<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, 1998
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 common shares of beneficial interest, $.01 par value, outstanding
on July 27, 1998 was 34,181,880.
<PAGE> 2
INNKEEPERS USA TRUST
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
INNKEEPERS USA TRUST
Consolidated Balance Sheets at
June 30, 1998 (unaudited) and December 31, 1997 1
Consolidated Statements of Income for the
three and six months ended June 30, 1998 (unaudited)
and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 (unaudited)
and 1997 (unaudited) 3
Notes to Consolidated Financial Statements 4
JF HOTEL
Combined Balance Sheets at June 30,
1998 (unaudited) and December 31, 1997 11
Combined Statements of Income for the
three and six months ended June 30, 1998 (unaudited)
and 1997 (unaudited) 12
Combined Statements of Cash Flows for
the six months ended June 30, 1998 (unaudited)
and 1997 (unaudited) 13
Notes to Combined Financial Statements 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 27
PART II. Other Information
Item 4. Submission of matters to a vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
Signature 29
</TABLE>
<PAGE> 3
INNKEEPERS USA TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties:
Land and improvements $ 86,634 $ 71,508
Buildings and improvements 537,460 449,813
Furniture and equipment 77,080 63,439
Renovations in process 12,482 14,837
Hotels under development 5,381 1,911
--------- ---------
719,037 601,508
Accumulated depreciation (50,932) (35,865)
--------- ---------
Net investment in hotel properties 668,105 565,643
Cash and cash equivalents 8,465 4,228
Restricted cash and cash equivalents 8,561 6,748
Due from Lessees 13,025 4,417
Deferred expenses, net 4,367 5,235
Deposits under purchase agreements 1,250 5,050
Other assets 895 1,286
--------- ---------
Total assets $ 704,668 $ 592,607
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 163,787 $ 160,455
Accounts payable and other accrued expenses 6,710 4,461
Distributions payable 12,436 10,501
Deferred Percentage Lease revenue 21,244
Minority interest in Partnership 61,029 74,552
--------- ---------
Total liabilities 265,206 249,969
--------- ---------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred Shares, $.01 par value, 20,000,000 shares
authorized, 4,630,000 shares issued and outstanding at
June 30, 1998 115,750
Common Shares, $.01 par value, 100,000,000 shares
authorized, 34,181,880 and 32,848,608 shares
issued and outstanding at June 30,1998 and
December 31, 1997, respectively 342 328
Additional paid-in capital 363,511 355,828
Unearned compensation (1,975) (1,812)
Distributions in excess of net earnings (38,166) (11,706)
--------- ---------
Total shareholders' equity 439,462 342,638
--------- ---------
Total liabilities and shareholders' equity $ 704,668 $ 592,607
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE> 4
INNKEEPERS USA TRUST
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Percentage Lease revenue $ 15,557 $ 14,932 $ 28,893 $ 27,312
Other revenue 188 212 364 557
-------- -------- -------- --------
Total revenue 15,745 15,144 29,257 27,869
-------- -------- -------- --------
Expenses:
Depreciation 7,626 3,782 15,067 6,999
Amortization of franchise costs 18 16 36 33
Ground rent 113 88 225 176
Interest expense 3,917 2,449 8,722 4,446
Amortization of loan origination
fees 247 148 515 404
Real estate and personal
property taxes and property
insurance 2,405 1,124 4,760 2,253
General and administrative 818 588 1,944 1,018
Amortization of unearned
compensation 148 47 297 57
-------- -------- -------- --------
Total expenses 15,292 8,242 31,566 15,386
-------- -------- -------- --------
Income (loss) before minority interest
and extraordinary loss 453 6,902 (2,309) 12,483
Minority interest, common 143 (346) 692 (580)
Minority interest, preferred (1,174) (1,117) (2,347) (2,234)
Extraordinary loss (2,760)
-------- -------- -------- --------
Net income (loss) (Note 2) (578) 5,439 (6,724) 9,669
Preferred share dividends (1,192) (1,192)
-------- -------- -------- --------
Net income (loss) applicable
to common shareholders (Note 2) $ (1,770) $ 5,439 $ (7,916) $ 9,669
======== ======== ======== ========
Earnings (loss) per share data (Note 2):
