<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 June 30, 1997
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 (561) 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 August 4,
1997 was 31,823,637.
<PAGE> 2
INNKEEPERS USA TRUST
INDEX
Page Number
-----------
PART I. Financial Information
INNKEEPERS USA TRUST
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 1997 (unaudited) and December 31, 1996 1
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1997 (unaudited)
and June 30, 1996 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 (unaudited)
and June 30, 1996 (unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
JF HOTEL, INC., JF HOTEL II, INC., JF HOTEL III, INC., JF
HOTEL IV, INC., AND JF HOTEL V, INC.
Item 1. Financial Statements
Condensed Combined Balance Sheets at June 30,
1997 (unaudited) and December 31, 1996 26
Condensed Combined Statements of Income for the
three and six months ended June 30, 1997 (unaudited)
and June 30, 1996 (unaudited) 27
Condensed Combined Statements of Cash Flows for
the six months ended June 30, 1997 (unaudited)
and June 30, 1996 (unaudited) 28
Notes to Condensed Combined Financial Statements 29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 31
<PAGE> 3
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 33
Signature 34
<PAGE> 4
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
Investment in hotel properties:
Land $ 60,404 $ 42,565
Buildings and improvements 392,559 251,411
Furniture and equipment 58,538 32,644
--------- ---------
511,501 326,620
Accumulated depreciation (24,559) (17,560)
--------- ---------
Net investment in hotel properties 486,942 309,060
Cash and cash equivalents 15,233 44,739
Due from Lessee 7,971 3,541
Deferred expenses, net 5,518 2,718
Other assets 497 299
--------- ---------
Total assets $ 516,161 $ 360,357
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 219,505 $ 100,740
Accounts payable and other accrued expenses 3,857 915
Distributions payable 7,119 5,217
Minority interest in Partnership 69,945 45,880
--------- ---------
Total liabilities 300,426 152,752
--------- ---------
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, 22,323,108 and 22,322,498 shares
issued and outstanding at June 30,1997 and
December 31, 1996, respectively 223 223
Additional paid-in capital 223,295 213,692
Unearned trustees' compensation (118) (138)
Distributions in excess of net earnings (7,665) (6,172)
--------- ---------
Total shareholders' equity 215,735 207,605
--------- ---------
Total liabilities and shareholders' equity $ 516,161 $ 360,357
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
<PAGE> 5
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Percentage lease revenue $ 14,932 $ 6,354 $ 27,312 $ 12,050
Other revenue 212 153 557 247
------------ ------------ ------------ ------------
Total revenue 15,144 6,507 27,869 12,297
------------ ------------ ------------ ------------
Expenses:
Depreciation and amortization 3,798 1,575 7,032 3,044
Ground rent 88 86 176 171
Interest expense 2,449 1,377 4,446 2,442
Amortization of loan origination
fees 148 215 404 376
Real estate and personal
property taxes and property
insurance 1,124 638 2,253 1,153
General and administrative 588 390 1,018 611
Amortization of unearned trustees'
and officers' compensation 47 12 57 24
------------ ------------ ------------ ------------
Total expenses 8,242 4,293 15,386 7,821
------------ ------------ ------------ ------------
Income before minority interest 6,902 2,214 12,483 4,476
Minority interest, common (346) (144) (580) (291)
Minority interest, preferred (1,117) -- (2,234) --
------------ ------------ ------------ ------------
Net income $ 5,439 $ 2,070 $ 9,669 $ 4,185
============ ============ ============ ============
Net income per common share $ .24 $ .19 $ .43 $ .39
============ ============ ============ ============
Weighted average number of
common shares and common
share equivalents outstanding 24,037,138 11,568,783 23,810,518 11,568,687
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
<PAGE> 6
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except supplemental non-cash financing activities)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30,1997 June 30, 1996
------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,669 $ 4,185
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,089 3,068
Amortization of loan origination fees 404 376
Minority interest, common and preferred 2,814 291
Change in operating assets and liabilities:
(Increase) decrease in:
Due from lessee (4,430) (1,216)
Deferred expenses, net (1,415) (10)
Other assets (198) 176
Increase (decrease) in:
Accounts payable and other accrued expenses 1,822 87
--------- --------
Net cash provided by operating activities 15,755 6,957
--------- --------
Cash flows from investing activities:
Investment in hotel properties (150,892) (26,544)
Payments paid for franchise fees 0 (122)
Deposit on Acquisition Hotels 0 (2,850)
--------- --------
Net cash used in investing activities (150,892) (29,516)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt 118,894 35,086
Payments on long-term debt (129) (2,049)
Proceeds from accounts payable and other accrued expenses 1,120 0
Payments for dividend reinvestment plan and shelf registration (203) (47)
Payments on accrued expenses-public offering 0 (397)
Distributions paid (12,224) (5,091)
Loan origination fees paid (1,827) (525)
--------- --------
Net cash provided by financing activities 105,631 26,977
--------- --------
Net increase (decrease) in cash and cash equivalents (29,506) 4,418
Cash and cash equivalents at beginning of period 44,739 2,093
--------- --------
Cash and cash equivalents at end of period $ 15,233 $ 6,511
========= ========
Supplemental cash flow information:
Interest paid $ 4,286 $ 2,442
========= ========
</TABLE>
Supplemental non-cash financing activities:
The Company incurred $18,000 of accrued expenses-public offering which was
recorded in additional paid in capital for the period January 1, 1996 through
June 30, 1996.
The Company issued 2,307,763 common units aggregating $33,989,000 for the
acquisition of 11 hotel properties during the six months ended June 30, 1997.
The accompany notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 7
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Innkeepers USA Trust (the "Company") commenced operations on September
30, 1994. The Company owned an 75.5% equity interest in Innkeepers USA
Limited Partnership (with its subsidiary partnerships, the
"Partnership") as of June 30, 1997 and has elected to be taxed as a
real estate investment trust ("REIT"). The Partnership owned 47 Hotels
(the "Hotels") in 18 states as of June 30, 1997. The 47 Hotels are
comprised of 23 Residence Inn by Marriott, 12 Hampton Inns, 6
Summerfield Suites, 2 Sierra Suites, 1 Comfort Inn, 1 Sheraton Inn, 1
Holiday Inn Express and 1 Sunrise Suites.
The Partnership leases 38 of the Hotels to JF Hotel, Inc. (or other
entities under common ownership, collectively the "JF Lessee") and nine
of the Hotels to an affiliate of Summerfield Hotel Corporation (the
"Summerfield Lessee" and collectively with the JF Lessee, the "Lessee")
pursuant to leases which provide for rent based, in substantial part,
on the room revenues of the Hotels ("Percentage Leases").
One officer of the Company is also an officer and principal
shareholder of the JF Lessee, and another officer of the Company is
the other principal shareholder of the JF Lessee. A trustee of the
Company is a principal shareholder of the Summerfield Lessee.
