4,076
------- ------- ------- -------
Gross operating profit 7,729 21,720 2,503 7,948
------- ------- ------- -------
Insurance (82) (288) (51) (157)
------- ------- ------- -------
Net operating profit 7,647 21,432 2,452 7,791
------- ------- ------- -------
Lessee overhead (520) (1,424) (309) (720)
Percentage lease payments (6,882) (18,932) (2,364) (6,882)
------- ------- ------- -------
Net income $ 245 $ 1,076 $ (221) $ 189
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed combined financial statements.
25
<PAGE> 28
JF HOTEL, INC. AND JF HOTEL II, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(in thousands, except supplemental non-cash financing activities)
<TABLE>
<CAPTION>
(JF Hotel, Inc. and
JF Hotel II, Inc.) (JF Hotel, Inc.)
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,076 $ 189
Adjustments to reconcile net income to
net cash provided by operating activities:
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (461) (156)
Inventory (21) 6
Prepaid expenses (5) 126
Other assets (54) (40)
Increase (decrease) in:
Account payable (293) 94
Accrued expenses 186 176
Due to partnership 1,475 164
--------- ---------
Net cash provided by operating activities 1,903 559
--------- ---------
Cash flows from investing activities:
Purchase of marketable securities (519) 0
--------- ---------
Net cash used in investing activities (519) 0
--------- ---------
Cash flows from financing activities:
Dividends paid (575) (349)
--------- ---------
Net cash used in financing activities (575) (349)
--------- ---------
Net increase in cash and cash equivalents 809 210
Cash and cash equivalents at beginning of period 2,894 549
--------- ---------
Cash and cash equivalents at end of period $ 3,703 $ 759
========= =========
</TABLE>
Supplemental non-cash financing activities:
The Lessee's shareholders repaid due from shareholders from retained earnings
in the amount of $41,000 for the period January 1, 1996 through September 30,
1996.
The accompanying notes are an integral part of these condensed combined
financial statements
26
<PAGE> 29
JF HOTEL, INC. AND JF HOTEL II, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
JF Hotel, Inc. was formed primarily to lease and operate hotels owned
by Innkeepers USA Trust (including its subsidiaries, the "Company")
through Innkeepers USA Limited Partnership and its subsidiary
partnerships (collectively the "Partnership"). As of September 30,
1996, approximately 93.5% of the Partnership was owned by the Company.
The principal shareholder of the Lessee is also the President and
Chairman of the Board of Trustees of the Company. JF Hotel, Inc.
commenced the leasing and operation of seven hotels owned by the
Partnership (the "Initial Hotels") on September 30, 1994. The
Partnership has acquired fifteen hotels subsequent to September 30,
1994 (the "Acquired Hotels" and together with the Initial Hotels, the
"Hotels"). JF Hotel, Inc. leases and operates seven of the Acquired
Hotels, and a total of 14 of the Hotels, owned by the Partnership.
JF Hotel II, Inc., a company under common ownership with JF Hotel,
Inc., was formed to lease eight of the Acquired Hotels owned by the
Partnership (JF Hotel, Inc. and JF Hotel II, Inc. are referred to
collectively herein as the "Lessee"). JF Hotel II, Inc. has contracted
with an unaffiliated party to operate five of the eight Acquired Hotels
that it leases.
Each Hotel is leased by the Partnership to the Lessee under a
percentage lease agreement (a "Percentage Lease"). The Percentage Lease
for each Hotel provides for the payment to the Partnership of monthly
base rent and monthly percentage rent based, in substantial part, on
fixed percentages of gross room revenue in excess of certain specified
levels of room revenue.
Each Hotel is operated under a franchise license. The cost of obtaining
the franchise licenses is paid by the Partnership and the continuing
franchise and related fees (generally percentages of room revenue) are
paid by the Lessee. The franchise licenses are held by the Lessee.
2. ACQUISITIONS
In February 1996, the Partnership acquired and leased to the Lessee an
existing hotel.
In May 1996, the Partnership acquired and leased to the Lessee two
existing hotels.
In August 1996, the Partnership acquired and leased to the Lessee an
existing hotel.
27
<PAGE> 30
JF HOTEL, INC. AND JF HOTEL II, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS, CONTINUED
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future minimum base lease commitments under the
Percentage Lease agreements to the Partnership through the year 2006.
Minimum future base lease payments under the Percentage Lease
agreements, are as follows (in thousands):
YEAR AMOUNT
---- ------
1996 $ 2,994
1997 11,975
1998 11,975
1999 11,975
2000 11,975
Thereafter 54,500
The Lessee has purchased 81,050 common shares of the Company which is
included in marketable securities.