Basic - before extraordinary loss $ (0.05) $ 0.24 $ (0.16) $ 0.43
Extraordinary loss (0.08)
-------- -------- -------- --------
Basic $ (0.05) $ 0.24 $ (0.24) $ 0.43
======== ======== ======== ========
Diluted - before extraordinary loss $ (0.05) $ 0.24 $ (0.16) $ 0.43
Extraordinary loss (0.08)
-------- -------- -------- --------
Diluted $ (0.05) $ 0.24 $ (0.24) $ 0.43
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 5
INNKEEPERS USA TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except supplemental non-cash financing activities)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,724) $ 9,669
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 15,915 7,493
Minority interest 1,655 2,814
Extraordinary loss 2,760
Change in operating assets and liabilities:
Due from Lessees (8,608) (4,430)
Deferred expenses, net (1,415)
Other assets 391 (198)
Accounts payable and other accrued expenses 2,249 1,822
Deferred Percentage Lease revenue 21,244
--------- ---------
Net cash provided by operating activities 28,882 15,755
--------- ---------
Cash flows from investing activities:
Investment in hotel properties (112,229) (149,772)
Net deposits into restricted cash accounts (1,813) (4,805)
Payments for franchise fees (82)
Deposits under purchase agreements (1,250)
--------- ---------
Net cash used in investing activities (115,374) (154,577)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 279,064 118,894
Payments on long-term debt (275,732) (129)
Dividend reinvestment plan and shelf registration costs paid (32) (203)
Distributions paid to unit holders (3,932) (1,621)
Distributions paid to common shareholders (17,812) (10,603)
Redemption of units (64)
Proceeds from issuance of preferred shares, net 111,848
Loan origination fees and costs paid (2,611) (1,827)
--------- ---------
Net cash provided by financing activities 90,729 104,511
--------- ---------
Net increase (decrease) in cash and cash equivalents 4,237 (34,311)
Cash and cash equivalents at beginning of period 4,228 40,339
--------- ---------
Cash and cash equivalents at end of period $ 8,465 $ 6,028
========= =========
Supplemental cash flow information:
Interest paid $ 8,799 $ 4,286
========= =========
</TABLE>
Supplemental non-cash financing activities:
The Company issued 2,307,763 Common Units, with a deemed value at the time
of issuance of $33,995,000 for the acquisition of 11 hotel properties
during the six months ended June 30, 1997.
The accompany notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RECENT DEVELOPMENTS
ORGANIZATION
Innkeepers USA Trust ("Innkeepers") is a self-administered real estate
investment trust ("REIT"), which commenced operations on September 30,
1994. At June 30, 1998, Innkeepers owned interests in 63 hotels with an
aggregate of 7,552 rooms (the "Hotels") through its 95.1% interest in
Innkeepers USA Limited Partnership (with its subsidiary partnerships,
the "Partnership" and collectively with Innkeepers, the "Company"). The
Hotels are comprised of 38 Residence Inn by Marriott hotels, 12 Hampton
Inn hotels, 6 Summerfield Suites hotels, 3 Sierra Suites hotels, 1
Comfort Inn hotel, 1 Sheraton Inn hotel, 1 Holiday Inn Express hotel
and 1 Sunrise Suites hotel. The Hotels are located in 24 states, with
ten hotels located in California.
The Company leases 53 of the Hotels to JF Hotel, Inc. (or other
entities under common ownership, collectively the "JF Lessee") and ten
of the Hotels to affiliates of Patriot American Hospitality, Inc. (the
"Summerfield Lessee" and collectively with the JF Lessee, the
"Lessees") pursuant to leases which provide for rent based on the room
revenues of the Hotels ("Percentage Leases"). Two officers of the
Company are the shareholders of the JF Lessee.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC")
and should be read in conjunction with the financial statements and
notes thereto of the Company and the JF Lessee included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997 (the "10-K"). The notes to the financial statements included
herein highlight significant changes to the notes included in the 10-K
and present interim disclosures required by the SEC. In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. The
results of any interim period are not necessarily indicative of results
for the full year.