In the opinion of the Company's management, 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, 1996. The December 31,
1996 condensed consolidated balance sheet was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
4
<PAGE> 8
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Capitalized Interest
Interest is capitalized on Hotels which are closed due to renovation.
Interest capitalized for the six months ended June 30, 1997 was
$127,000.
Deferred Expenses
Deferred expenses consist primarily of loan origination fees and
franchise application fees and are recorded at cost. Amortization is
computed using the straight-line method over the original lives of the
franchise agreements, which range from approximately 3 to 13 years.
Loan origination fees are amortized using the interest method over the
original or amended term of the Company's $190 million line of credit
("First Line of Credit"), $30 million term loan ("First Term Loan") and
$42 million term loan ("Second Term Loan"), which is 3, 12 and 12
years, respectively.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of approximately $9.4 million and
$4.4 million that is required to be held in escrow accounts as
specified primarily by the terms of the Company's First Line of Credit
and two Term Loans at June 30, 1997 and December 31, 1996,
respectively. The restricted cash and cash equivalents are to be used
to pay for insurance, taxes, furniture, fixtures, equipment and capital
expenditures pertaining to the 11 Hotels that collateralize the First
Line of Credit, the eight Hotels that collateralize the First Term Loan
and the eight Hotels that collateralize the Second Term Loan.
3. DEFERRED EXPENSES AND OFFERING COSTS
Deferred expenses also include loan origination fees and costs incurred
during the first six months of 1997 in connection with (a) amending the
First Line of Credit in May 1997 in the amount of approximately
$1,319,000, (b) refinancing $42,000,000 of outstanding principal
balance on the First Line of Credit with the Second Term Loan in March
1997 in the amount of $1,251,000 and (c) the process of establishing an
additional $70 million line of credit ("Second Line of Credit") in the
amount of $542,000.
Deferred expenses also consist of $14,000 of public offering costs
relating to the Company's fourth public offering of common shares which
was consummated in July 1997 (the "Follow-On Offering").
5
<PAGE> 9
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT
Long-term debt at June 30, 1997 consisted of (a) mortgage notes
collateralized by one hotel property located in Florida (the "Florida
Mortgage Note"), one hotel property located in California (the
"California Mortgage Note") and two hotel properties located in
Michigan (the "Michigan Mortgage Note"), (b) outstanding borrowings
under the First Line of Credit, (c) outstanding borrowings under the
two Term Loans, and (d) outstanding borrowings under an interim loan
(the "Interim Loan").
The Florida Mortgage Note is payable in equal monthly installments of
$23,526 including interest at a fixed rate of 5.0% per annum through
January 2002 at which time all outstanding principal and interest is
due. The outstanding principal balance on the Florida Mortgage Note was
approximately $3.5 million and $3.6 million at June 30, 1997 and
December 31, 1996, respectively.
The California Mortgage Note is payable in equal monthly installments
of $141,331, including interest at a fixed rate of 10.35% per annum
through June 2010, at which time all outstanding principal and interest
is due. The outstanding principal balance on the California Mortgage
Note was approximately $14.9 million at June 30, 1997 and December 31,
1996, respectively.
The Michigan Mortgage Note is payable in monthly interest only
payments, at a variable interest rate based upon the 30-day yield of
tax exempt securities selected by an independent party, through
December 2014, at which time all outstanding principal and interest is
due. The Michigan Mortgage Note is also collateralized by irrevocable
letters of credit collateralized by two hotel properties located in
Michigan. The interest rate and outstanding principal balance on the
Michigan Mortgage Note is 3.75% and $10.0 million, respectively, at
June 30, 1997 and 3.9% and $10.0 million, respectively, at December 31,
1996.
Outstanding borrowings under the First Line of Credit bear interest at
the 30-day LIBOR rate plus 175 basis points for the collateralized
portion and 30-day LIBOR rate plus 195 basis points for the
uncollateralized portion. The interest rate on borrowings under the
First Line of Credit at June 30, 1997 was 7.4% and at December 31, 1996
was 7.1%. The First Line of Credit was amended in May 1997 and expires
May 2000. Borrowings were outstanding only on the collateralized
portion. The outstanding principal balance on the First Line of Credit
was approximately $29.7 million and $42.2 million at June 30, 1997 and
December 31, 1996, respectively.
6
<PAGE> 10
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT, CONTINUED
The First Term Loan matures in 2015 and bears interest at an 8.17%
fixed annual rate. The First Term Loan has scheduled principal
amortization over a twenty-year term commencing on the second
anniversary of the First Term Loan. Interest on the outstanding
principal balance of the First Term Loan will accrue at 13.17% if the
outstanding principal balance is not paid in full by the end of the
twelfth year of the First Term Loan. The outstanding principal balance
on the First Term Loan was $30 million at June 30, 1997 and December
31, 1996.
In March 1997, $42,000,000 of the outstanding principal balance on the
First Line of Credit was refinanced with the Second Term Loan. The
Second Term Loan matures in 2017 and bears interest at an 8.15% fixed
annual rate. The Second Term Loan has scheduled principal amortization
over a twenty-year term commencing on the second anniversary of the
Second Term Loan. Interest on the outstanding principal balance of the
Second Term Loan will accrue at 13.15% if the outstanding principal
balance is not paid in full by the end of the twelfth year of the
Second Term Loan. The outstanding principal balance on the Second Term
Loan was $42 million at June 30, 1997.
Effective June 1997, the Company borrowed on the Interim Loan
approximately $89,380,000 to partially finance the purchase of nine
existing Hotels from an unaffiliated party. Outstanding borrowings
under the Interim Loan bear interest at the 30-day LIBOR rate plus 171
basis points. The interest rate on borrowings under the Interim Loan is
7.4% and the Interim Loan was repaid in full in July 1997 from proceeds
of the Follow-On Offering.
Substantially all of the Company's assets at June 30, 1997, other than
the hotel properties collateralizing the Florida, California and
Michigan Mortgage Notes and seven unencumbered hotel properties, are
pledged as collateral for the First Line of Credit, the two Term Loans
and the Interim Loan.
5. RESTRICTED COMMON SHARE AND SHARE OPTION PLAN
In May 1997, the Company's shareholders approved an amended share
incentive plan ("Amended 1994 Plan") which covers employees and
officers of the Company. The Amended 1994 Plan increased from 800,000
to 2,700,000 the number of Common Shares reserved for issuance (a) upon
the exercise of incentive share options and nonqualified options or (b)
as restricted Common Shares and performance based Common Shares. The
Company may grant up to 900,000 restricted Common Shares and
performance based Common Shares under the Amended 1994 Plan.