4. SUBSEQUENT EVENTS
In October 1996, the shareholders of the Lessee formed a sister
corporation with common ownership to the Lessee (the Lessee and such
sister corporation being referred to collectively hereinafter as the
"Lessee") to lease ten hotels acquired by the Partnership in October
and November 1996 (the "Acquisition Hotels") under Percentage Leases.
The Lessee has contracted with Residence Inn by Marriott ("Marriott")
to operate the nine Acquisition Hotels which operate as Residence Inn
by Marriott hotels under the management agreements between the Lessee
and Marriott. The Lessee operates and holds the franchise license for
the tenth Acquisition Hotel. There are no separate franchise agreements
for eight of the nine Residence Inn Acquisition Hotels operated by
Marriott. The Lessee holds the franchise agreement for the ninth
Residence Inn Acquisition Hotel operated by Marriott.
28
<PAGE> 31
JF HOTEL, INC. AND JF HOTEL II, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
condensed financial statements and related notes thereto.
GENERAL
JF Hotel, Inc. was formed primarily to lease and operate hotels owned by
Innkeepers USA Trust (including its subsidiaries, the "Company") through
Innkeepers USA Limited Partnership and its subsidiary partnerships (collectively
the "Partnership"). As of September 30, 1996, approximately 93.5% of the
Partnership was owned by the Company. The principal shareholder of the Lessee is
also the President and Chairman of the Board of Trustees of the Company. JF
Hotel, Inc. commenced the leasing and operation of seven hotels owned by the
Partnership (the "Initial Hotels") on September 30, 1994. The Partnership has
acquired fifteen hotels subsequent to September 30, 1994 (the "Acquired Hotels"
and together with the Initial Hotels, the "Hotels"). JF Hotel, Inc. leases and
operates seven of the Acquired Hotels, and a total of 14 of the Hotels, owned by
the Partnership.
JF Hotel II, Inc., a company under common ownership with JF Hotel, Inc., was
formed to lease eight of the Acquired Hotels owned by the Partnership (JF Hotel,
Inc. and JF Hotel II, Inc. are referred to collectively herein as the "Lessee").
JF Hotel II, Inc. has contracted with an unaffiliated party to operate five of
the Acquired Hotels that it leases.
Each Hotel is leased by the Partnership to the Lessee under a percentage lease
agreement (a "Percentage Lease"). The Percentage Lease for each Hotel provides
for the payment to the Partnership of monthly base rent and monthly percentage
rent based, in substantial part, on fixed percentages of gross room revenue in
excess of certain specified levels of room revenue.
Each Hotel is operated under a franchise license. The cost of obtaining the
franchise licenses is paid by the Partnership and the continuing franchise fees
(generally percentages of room revenue) are paid by the Lessee. The franchise
licenses are held by the Lessee.
RESULTS OF OPERATIONS
The Lessee - Actual
Three months ended September 30, 1996
The Lessee had total revenue of $15,386,000, consisting of $14,425,000 of room
revenue and $961,000 of other revenue. Percentage Lease payments, hotel
operating expenses and overhead expenses were $6,882,000, $7,739,000 and
$520,000, respectively, resulting in net income of $245,000.
29
<PAGE> 32
JF HOTEL, INC. AND JF HOTEL II, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Three months ended September 30, 1995
The Lessee had total revenue of $5,478,000, consisting of $5,132,000 of room
revenue and $346,000 of other revenue. Percentage Lease payments, hotel
operating expenses and overhead expenses were $2,364,000, $3,026,000 and
$309,000, respectively, resulting in net loss of $221,000.
Room revenues, Percentage Lease payments, hotel operating expenses and overhead
expenses increased for the three months ended September 30, 1996 over the three
months ended September 30, 1995 primarily due to the number of hotels leased
increasing from 7 at January 1, 1995 to 18 at January 1, 1996, and to 22 at
September 30, 1996.
Additionally, the gross margin percentage was 77.0% and 73.8% for the three
months ended September 30, 1996 and September 30, 1995, respectively. The
increase in gross margin percentage is primarily attributable to a 4.7% increase
in ADR. Unallocated operating expenses as a percentage of gross operating
revenue remained relatively constant at 26.8% and 28.1% for the three months
ended September 30, 1996 and September 30, 1995, respectively. Net income as a
percentage of gross operating revenue remained relatively constant at 1.6% and
(.4)% for the three months ended September 30, 1996 and September 30, 1995,
respectively.
Nine months ended September 30, 1996
The Lessee had total revenue of $42,612,000, consisting of $39,758,000 of room
revenue and $2,854,000 of other revenue. Percentage Lease payments, hotel
operating expenses and overhead expenses were $18,932,000, $21,180,000 and
$1,424,000, respectively, resulting in net income of $1,076,000.