RECENT DEVELOPMENTS
On January 9, 1998, the Company purchased a 120-room Residence Inn by
Marriott hotel located in Bothell (Seattle Northeast), Washington for a
purchase price of $11,750,000. The purchase price was funded through
its line of credit in place at that time (the "Previous Line of
Credit").
On January 14, 1998, the Company purchased five Residence Inn by
Marriott hotels located in Lynnwood (Seattle North), Washington;
Vancouver (Portland North), Washington; Bellevue (Seattle East),
Washington; Lake Oswego (Portland South), Oregon; and, Tukwila (Seattle
South), Washington, with an aggregate of 616 rooms for a purchase price
of approximately $83,000,000. The purchase price was funded through the
Previous Line of Credit and the assumption of a $59,320,000 loan.
4
<PAGE> 7
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND RECENT DEVELOPMENTS, CONTINUED
On April 24, 1998 the Company entered into an agreement to acquire a
portfolio of six newly constructed Residence Inn by Marriott hotels
from an affiliate of Marriott International, Inc. ("Marriott") for an
aggregate purchase price of approximately $89.1 million which will be
paid in a combination of cash and common units of limited partnership
interest in the Partnership ("Common Units"). The Company will acquire
each hotel within 90 days of opening which is expected to occur between
July and December 1998. The hotels are located in San Jose, California;
Gaithersburg, Maryland; Chicago/O'Hare, Illinois; Richmond, Virginia;
Detroit/Livonia, Michigan; and Atlanta, Georgia. The Company
anticipates leasing the hotels to the JF Lessee and that the hotels
will be managed by Marriott. The Company intends to utilize its New
Line of Credit (defined below) to fund the cash portion of the purchase
price and to issue Common Units for the balance of the purchase price.
On May 18 and 27, 1998 the Company sold an aggregate of 4,630,000
8.625% Series A cumulative convertible preferred shares of beneficial
interest (the "Series A Preferred Shares") at $25 per share in a
private offering underwritten by Everen Securities, Inc. The total
underwriting discount was $3,796,600. The offering was exempt from
registration under Rule 144A. The Series A Preferred Shares are
convertible into 1.4811 common shares at any time. The Series A
Preferred Shares are redeemable by the Company after May 18, 2003 and
have no stated maturity or sinking fund requirements. The Series A
Preferred Shares have a liquidation preference of $25 per share and are
entitled to annual dividends equal to the greater of (i) $2.15624 per
share ($0.53906 per share payable quarterly) or (ii) the cash dividend
paid or payable on the number of common shares into which a Series A
Preferred Share is then convertible. The net proceeds of the preferred
offering were used to repay borrowings outstanding under the New Line
of Credit.
On June 22, 1998, the Company opened a 113-room Sierra Suites hotel
located in Westborough, Massachusetts. The cost of development of the
hotel was funded through available cash and the New Line of Credit.
On July 10, 1998, the Company purchased a 132-room Residence Inn by
Marriott hotel located in Gaithersburg, Maryland under its previously
described agreement with Marriott. The purchase price was funded
through available cash and the New Line of Credit.
2. CHANGE IN ACCOUNTING PRINCIPLE
In May 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force (the "EITF") issued EITF number 98-9, "Accounting for
Contingent Rent in Interim Financial Periods" ("EITF 98-9"). EITF 98-9
provides that a lessor shall defer recognition of contingent rental
income in interim periods until specified annual targets that trigger
the contingent income are met. The Company has reviewed the terms of
its Percentage Leases and has determined that the provisions of EITF
98-9 will impact the Company's current revenue recognition on an
interim basis, but will have no impact on the Company's annual
Percentage Lease revenue recognition or
5
<PAGE> 8
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. CHANGE IN ACCOUNTING PRINCIPLE, CONTINUED
interim cash flow from its Lessees. The Company adopted the provisions
of EITF 98-9 as a change in accounting principle, restated the first
quarter results of 1998 and recorded the results of the second quarter
in accordance with the new pronouncement. The following table presents
the effects of the adoption of the provisions of EITF 98-9 on the three
and six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRO FORMA AMOUNTS (A):
Percentage Lease revenue $ 15,557 $ 6,887 $ 28,893 $ 12,878
Net loss applicable to
common shareholders (1,770) (2,125) (7,916) (3,948)
Basic and diluted
loss per share (0.05) (0.10) (0.24) (0.18)
PRO FORMA AMOUNTS (B):
Percentage Lease revenue 26,457 14,932 50,137 27,312
Net income applicable to
common shareholders 8,263 5,439 11,620 9,669
Basic and diluted
earnings per share 0.25 0.24 0.35 0.43
</TABLE>
(A) The 1998 amounts reflect the adoption of the provisions of EITF
98-9 and are the amounts reported in the accompanying statements
of income. The 1997 amounts assume that the provisions of EITF
98-9 were applied as of January 1, 1997.