7
<PAGE> 11
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRICTED COMMON SHARE AND SHARE OPTION PLAN, CONTINUED
The exercise price of common share options may not be less than fair
market value of the common shares at the date of grant. The table below
delineates information concerning outstanding common share options
granted under the Amended 1994 Plan.
<TABLE>
<CAPTION>
Granted Common Shares Option Price Per Share
------- ------------- ----------------------
<S> <C> <C>
1994 250,000 $10.00
1995 20,000 8.875
1996 156,000 9.75
1997 1,192,500 13.25
</TABLE>
Of the 1,618,500 common share options granted, 560,000 are incentive
share options and 1,058,500 are nonqualified options. As of August 4,
1997, no common share options have been exercised. The incentive share
options and nonqualified options vest over varying periods, not to
exceed ten and five years, respectively. Of the 1,618,500 common share
options granted, 1,108,500 have been granted to an officer of the
Company, who is also a Trustee.
The Company has granted 116,250 restricted Common Shares which vest
equally over a seven year period commencing February 1997. Common share
dividends are payable on the restricted Common Shares. Of the 116,250
restricted Common Shares granted, 60,000 have been granted to an
officer of the Company, who is also a trustee. The Company has also
granted 116,250 performance based Common Shares of which up to one-half
will be earned in February 1998 based upon certain common share price
appreciation performance during 1997. In addition, the other one-half
of performance based Common Shares will be earned in February 1999
based upon certain common share price appreciation performance during
1998. Performance based common shares eligible to be earned but that
are not earned in February 1998, can be earned in February 1999 based
upon certain common share price appreciation performance during 1997
and 1998. Restricted Common Shares will be issued equal to the number
of performance based Common Shares earned. Restricted Common Shares
vest equally over six years commencing February 1998 for those
performance based Common Shares earned for 1997 and vest equally over
five years commencing February 1999 for those performance based Common
Shares earned in 1998.
In May 1997, the Company's shareholders approved an amended nonemployee
trustees share incentive plan which provides for the granting of
incentive share options and restricted Common Shares. The amended
trustees plan provides for awards beyond the year 2000 and increased
awards to its nonemployee trustees.
8
<PAGE> 12
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. RESTRICTED COMMON SHARE AND SHARE OPTION PLAN, CONTINUED
The Company has granted an aggregate of 25,000 nonqualified options to
five of its non-employee trustees. The table below delineates
information concerning outstanding common share options granted under
its amended trustees plan.
<TABLE>
<CAPTION>
Granted Common Shares Option Price Per Share
------- ------------- ----------------------
<S> <C> <C>
1994 15,000 $10.00
1996 3,000 11.75
1997 7,000 13.25 - 14.25
</TABLE>
The nonqualified options vest over varying periods not to exceed five
years. As of August 4, 1997 no common share options have been
exercised.
The Company since September 1994 has also granted 57,939 outstanding
restricted Common Shares to its five non-employee trustees, which vest
over varying periods not to exceed five years.
6. ACQUISITIONS
In January 1997, the Partnership acquired an existing hotel from an
unaffiliated party for approximately $10,630,000 in cash and
approximately $620,000 in common units of limited partnership interest
in the Partnership ("Common Units").
In February 1997, the Partnership acquired an existing hotel for
$10,500,000 in cash and a newly developed hotel for approximately
$10,200,000 in cash and approximately $4,300,000 in Common Units, from
an unaffiliated party.
On June 26, 1997, the Partnership acquired three existing hotels from
an unaffiliated party for $19,100,000 in cash.
Effective June 20, 1997, the Partnership acquired nine existing hotels
from an unaffiliated party for $89,380,000 in cash and approximately
$29,069,000 in common units.
7. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Pursuant to the Partnership's Partnership Agreement, limited partners
who hold Common Units at June 30, 1997 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. The redemption rights become
effective, in the case of 654,906 common units at any time after
September 30, 1995, in
9
<PAGE> 13
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS,
CONTINUED
the case of 91,991 Common Units after October 7, 1997, in the case of
119,473 Common Units after October 1997, in the case of 369,816 Common
Units after July 31, 1997, in the case of 1,856,954 Common Units after
June 1998 and in the case of 80,993 Common Units after June 1999. The
aggregate number of Common Shares issuable upon exercise of such
redemption rights is 3,174,133 at June 30, 1997.
Additionally, limited partners who hold preferred units of limited
partnership interest in the Partnership ("Preferred Units" and
collectively with the Common Units, "Units") at June 30, 1997 have
Redemption Rights which enable them to redeem their Preferred 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 November 1,
1998. The aggregate number of Common Shares issuable upon exercise of
such Redemption Rights is 4,063,329 at June 30, 1997.
Annual preferred distributions 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. The Preferred
Units have a preference value of $11.00 per unit, may be converted into
Common Units at any time on a one-for-one basis and will be converted
into Common Units on the tenth anniversary of the Preferred Units
issuance unless previously converted or redeemed.
The Hotels are operated under franchise or management agreements as
Hampton Inn, Residence Inn by Marriott, Summerfield Suites, Sierra
Suites, Sunrise Suites, 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, if applicable.
The franchise and management agreements require the payment of fees
based on a percentage of hotel revenue. These fees are paid by the
Lessee, which holds any franchise licenses.
The Partnership generally is obligated to pay the costs of certain
capital improvements, real estate and personal property taxes and
property insurance. Additionally, the Partnership must make available
to the Lessee on a monthly basis an amount equal to 4.0% of room
revenues for the periodic replacement or refurbishment of furniture,
fixtures and equipment at the Hotels except that the amount that must
be made available is 5% of room revenues for the eight Hotels that
collateralize the Second Term Loan. The amount of cash and cash
equivalents availabile to the Lessee under these provisions is
approximately $2,614,000 and $287,000 at June 30, 1997 and December 31,
1996, respectively.
10
<PAGE> 14
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS, CONTINGENCIES, AND RELATED PARTY TRANSACTIONS,
CONTINUED
The Lessee has future minimum base rent commitments under the
Percentage Lease agreements to the Partnership. Minimum future base
rent revenue, under the Percentage Lease agreements, are as follows
through the year 2006 (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
1997 $ 34,000
1998 40,000
1999 35,000
2000 35,000
2001 35,000
Thereafter 151,000
</TABLE>
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 was
approximately 43% of its investment in hotels, at cost, at June 30,
1997.
8. SUBSEQUENT EVENTS
Common Share Offering
In July 1997, the Company completed the 9,500,000 Common Share
Follow-On Offering, raising gross proceeds of approximately
$133,000,000. The net proceeds of the Follow-On Offering were used to
repay in full the First Line of Credit and Interim Loan 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
81.5% interest in the Partnership. As of August 4, 1997, the Company
has 31,823,637 common shares issued and outstanding and limited
partners of the Partnership own 3,174,133 Common Units and 4,063,329
Preferred Units.