Nine months ended September 30, 1995
The Lessee had total revenue of $15,752,000, consisting of $14,645,000 of room
revenue and $1,107,000 of other revenue. Percentage Lease payments, hotel
operating expenses and overhead expenses were $6,882,000, $7,961,000 and
$720,000, respectively, resulting in net income of $189,000.
Room revenues, Percentage Lease payments, hotel operating expenses and overhead
expenses increased for the nine months ended September 30, 1996 over the nine
months ended September 30, 1995 primarily due to the number of hotels leased
increasing from 7 at January 1, 1995 to 18 at January 1, 1996, and to 22 at
September 30, 1996.
Additionally, the gross margin percentage was 77.6% and 76.3% for the nine
months ended September 30, 1996 and September 30, 1995, respectively. The
increase in gross margin percentage is primarily attributable to a 4.1% increase
in ADR. Unallocated operating expenses
30
<PAGE> 33
JF HOTEL, INC. AND JF HOTEL II, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
as a percentage of gross operating revenue remained relatively constant at 26.6%
and 25.9% for the nine months ended September 30, 1996 and September 30, 1995,
respectively. Net income as a percentage of gross operating revenue remained
relatively constant at 2.5% and 1.2% for the nine months ended September 30,
1996 and September 30, 1995, respectively.
The Lessee - Pro Forma
The following pro forma information is presented as if the acquisition of the
Hotels had occurred at the beginning of the periods presented.
Three months ended September 30, 1996 compared to the three months
ended September 30, 1995
Pro forma room revenue increased by $895,000, or 6.5%, from $13,789,000 for the
three months ended September 30, 1995 to $14,684,000 for the three months ended
September 30, 1996. REVPAR increased 9.6% for the three months ended September
30, 1996 compared to the three months ended September 30, 1995 (for the three
months ended September 30, 1996 REVPAR results exclude certain room nights due
to renovation).
Occupancy, ADR and REVPAR for the hotels on a pro forma basis for the three
months ended September 30, 1996 was 84.5%, $77.38 and $65.39, respectively.
Nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995
Pro forma room revenue increased by $3,370,000, or 8.6%, from $39,141,000 for
the nine months ended September 30, 1995 to $42,511,000 for the nine months
ended September 30, 1996. REVPAR increased 9.2% for the nine months ended
September 30, 1996 compared to the nine months ended September 30, 1995 (for the
three months ended September 30, 1996 REVPAR results exclude certain room nights
due to renovation).
Occupancy, ADR and REVPAR for the hotels on a pro forma basis for the nine
months ended September 30, 1996 was 81.4%, $76.62 and $62.37, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,904,000 for the nine months
ended September 30, 1996. The Lessee has met all of its obligations under the
Percentage Leases since September 30, 1994 (inception). The Lessee has only
nominal assets and relies solely on cash flow from the hotels that it leases to
satisfy all of its obligations under the Percentage Leases.
31
<PAGE> 34
JF HOTEL, INC. AND JF HOTEL II, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
SEASONALITY
The hotel industry is seasonal in nature. The Hotels' operations historically
reflect higher occupancy rates and ADR during the second and third quarters for
the 17 Hotels located outside of Florida and higher occupancy rates and ADR
during the first and fourth quarters for three of the four Hotels located in
Florida.
INFLATION
Operators of hotels, including the Lessee and any third-party manager retained
by the Lessee, 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 Lessee and any third-party manager retained by the Lessee to
raise room rates in response to inflation.
SUBSEQUENT EVENTS
In October 1996, the shareholders of the Lessee formed a sister corporation with
common ownership to the Lessee (the Lessee and such sister corporation being
referred to collectively hereinafter as the "Lessee") to lease the Acquisition
Hotels acquired by the Partnership.
The Lessee has contracted with Residence Inn by Marriott ("Marriott") to operate
the nine Acquisition Hotels which operate as Residence Inn by Marriott hotels
under the management agreements between the Lessee and Marriott. The Lessee
operates and holds the franchise license for the tenth Acquisition Hotel. There
are no separate franchise agreements for eight of the nine Residence Inn
Acquisition Hotels operated by Marriott. The Lessee holds the franchise
agreement for the ninth Residence Inn Acquisition Hotel operated by Marriott.
32
<PAGE> 35
INNKEEPERS USA TRUST
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
Exhibit 27 - Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K - None
33
<PAGE> 36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INNKEEPERS USA TRUST
November 14, 1996 /s/ David Bulger
---------------------------------------
David Bulger
Chief Financial Officer
(Principal Financial Officer)
34
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
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<COMMON> 108
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