(B) The 1998 amounts assume that the provisions of EITF 98-9 were not
applied. The 1997 amounts are as reported in the accompanying
statements of income and do not reflect the adoption of the
provisions of EITF 98-9.
3. LONG-TERM DEBT
On February 19, 1998, the Company obtained a new line of credit (the
"New Line of Credit"). The New Line of Credit is uncollateralized and
has a maximum borrowing amount of $250,000,000. The interest rate on
the New Line of Credit is LIBOR plus 122.5 to 162.5 basis points. The
Company utilized the New Line of Credit to repay borrowings outstanding
on the Previous Line of Credit and the $59,320,000 loan which was
assumed as described under "Recent Developments" in Note 1 above. Upon
closing of the New Line of Credit, the Previous Line of Credit was
extinguished. The Company was amortizing loan origination fees and
costs incurred in connection with the Previous Line of Credit over its
original three-year term. When the Previous Line of Credit was
extinguished and replaced with the New Line of Credit, those loan
origination fees and costs were expensed immediately and recognized as
an extraordinary loss of approximately $2,760,000 in February 1998.
6
<PAGE> 9
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. LONG-TERM DEBT, CONTINUED
On February 19, 1998, the Company refinanced $40,000,000 of borrowings
outstanding under the Previous Line of Credit with a new term loan (the
"Third Term Loan"). The terms of the Third Term Loan are similar to the
Company's other two term loans (the "First Term Loan" and "Second Term
Loan"), except that the interest rate is fixed at 7.02%. At June 30,
1998, 28 of the Company's hotel properties collateralize its long-term
debt.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the three and six months ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings (loss) per share:
Net income (loss) $ 578,000 $ 5,439,000 $ (6,724,000) $ 9,669,000
Preferred share dividends (1,192,000) (1,192,000)
------------ ------------ ------------ -----------
Net income (loss) applicable
to common shareholders (1,770,000) 5,439,000 (7,916,000) 9,669,000
Extraordinary loss 2,760,000
------------ ------------ ------------ -----------
Net income (loss) applicable
to common shareholders
before extraordinary loss $ (1,770,000) $ 5,439,000 $ (5,156,000) $ 9,669,000
============ ============ ============ ===========
Denominator:
Denominator for basic
earnings per share -
weighted average shares 32,979,064 22,322,500 32,918,982 22,316,576
Effect of dilutive securities:
Stock options 242,611 196,447 279,636 182,568
Restricted shares 13,412 1,877 16,869 3,685
------------ ------------ ------------ -----------
Denominator for diluted
earnings per share - adjusted
weighted average shares 33,235,087 22,520,824 33,215,487 22,502,829
============ ============ ============ ===========
Earnings (loss) per share data:
Basic - before extraordinary loss $ (0.05) $ 0.24 $ (0.16) $ 0.43
Extraordinary loss (0.08)
------------ ------------ ------------ -----------
Basic $ (0.05) $ 0.24 $ (0.24) $ 0.43
============ ============ ============ ===========
Diluted - before extraordinary loss $ (0.05)(a) $ 0.24 $ (0.16)(a) $ 0.43
Extraordinary loss (0.08)(a)
------------ ------------ ------------ -----------
Diluted $ (0.05)(a) $ 0.24 $ (0.24)(a) $ 0.43
============ ============ ============ ===========
</TABLE>
(a) The effect of dilutive securities is not considered in calculating these
amounts.