11
<PAGE> 15
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma condensed consolidated balance sheet is
presented as if the consummation of the Follow-On Offering and the
application of the net proceeds of the Follow-On Offering had occurred
on June 30, 1996. Such pro forma information is based in part upon the
consolidated balance sheet of the Company.
The unaudited pro forma consolidated statements of income of the
Company are presented as if the acquisition of the Hotels has occurred
at the beginning of the periods presented and all of the Hotels had
been leased to the Lessee pursuant to Percentage Leases throughout the
periods presented.
The unaudited pro forma condensed consolidated balance sheet and
statements of income of the Company for the periods presented are not
necessarily indicative of what the financial position and results of
the operations of the Company would have been assuming such
transactions had been completed as of the beginning of the periods
presented, nor does it purport to represent the results of operations
for future periods.
12
<PAGE> 16
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. PROFORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
(Unaudited, Amounts in Thousands)
ASSETS
<S> <C> <C> <C>
Investments in hotels properties $511,501 $511,501
Accumulated depreciation (24,559) (24,559)
-------- --------
486,942 486,942
Cash and cash equivalents 15,233 6,576 (A) 21,809
Due from Lessee 7,971 7,971
Deferred expenses, net 5,518 5,518
Other assets 497 497
-------- --------- --------
Total assets $516,161 $ 6,576 $522,737
======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $219,505 $(119,105)(B) $100,400
Accounts payable and other accrued expenses 3,857 3,857
Distributions payable 7,119 7,119
Minority interest in partnership 69,945 6,157 (C) 76,102
-------- -------- ---------
Total liabilities 300,426 (112,948) 187,478
Shareholders' equity:
Common shares 223 95 (D) 318
Additional paid in capital 223,295 119,429 (E) 342,724
Unearned trustees' compensation (118) (118)
Distributions in excess of net earnings (7,665) (7,665)
-------- -------- ---------
Total shareholders' equity 215,735 119,524 335,259
-------- -------- --------
Total liabilities and shareholders' equity $516,161 $ 6,576 $522,737
======== ======== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
13
<PAGE> 17
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. PROFORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED
Notes to Pro Forma Condensed Consolidated Balance Sheet
(A) Represents net proceeds from the Follow-On Offering ($125,681,000), less
reduction of the First Line of Credit and Interim Loan ($119,105,000).
(B) Represents reduction on the First Line of Credit and Interim Loan
($119,105,000).
(C) Represents the value assigned to the minority interest as a result of the
Follow-On Offering ($6,157,000).
(D) Reflects the par value of the Common Shares sold in the Follow-On Offering
($95,000).
(E) Net increase reflects the gross proceeds from the Follow-On Offering
($133,000,000), less estimated underwriting and other expenses of the
Offering ($7,319,000), less the par value of the common shares issued
($95,000) minus the allocation of equity to minority interest ($6,157,000).
14
<PAGE> 18
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. PROFORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Operating Data:
Percentage Lease Revenue $ 35,712 $ 31,667
Other revenue 557 252
-------- --------
Total Revenue 36,269 31,919
-------- --------
Depreciation and amortization 10,809 9,599
Ground rent 176 212
Interest expense 4,019 4,019
Amortization of loan origination fees 526 587
Real estate and personal property taxes
and property insurance 3,332 3,328
General and administrative 1,094 1,094
Amortization of unearned Trustees'
and Officers' compensation 57 24
-------- --------
Total Expenses 20,013 18,863
-------- --------
Income before minority interest 16,256 13,056
Minority interest, common (1,262) (974)
Minority Interest, preferred (2,235) (2,235)
-------- --------
Net Income 12,759 9,847
======== ========
Net income per common share .40 .31
======== ========
Weighted average number of
common shares and common share
equivalents outstanding $ 35,282 $ 35,113
======== ========
</TABLE>
15
<PAGE> 19
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes thereto.
GENERAL
Innkeepers USA Trust (the "Company") commenced operations on September 30, 1994.
The Company owned an 75.5% equity interest in Innkeepers USA Limited Partnership
(with its subsidiary partnerships, the "Partnership") as of June 30, 1997 and
has elected to be taxed as a real estate investment trust ("REIT"). The
Partnership owned 47 Hotels (the "Hotels") in 18 states as of June 30, 1997. The
47 Hotels are comprised of 23 Residence Inn by Marriott, 12 Hampton Inns, 6
Summerfield Suites, 2 Sierra Suites, 1 Comfort Inn, 1 Sheraton Inn, 1 Holiday
Inn Express and 1 Sunrise Suites.
The Partnership leases 38 of the Hotels to JF Hotel, Inc. (or other entities
under common ownership, collectively the "JF Lessee"), and nine of the Hotels to
an affiliate of Summerfield Hotel Corporation (the "Summerfield Lessee" and
collectively with the JF Lessee, the "Lessee") pursuant to leases which provide
for rent based, in substantial part, on the room revenues of the Hotels
("Percentage Leases"). JF Lessee operates 24 of the Hotels, Residence Inn by
Marriott, Inc., a wholly-owned subsidiary of Marriott International, Inc.,
operates 12 of the Hotels, an affiliate of Summerfield Hotel Corporation
operates nine of the Hotels, and another unaffiliated party manages two of the
Hotels. The non-JF Lessee managed Hotels are managed under management
agreements between the respective manager and the respective Lessee. The
non-Marriott-managed Hotels operate under franchise licenses held by the
Lessee, the cost of obtaining which was paid for by the Partnership, if
applicable. The right to operate the 12 Marriott-managed Hotels as Residence
Inns is contained in the Marriott management agreements. Continuing franchise
and management fees are paid by the Lessee.
The Company acquired the following hotel properties during the six months ended
June 30, 1997:
<TABLE>
<CAPTION>
Number of
Hotel Suites/Rooms
- ----- ------------
<S> <C>
Residence Inn-Addison, TX 150
Residence Inn-Arlington, TX 114
Residence Inn-Eden Prairie, MN 126
Hampton Inn-Schaumburg (Chicago),IL 128
Hampton Inn-Westchester (Chicago), IL 112
</TABLE>
16
<PAGE> 20
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Hampton Inn-Lombard (Chicago), IL 128
Summerfield Suites-Belmont, CA 132
Summerfield Suites-El Segundo, CA 122
Summerfield Suites-West Hollywood, CA 109
Summerfield Suites-Mount Laurel, NJ 116
Summerfield Suites-Addison, TX 132
Summerfield Suites-Irving(Las Colinas), TX 148
Sunrise Suites-Eatontown (Tinton Falls), NJ 96
Sierra Suites-Phoenix (Camelback), AZ 113
Sierra Suites-Atlanta (Cumberland), GA 89
The following chart summarizes information regarding the Hotels at
June 30, 1997.