7
<PAGE> 10
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. COMMITMENTS AND CONTINGENCIES
Pursuant to the partnership agreement, limited partners who hold
Common Units have redemption rights ("Redemption Rights") which enable
them to redeem their Common Units for cash or, at Innkeeper's option,
common shares on a one-for-one basis. The Redemption Rights for units
outstanding at June 30, 1998 become (or became) effective as follows:
<TABLE>
<CAPTION>
Number of Effective
Common Units Date
------------ ----
<S> <C>
654,906 September 30, 1995
45,488 July 31, 1997
91,991 October 7, 1997
119,474 November 1, 1997
500,273 June 20, 1998
365,086 June 20, 1999
----------
1,777,218
==========
</TABLE>
Additionally, limited partners who hold preferred units of limited
partnership interest in the Partnership ("Preferred Units" and
collectively with the Common Units, "Units") have Redemption Rights
which enable them to redeem their Preferred Units for cash or, at
Innkeeper's option, common shares on a one-for-one basis at any time
after November 1, 1998. The aggregate number of Preferred Units
outstanding was 4,063,329 at June 30, 1998.
The Company pays regular quarterly distributions on its common shares
and units and the current quarterly distribution is $0.28 per share.
The current quarterly preferred distribution rate is $0.28875 for each
Preferred Unit ($1.155 on an annualized basis). 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 November 1, 2006 unless previously converted or
redeemed.
The Hotels are operated under franchise or management agreements with
the Lessees as Residence Inn by Marriott, Summerfield Suites, Sierra
Suites, Hampton Inn, Sheraton Inn, Holiday Inn Express or Comfort Inn
hotels. The Company has paid the cost of obtaining or transferring
certain franchise license agreements to the JF Lessee. For certain
hotels which did not require a franchise transfer fee, the Company has
advanced to the JF Lessee the working capital deposit required under
the JF Lessee's management agreements with Residence Inn by Marriott.
The franchise and management agreements require the Lessees to pay
fees based on percentages of hotel revenue. The Company has
8
<PAGE> 11
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. COMMITMENTS AND CONTINGENCIES, CONTINUED
guaranteed certain of the JF Lessee's obligations under the franchise
licenses and the Marriott management agreements, generally in exchange
for certain rights to substitute replacement lessees if the Company
terminates the related Percentage Lease.
Under the Percentage Leases, the Company generally is obligated to pay
the costs of certain capital improvements, real estate and personal
property taxes and property insurance at the Hotels. Additionally, the
Company must make available to the Lessees on a monthly basis an
amount equal to 4.0% of room revenues from the Hotels, on a monthly
basis, for the periodic replacement or refurbishment of furniture and
equipment and certain other capital expenditures at the Hotels. The
Second and Third Term Loans require that the Company make available
for such purposes, at the Hotels collateralizing those loans, an
additional 1.0% (for a total of 5.0%) of room revenues from such
Hotels.
The Company's Declaration of Trust limits 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 "Debt Limitation"). The Company's
consolidated indebtedness was approximately $163,787,000 or 22.8% of
its investment in hotels, at cost, at June 30, 1998.
6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma statements of income of the Company are
presented as if the acquisition of the Hotels and the equity offerings
in 1997 and 1998 had occurred at the beginning of the periods presented
and all of the Hotels had been leased to the Lessees pursuant to
Percentage Leases at the beginning of the periods presented. Such pro
forma information is based in part on the consolidated statements of
income of the Company and the JF Lessee. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have
been made.
The unaudited pro forma statements of income of the Company for the
periods presented are not necessarily indicative of what the 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.
9
<PAGE> 12
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Percentage Lease revenue (a) $ 29,215 $ 28,651
Other revenue 364 557
-------- --------
Total revenue 29,579 29,208
-------- --------
Expenses:
Depreciation 15,067 13,192
Amortization of franchise costs 47 52
Ground rent 225 176
Interest expense 6,123 6,063
Amortization of loan origination fees 515 658
Real estate and personal property taxes
and property insurance 4,788 3,928
General and administrative 1,944 1,520
Amortization of unearned compensation 297 57
-------- --------
Total expenses 29,006 25,646
-------- --------
Income before minority interest and preferred
share dividends 573 3,562
Minority interest, common 332 180
Minority interest, preferred (2,347) (2,235)
-------- --------
Net income (loss) (1,442) 1,507
Preferred share dividends (4,992) (4,992)
-------- --------
Net loss applicable to
common shareholders $ (6,434) $ (3,485)
======== ========
Diluted loss per share $ (0.19) $ (0.10)
</TABLE>
(a) Recognized in accordance with EITF 98-9, see Note 2.
10
<PAGE> 13
JF HOTEL
COMBINED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $14,515 $ 7,863
Marketable securities 2,396 1,775
Accounts receivable, net 8,081 3,090
Inventory 53 23
Prepaid expenses 53 351
------- -------
Total current assets 25,098 13,102
Other assets 175 180
------- -------
Total assets $25,273 $13,282
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,872 $ 3,061
Accrued expenses 2,864 2,055
Payable to Manager 2,241 2,025
Due to Partnership 11,228 3,791
------- -------
Total current liabilities 21,205 10,932
Other long-term liabilities 585 585
------- -------
Total liabilities 21,790 11,517
------- -------
Commitments (Note 2)
Shareholders' equity:
Common shares, $1 par value, 3,000 shares
authorized issued and outstanding 3 3
Unrealized gain on marketable securities 148 562
Retained earnings 3,332 1,200
------- -------
Total shareholders' equity 3,483 1,765
------- -------
Total liabilities and shareholders' equity $25,273 $13,282
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
11
<PAGE> 14
JF HOTEL
COMBINED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited) ( Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross operating revenue:
Rooms $ 46,729 $ 28,198 $ 88,301 $ 53,731
Food and beverage 119 170 277 339
Telephone 1,366 1,030 2,677 1,994
Other 866 605 1,673 1,139
-------- -------- -------- --------
Gross operating revenue 49,080 30,003 92,928 57,203
Departmental expenses:
Rooms 9,736 5,187 17,389 10,054
Food and beverage 137 148 287 290
Telephone 510 385 957 729
Other 335 289 682 521
-------- -------- -------- --------
Total departmental profit 38,362 23,994 73,613 45,609
-------- -------- -------- --------
Unallocated operating expenses:
General and administrative 3,537 2,046 6,922 3,993
Franchise fees 2,926 1,503 5,620 3,496
Advertising and promotions 2,131 1,522 4,079 2,406
Utilities 1,602 1,084 3,499 2,412
Repairs and maintenance 2,033 1,246 3,863 2,466
Management fees 818 394 1,689 933
-------- -------- -------- --------
Total unallocated operating
expenses 13,047 7,795 25,672 15,706
-------- -------- -------- --------
Gross profit 25,315 16,199 47,941 29,903
Insurance (245) (164) (509) (369)
Lessee overhead (347) (658) (1,142) (1,281)
Percentage Lease payments (22,957) (13,802) (43,027) (26,182)
-------- -------- -------- --------
Net income 1,766 1,575 3,263 2,071
Other comprehensive income -
unrealized gains (losses) on
marketable securities (509) 86 (414) 148
-------- -------- -------- --------
Comprehensive income $ 1,257 $ 1,661 $ 2,849 $ 2,219
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
12
<PAGE> 15
JF HOTEL
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,263 $ 2,071
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 24 23
Changes in operating assets and liabilities:
Accounts receivable (4,991) (1,208)
Due from affiliates 298
Inventory (30) 49
Prepaid expenses 298 197
Other assets 32
Accounts payable 1,811 3,264
Accrued expenses 809 885
Payable to Manager 216 (1,634)
Other liabilities (785)
Due to Partnership 7,437 3,288
-------- --------
Net cash provided by operating activities 8,837 6,480
-------- --------
Cash flows from investing activities:
Purchase of equipment (19)
Purchase of marketable securities (1,035) (1,328)
-------- --------
Net cash used in investing activities (1,054) (1,328)
-------- --------
Cash flows from financing activities:
Dividends paid (1,131)
-------- --------
Net cash used in financing activities (1,131)
-------- --------
Net increase in cash and cash equivalents 6,652 5,152
Cash and cash equivalents at beginning of period 7,863 5,551
-------- --------
Cash and cash equivalents at end of period $ 14,515 $ 10,703
======== ========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
13
<PAGE> 16
JF HOTEL
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
JF Hotel, Inc. and other entities with identical ownership
(collectively "JF Hotel" or the "JF Lessee") are under common control
and were formed primarily to lease and operate hotels owned by
Innkeepers USA Trust ("Innkeepers") through Innkeepers USA Limited
Partnership and its subsidiaries (collectively the "Partnership," and
together with Innkeepers, the "Company"). The JF Lessee commenced the
leasing and operation of seven hotels (the "Initial Hotels") on
September 30, 1994 and at June 30, 1998 leased 53 hotels (the "JF
Leased Hotels") from the Company.