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Upscale extended-stay hotels:
Residence Inn 23 2,713
Summerfield Suites 6 759*
Sunrise Suites 1 96
-- -----
30 3,568
Mid-priced extended-stay hotels:
Sierra Suites 2 202
-- -----
Limited service hotels:
Hampton Inn 12 1,527
Comfort Inn 1 127
Holiday Inn Express 1 164
-- -----
14 1,818
Full service hotels:
Sheraton Inn 1 139
-- -----
Total 47 5,727
== =====
</TABLE>
* contains a total of 1,057 bedrooms
17
<PAGE> 21
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
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 11.9% for the three months ended June 30, 1997 as compared
to the three months ended June 30, 1996 and 10.9% for the six months ended June
30, 1997 as compared to the six months ended June 30, 1996. Results were
excluded for such comparison for two newly developed hotels and 12 hotels
acquired during the last two weeks of June 1997. Management believes that 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 third party management and improving industry
conditions. The following table sets forth pro forma information with respect to
occupancy, average daily rate ("ADR") and REVPAR for the three and six months
ended June 30, 1997 as compared to the three and six months ended June 30, 1996.
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.
<TABLE>
<CAPTION>
For the For the
Three Months Ended Three Months Ended Percentage
June 30, 1997 June 30, 1996 Change
------------- ------------- ------
<S> <C> <C> <C>
Occupancy 83.94% 84.64% (.8)%
ADR $92.19 $81.70 12.8%
REVPAR $77.38 $69.15 11.9%
</TABLE>
<TABLE>
<CAPTION>
For the For the
Six Months Ended Six Months Ended Percentage
June 30, 1997 June 30, 1996 Change
------------- ------------- ------
<S> <C> <C> <C>
Occupancy 81.73% 82.90% (1.4)%
ADR $91.76 $81.60 12.5%
REVPAR $74.99 $67.64 10.9%
</TABLE>
18
<PAGE> 22
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the Company.
The Company - Actual
Comparison of the Three Months Ended June 30, 1997 ("1997") to the Three Months
Ended June 30, 1996 ("1996")
The Company had revenues of $15,144,000, consisting of $14,932,000 of Percentage
Lease revenue from the Lessee and $212,000 of other revenue for 1997 compared
with $6,507,000, $6,354,000 and $153,000, respectively, for 1996. Depreciation
and amortization, amortization of loan origination fees, and amortization of
unearned trustees' and officers' compensation ("Depreciation and Amortization")
were $3,993,000 in the aggregate for 1997 compared with $1,802,000 for 1996.
Real estate and personal property taxes and property insurance were $1,124,000
for 1997 compared with $638,000 for 1996. Interest expense for 1997 was
$2,449,000 compared with $1,377,000 for 1996. Interest expense for 1997
consisted primarily of interest incurred on borrowings outstanding under the
Company's $190 million line of credit ("First Line of Credit"), $30 million term
loan ("First Term Loan") and $42 million term loan ("Second Term Loan").
Interest expense for 1996 consisted primarily of interest incurred on borrowings
outstanding under the First Line of Credit and First Term Loan. Net income
before minority interest was $6,902,000 or $0.24 per share, for 1997 compared
with $2,214,000, or $0.19 per share, for 1996. Funds from Operations (FFO)
(income before minority interest and depreciation) was $10,679,000, or $.38 per
share, for 1997 compared with $3,773,000, or $.33 per share, for 1996.
Percentage Lease revenue, Depreciation and Amortization, interest expense and
real estate and personal property taxes and property insurance increased
substantially for 1997 compared with 1996, primarily due to the number of Hotels
owned increasing from 21 at June 30, 1996 to 47 at June 30, 1997.
The Company - Actual
Comparison of the Six Months Ended June 30, 1997 ("1997") to the Six Months
Ended June 30, 1996 ("1996")
The Company had revenues of $27,869,000 consisting of $27,312,000 of Percentage
Lease revenue from the Lessee and $557,000 of other revenue for 1997 compared
with $12,297,000,
19
<PAGE> 23
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
$12,050,00 and $247,000, respectively, for 1996. Depreciation and Amortization
were $7,493,000 for 1997 compared with $3,444,000 for 1996. Real estate and
personal property taxes and property insurance were $2,253,000 for 1997
compared with $1,153,000 for 1996. Interest expense for 1997 was $4,446,000
compared with $2,442,000 for 1996. Interest expense for 1997 consisted
primarily of interest incurred on borrowings outstanding under the Company's
First Line of Credit, First Term Loan and Second Term Loan. Interest expense
for 1996 consisted primarily of interest incurred on borrowings outstanding
under the First Line of Credit and First Term Loan. Net income before minority
interest was $12,483,000 or $0.43 per share for 1997 compared with $4,476,000,
or $0.39 per share, for 1996. FFO was $19,477,000, or $.70 per share, for 1997
compared with $7,490,000, or $.65 per share, for 1996.
Percentage Lease revenue, Depreciation and Amortization, interest expense and
real estate and personal property taxes and property insurance increased
substantially for 1997 compared with 1996, primarily due to the number of Hotels
owned increasing from 21 at June 30, 1996 to 47 at June 30, 1997.
The Company - Proforma
Comparison of Six Months Ended June 30, 1997 ("1997") to the
Six Months Ended June 30, 1996 ("1996")
Proforma Percentage Lease revenue increased by approximately $4,045,000 or
12.8%, from approximately $31,667,000 for 1996 to approximately $35,712,000 for
1997. The increase was primarily due to a 12.5% increase in ADR (excluding
results for two newly developed hotels and 12 hotels acquired during the last
two weeks of June 30, 1997) which resulted in increased Percentage Lease
revenue. As a percentage of total revenue, total pro forma expenses decreased
from 59.1% for 1996 to 55.2% for 1997 as a result of expenses remaining
relatively constant while pro forma total revenue increased.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is rent payments from the Lessee
under the Percentage Leases, and the Company is dependent on the Lessee to make
such payments to provide cash for additional hotel investment, debt service,
distributions, capital expenditures on its Hotels, and working capital. The
Company believes that its cash provided by operations will be adequate to meet
some of its liquidity needs, which primarily include funding distributions and
20
<PAGE> 24
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
paying operating expenses. The Company also currently expects to fund its growth
objectives in part by accessing the capital markets, borrowing on its Lines of
Credit, and exchanging equity for hotel properties as necessary and as market
conditions permit.
Cash and cash equivalents at June 30, 1997 were $15,233,000, including
approximately $2,614,000 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 $6,832,000 that is held in escrow to pay for insurance,
taxes, and capital expenditures pertaining primarily to the eleven Hotels that
collateralize the First Line of Credit, the eight Hotels that collateralize the
First Term Loan and the eight Hotels that collateralize the Second Term Loan.
Net cash provided by operating activities for the six months ended June 30, 1997
was $15,755,000.
Net cash used in investing activities was $150,892,000 for the six months ended
June 30, 1997. This was comprised primarily of the Company (a) acquiring a
Residence Inn hotel in Eden Prairie, Minnesota for approximately $10,630,000 in
cash and approximately $620,000 in Common Units, (b) acquiring a Residence Inn
hotel in Arlington, Texas for $10,500,000 in cash, (c) acquiring a Residence Inn
hotel in Addison, Texas for approximately $10,200,000 in cash and approximately
$4,300,000 in Common Units, (d) acquiring three Hampton Inns ("the Three Hampton
Inns Acquisition") each in Schaumburg, Westchester, and Lombard, Illinois, for
approximately $19,100,000 in cash and (e) acquiring six Summerfield Suites, two
Sierra Suites and one Sunrise Suite Hotels ("the Summerfield Acquisition") for
approximately $89,380,000 in cash and approximately $29,069,000 in Common Units.
Net cash provided by financing activities was $105,631,000 for the six months
ended June 30, 1997, consisting primarily of proceeds from long-term debt of
$118,894,000 and distributions paid of $12,224,000. The proceeds of long-term
debt were used primarily to fund the cash portion of the Three Hampton Inns
Acquisition and the Summerfield Acquisition.
In March of 1997, the Company declared an increase in its quarterly distribution
to $0.25 per Common Share from $0.225 per Common Share, which on an annualized
basis represents a distribution of $1.00 per Common Share. Annual preferred
distributions of $1.10 are payable on each Preferred Unit, which may increase up
to $1.155 for each Preferred Unit, based on increases in distributions payable
on the Common Shares. The Preferred Units are convertible at any time into
Common Units on a one-for-one basis. On or after November 1998, the holders of
the Preferred Units may redeem their Units for Common Shares of the Company or,
at the election
21
<PAGE> 25
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
of the Company, an equivalent value of cash. 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.
In making additional investments in hotel properties, the Company may incur, or
cause the Partnership to incur, indebtedness to make such investments. The
Company may also incur indebtedness 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 the consolidated indebtedness of the Company 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 43% of its investment in hotels, at cost,
at June 30, 1997. At June 30, 1997, the Company had outstanding indebtedness of
approximately $219,505,000. Approximately 41% of the Company's indebtedness at
June 30, 1997 bore interest at a fixed rate.
Long-term debt at June 30, 1997 consisted of (a) mortgage notes collateralized
by one hotel property located in Florida (the "Florida Mortgage Note"), one
hotel property located in California (the "California Mortgage Note") and two
hotel properties located in Michigan (the "Michigan Mortgage Note"), (b)
outstanding borrowings under the First Line of Credit, (c) outstanding
borrowings under the two Term Loans and (d) outstanding borrowings under an
interim loan (the "Interim Loan"). Forty of the 47 Hotels owned by the Company
at June 30, 1997 collateralized this indebtedness.
The Florida Mortgage Note is payable in equal monthly installments of $23,526
including interest at a fixed rate of 5.0% per annum through January 2002, at
which time all outstanding principal and interest is due. The outstanding
principal balance on the Florida Mortgage Note was approximately $3.5 million
and $3.6 million at June 30, 1997 and December 31, 1996, respectively.
The California Mortgage Note is payable in equal monthly installments of
$141,331 including interest at a fixed rate of 10.35% per annum through June
2010, at which time all outstanding principal and interest is due. The
outstanding principal balance on the California Mortgage Note was approximately
$14.9 million at June 30, 1997 and December 31, 1996, respectively.
The Michigan Mortgage Note is payable in monthly interest only payments, at a
variable interest rate based upon the 30-day yield of tax exempt securities
selected by an independent party, through December 2014, at which time all
outstanding principal and interest is due. The Michigan Mortgage Note is also
collateralized by irrevocable letters of credit collateralized by two hotel
22
<PAGE> 26
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
properties located in Michigan. The interest rate and outstanding principal
balance on the Michigan Mortgage Note was 3.75% and $10.0 million, respectively,
at June 30, 1997 and 3.9% and $10.0 million, respectively, at December 31, 1996.
Outstanding borrowings under the First Line of Credit bear interest at the
30-day LIBOR rate plus 175 basis points for the collateralized portion and
30-day LIBOR rate plus 195 basis points for the uncollateralized portion. The
interest rate on borrowings under the First Line of Credit at June 30, 1997 was
7.4% and at December 31, 1996 was 7.1%. The First Line of Credit was amended in
May 1997 and expires May 2000. Borrowings were outstanding only on the
collateralized portion. The outstanding principal balance on the First Line of
Credit was approximately $29.7 million and $42.2 million at June 30, 1997 and
December 31, 1996, respectively. The First Line of Credit is collateralized by
11 of the Hotels.
The First Term Loan matures in 2015 and bears interest at an 8.17% fixed annual
rate. The First Term Loan has scheduled principal amortization over a
twenty-year term commencing on the second anniversary of the First Term Loan.
Interest on the outstanding principal balance of the First Term Loan will accrue
at 13.17% if the outstanding principal balance is not paid in full by the end of
the twelfth year of the First Term Loan. The First Term Loan may be prepaid in
full without penalty on and after the twelfth anniversary of the closing of the
loan, when the Company expects to pay off the loan in full. The outstanding
principal balance on the First Term Loan was $30 million at June 30, 1997 and
December 31, 1996. The Term Loan is collateralized by eight Residence Inn
Hotels.
In March 1997, $42,000,000 of the outstanding principal balance on the First
Line of Credit was refinanced with the Second Term Loan. The Second Term Loan
matures in 2017 and bears interest at an 8.15% fixed annual rate. The Second
Term Loan has scheduled principal amortization over a twenty-year term
commencing on the second anniversary of the Second Term Loan. Interest on the
outstanding principal balance of the Second Term Loan will accrue at 13.15% if
the outstanding principal balance is not paid in full by the end of the twelfth
year of the Second Term Loan. The Second Term Loan may be prepaid in full
without penalty on or after the twelfth anniversary of the closing of the loan,
when the Company expects to pay off the loan in full. The outstanding principal
balance on the Second Term Loan was $42 million at June 30, 1997. The Second
Term Loan is collateralized by eight of the Hotels.
Effective June 1997, the Company borrowed on the Interim Loan approximately
$89,380,000 to partially finance the purchase of nine existing hotels from an
unaffiliated party. Outstanding borrowings under the Interim Loan bore interest
at the 30-day LIBOR rate plus 171 basis points. The interest rate on borrowings
under the Interim Loan is 7.4% and the Interim Loan was repaid in full in July
1997 from proceeds of the Follow-On Offering.
23
<PAGE> 27
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, short-term or 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.
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, on a monthly
basis, for the periodic replacement or refurbishment of furniture, fixtures and
equipment at the Hotels. The Partnership made available to the Lessee
approximately $11,100,000 for hotel renovations from September 30, 1994 to June
30, 1997. The Second Term Loan requires that the Partnership make available for
such purposes at the Hotels collateralizing that loan 5% of room revenues from
such Hotels. 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 interest of the Company.
Management believes that the amounts required to be made available by the
Partnership will be sufficient to meet required expenditures for furniture,
fixtures and equipment at the Hotels. 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 First 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 May 1997 the Company completed the conversion of the Comfort Inn Hotel in
Woburn, Massachusetts to a Hampton Inn and had expended approximately
$3,300,000 through June 30, 1997 for such conversion.
In May 1997 the Company completed the renovation and repositioning of the
Holiday Inn Express in Lexington, Massachusetts, and had expended approximately
$3,500,000 through June 30, 1997 for such conversion.
SEASONALITY OF HOTEL BUSINESS
The Hotel industry is seasonal in nature. Historically, the Hotels' operations
have generally reflected higher occupancy rates and ADR during the second and
third quarters. To the extent that
24
<PAGE> 28
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
cash flow from the Percentage Leases for a quarter is insufficient to fund all
of the distributions for such quarter due to seasonal and other factors, the
Company may maintain the annual distribution rate by funding quarterly
distributions with available cash or borrowings under the First Line of Credit.
INFLATION
Operators of hotels, including the Lessee and any third-party managers 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.
IMPLEMENTATION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings Per Share" ("FAS 128"). FAS 128 establishes standards for computing
and presenting earnings per share ("EPS") and replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations and requires
a reconciliation of the numerator and the denominator of the basic EPS
computation to the numerator and the denominator of the diluted EPS computation.
The Company will adopt the disclosure requirements of FAS 128 beginning December
31, 1997. The Company does not expect the adoption of FAS 128 to have a material
impact on their financial position, results of operations, and cash flows.
25
<PAGE> 29
JF HOTEL
CONDENSED COMBINED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
Cash $10,703 $ 5,551
Marketable Securities 2,480 1,161
Accounts Receivable 3,601 2,393
Due from Affiliates 0 298
Inventory 18 67
Prepaid Expenses 36 233
Other Assets 197 252
------- -------
Total assets $17,035 $ 9,955
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 5,414 $ 2,150
Accrued expenses 2,430 1,545
Payable to manager 0 1,634
Other liabilities 0 785
Due to Partnership 6,829 3,541
------- -------
Total liabilities 14,673 9,655
------- -------
Commitments (Note 3)
Common shares, $1 par value, 3,000 shares
authorized issued and outstanding 3 3
Unrealized gain on marketable securities 506 358
Retained earnings (deficit) 1,853 (61)
------- -------
Total shareholders' equity 2,362 300
------- -------
Total liabilities and shareholders' equity $17,035 $ 9,955
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed combined financial statements.
26
<PAGE> 30
JF HOTEL
CONDENSED COMBINED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross operating revenue:
Rooms $28,198 $53,731 $13,324 $25,333
Food and Beverage 170 339 254 441
Telephone 1,030 1,994 432 885
Other 621 1,139 266 567
------- ------- ------- ---------
Gross operating revenue $30,019 $57,203 $14,276 $27,226
------- ------- ------- -------
Departmental profit:
Rooms $23,011 $43,677 $10,549 $20,164
Food and Beverage 22 49 18 53
Telephone 645 1,265 314 578
Other 326 618 238 427
------- ------- ------- -------
Total departmental profit $24,004 $45,609 $11,119 $21,222
------- ------- ------- -------
Unallocated operating expenses:
General and administrative 2,010 3,993 785 1,497
Franchise fees 1,810 3,496 1,007 1,922
Advertising and promotions 1,238 2,406 518 974
Utilities 1,084 2,412 675 1,466
Repairs and maintenance 1,241 2,466 661 1,267
Management fees 677 933 54 105
------- ------- ------- -------
Total unallocated operating
expenses $ 8,060 $15,706 $ 3,700 $ 7,231
------- ------- ------- -------
Gross operating profit $15,944 $29,903 $ 7,419 $13,991
------- ------- ------- -------
Insurance (198) (369) (109) (206)
------- ------- ------- -------
Net operating profit $15,746 $29,534 $ 7,310 $13,785
------- ------- ------- -------
Lessee overhead (675) (1,281) (545) (904)
Percentage lease payments (13,852) (26,182) (6,354) (12,050)
------- ------- ------- --------
Net income $ 1,219 $ 2,071 $ 411 $ 831
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed combined financial statements.
27
<PAGE> 31
JF HOTEL
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(in thousands, except supplemental non-cash financing activities)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,071 $ 831
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 23 0
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,208) (374)
Due from affiliates 298
Inventory 49 2
Prepaid expenses 197 163
Other assets 32 (60)
Increase (decrease) in:
Accounts payable 3,264 (803)
Accrued expenses 885 41
Due to Partnership 3,288 1,216
Payable to Manager (1,634) 0
Other Liabilities (785) 0
-------- -------
Net cash provided by operating activities 6,480 1,016
-------- -------
Cash flows from investing activities:
Purchase of marketable securities (1,328) (503)
-------- -------
Net cash used in investing activities (1,328) (503)
-------- -------
Cash flows from financing activities:
Dividends paid 0 (256)
-------- -------
Net cash used in financing activities 0 (256)
-------- -------
Net increase in cash and cash equivalents 5,152 257
Cash and cash equivalents at beginning of period 5,551 2,894
-------- -------
Cash and cash equivalents at end of period $ 10,703 $ 3,151
======== =======
</TABLE>
The accompanying notes are an integral part of these
condensed combined financial statements.
28
<PAGE> 32
JF HOTEL
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
JF Hotel, Inc., JF Hotel II, Inc., JF Hotel III, Inc., JF Hotel IV,
Inc. and JF Hotel V, Inc. (collectively the "JF Lessee") are under
common control and were formed primarily to lease and operate Hotels
owned by Innkeepers USA Trust (the "Company") through Innkeepers USA
Limited Partnership and its subsidiaries (collectively the
"Partnership"). As of June 30, 1997, approximately 75.5% of the
Partnership was owned by the Company. The principal shareholder of the
JF Lessee is also the President and Chairman of the Company. The JF
Lessee commenced the leasing and operation of seven Hotels (the
"Initial Hotels") on September 30, 1994 and at June 30, 1997 leased 38
Hotels (the "Hotels") from the Partnership.
The JF Lessee operates 24 of the Hotels. Residence Inn by Marriott,
Inc. ("RIBM", a wholly-owned subsidiary of Marriott International,
Inc.) operates 12 of the Hotels, and an unaffiliated party ("TMH")
operates two of the Hotels. The financial statements of the twelve
Hotels operated by RIBM are maintained on a 52/53 week period basis.
Adjustments
The unaudited financial statements reflects all adjustments which are
necessary to a fair statement of the results for the interim periods
presented. All such adjustments are of a normal recurring nature.
2. NEW LEASES
In January 1997, the Partnership acquired an existing hotel from an
unaffiliated party for approximately $10,630,000 in cash and
approximately $620,000 in Common Units and leased the hotel to the JF
Lessee.
In February 1997, the Partnership acquired an existing hotel for
approximately $10,500,000 in cash and a newly developed hotel for
approximately $10,200,000 in cash and approximately $4,300,00 in
Common Units, from an unaffiliated party and leased the two hotels to
the JF Lessee.
29
<PAGE> 33
JF HOTEL
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS, CONTINUED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NEW LEASES, CONTINUED
In June 1997, the Partnership acquired three existing Hotels from an
unaffiliated party for approximately $19.1 million in cash and leased
the three hotels to the JF Lessee.
3. COMMITMENTS
The Lessee has future minimum base rent commitments under the
Percentage Lease agreements to the Partnership. Minimum future base
rent payments, under the Percentage Lease agreements, are as follows
through the year 2006 (in thousands):
YEAR AMOUNT
---- --------
1997 $ 25,000
1998 25,000
1999 25,000
2000 25,000
2001 25,000
Thereafter 103,000
RIBM operates twelve of the Hotels under management agreements with the
JF Lessee (the "RIBM Management Agreements"). The RIBM Management
Agreements have an initial term of 13 years and provide for a base fee
of 2% of gross revenues at the managed Hotels and an incentive fee
which is either 50% of available cash flow, as defined, or 65% of
available cash flow up to 3.5% of gross revenue and 50% of available
cash flow thereafter. The agreements also contain penalties for early
termination. The right to operate the twelve Hotels as Residence Inns
is contained in the RIBM Management Agreements. There are no separate
franchise agreements for the 12 Hotels. The right to operate these
hotels as Residence Inns is contained in the RIBM Management
Agreements.
TMH operates two of the Hotels under management agreements with the JF
Lessee (the "TMH Management Agreements"). The TMH Management Agreements
have terms of five years and provide for a base fee of 2% of gross
revenues and an incentive fee based on the performance of the Hotels
managed.
30
<PAGE> 34
JF HOTEL
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.
RESULTS OF OPERATIONS
The following is a discussion of the results of operations of the Lessee.
The Lessee - Actual
Comparison of Six Months Ended June 30, 1997 ("1997") to the Six Months
Ended June 30, 1996 ("1996")
The Lessee had total revenue for 1997 of $57,203,000, consisting of $53,731,000
of rooms revenue and $3,472,000 of other revenue. Rooms revenue increased by
$28,398,000, or 112.1% from $25,333,000 for 1996. This increase was primarily
due to the number of Hotels leased increasing from 21 at June 30, 1996 to 38 at
June 30, 1997.
Percentage Lease payments, hotel operating expenses and overhead expenses for
1997 were $26,182,000, $27,669,000, and $1,281,000, respectively. Percentage
Lease payments, hotel operating expense and overhead expenses increased by
$14,132,000, or 117.3%, $14,228,000, or 105.9%, and $377,000, or 41.7%,
respectively, from $12,050,000, $13,441,000, and $904,000, respectively, for
1996. These increases were primarily due to the number of Hotels leased
increasing from 21 at June 30, 1996 to 38 at June 30, 1997. Net income for 1997
was $2,071,000. Net income increased $1,240,000, or 149.2% from $831,000 for
1996.
The gross margin percentage increased to 79.7% in 1997 from 78.0% in 1996. This
was primarily due to direct room operating expenses decreasing as a percentage
of room revenue in 1997. Net income as a percentage of gross operating revenue
remained relatively constant at 3.1% in 1996 and 3.6% in 1997.
31
<PAGE> 35
INNKEEPERS USA TRUST
PART II - OTHER INFORMATION
ITEM 4 Submission of matters to a vote of Security Holders.
A. The Annual Meeting of Shareholders was held on May 7, 1997 for the
following purposes:
- To elect (a) one Class I trustee to serve on the Board of
Trustees until the annual meeting of shareholders in 1998 and (b)
two Class III trustees to serve on the Board of Trustees until
the annual meeting of shareholders in 2000. (Proposal one)
- To vote upon a proposal to amend the Company's 1994 Share
Incentive Plan to increase (a) the maximum aggregate number of
Common Shares issuable under the 1994 Share Incentive Plan from
800,000 to 2,700,000 common shares, (b) the maximum aggregate
number of Common Shares that can be issued as share awards and
performance shares and (c) individual annual award units.
(Proposal two)
- To vote upon a proposal to amend the Company's Trustees' Share
Incentive Plan to provide for additional non-discretionary share
awards and option grants to non-employee trustees of the
company. (Proposal three)
Under proposal one, shareholders voted to elect one Class I trustee, Mr.
Jack P. Deboer, with 16,767,201 shares voted for (71,533 votes withheld
authority), and two Class III trustees, Mr. Jeffrey H. Fisher, with
16,766,201 shares voted for (72,533 votes withheld authority) and Mr.
Thomas J. Crocker with 16,766,201 shares voted for (72,533 votes withheld
authority). Mr. Bruce Zenkel, Mr. Miles Berger and Mr. C. Gerald Goldsmith
also continue to serve as trustees of the Company.
Under proposal two, the shareholders voted to amend the Company's 1994
Share Incentive Plan with 12,094,672 shares voted for, 552,800 shares voted
against and 4,191,262 votes withholding authority.
Under proposal three, the shareholders voted to amend the Company's
Trustees' Share Incentive Plan with 11,691,693 shares voted for, 932,436
shares voted against and 4,214,604 votes withholding authority.
32
<PAGE> 36
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K -
- A Form 8-K regarding the acquisition of six
Summerfield Suites Hotels, two Sierra Suites Hotels,
and one Sunrise Suites Hotels was filed on July 18,
1997.
33
<PAGE> 37
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
August 13, 1997 /s/ David Bulger
------------------------------
David Bulger
Chief Financial Officer
(Principal Financial Officer)
34
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,233
<SECURITIES> 0
<RECEIVABLES> 7,971
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 511,501
<DEPRECIATION> (24,559)
<TOTAL-ASSETS> 486,942
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 223
<OTHER-SE> 215,512
<TOTAL-LIABILITY-AND-EQUITY> 516,161
<SALES> 0
<TOTAL-REVENUES> 15,144
<CGS> 0
<TOTAL-COSTS> 8,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,449
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,902
<EPS-PRIMARY> 0
<EPS-DILUTED> .24
</TABLE>