The JF Lessee operates 31 of the JF Leased Hotels, Residence Inn by
Marriott, Inc. ("RIBM," a wholly-owned subsidiary of Marriott
International, Inc.) operates 20 of the JF Leased Hotels, and an
unaffiliated party operates two of the JF Leased Hotels. The financial
statements of the 20 hotels operated by RIBM are maintained on a 52/53
week period basis. The 1997 fiscal second quarter for the RIBM managed
hotels ended on June 20, 1997 and the 1998 fiscal second quarter for
the RIBM managed hotels ended on June 19, 1998.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto of the Company and the JF
Lessee included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (the "10-K"). The notes to the financial
statements included herein highlight significant changes to the notes
included in the 10-K and present interim disclosures required by the
SEC. In the opinion of management, all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation
have been included. The results of any interim period are not
necessarily indicative of results for the full year.
2. COMMITMENTS
RIBM operates 20 of the JF Leased Hotels under management agreements
with the JF Lessee (the "RIBM Management Agreements"). The RIBM
Management Agreements, generally, have an initial term of 13 years and
provide for a base fee of 2% of gross revenues at the RIBM managed
hotels and an incentive fee which is 50% of available cash flow, as
defined. For seven of the JF Leased Hotels, the RIBM Management
Agreements provide for an incentive fee of 65% of available cash flow
up to 3.5% of gross revenue and 50% of available cash flow thereafter.
The payment of incentive fees is subordinate to the JF Lessee's
obligations under the Percentage Leases at the RIBM managed hotels. The
RIBM Management Agreements also contain substantial penalties for early
termination. Amounts due to RIBM under the RIBM Management Agreements
are included in "Payable to Manager" in the accompanying combined
balanced sheets. The right to operate the 20 hotels as Residence Inn by
Marriott hotels is contained in the RIBM Management Agreements. In lieu
of a franchise fee, the RIBM Management Agreements provide for a system
fee of 5% of gross revenues at the RIBM managed hotels. The system fee
is included in franchise fees in the accompanying combined statements
of income.
14
<PAGE> 17
JF HOTEL
NOTES TO COMBINED FINANCIAL STATEMENTS
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components. As required by SFAS
130, JF Hotel has implemented this standard in the accompanying
financial statements.
15
<PAGE> 18
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
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and related notes thereto
of Innkeepers USA Trust included in its Annual Report on Form 10-K for the year
ending December 31, 1997.
GENERAL
For background information relating to the Company and the JF Lessee and the
definitions of certain capitalized terms used herein, reference is made to the
notes to the Consolidated Financial Statements of Innkeepers USA Trust and the
Combined Financial Statements of JF Hotel appearing elsewhere herein, or in the
Company's Annual Report on Form 10-K for the year ending December 31, 1997.
The Company acquired the following hotel properties during the six months ended
June 30, 1998:
<TABLE>
<CAPTION>
Number of Date Purchase
Hotel Suites/Rooms Acquired Price
- ----- ------------ -------- -----
<S> <C> <C> <C>
Residence Inn - Bothell, WA 120 January 9, 1998 $11,750,000
Residence Inn - Lynnwood, WA 120 January 14, 1998 (a)
Residence Inn - Vancouver, WA 120 January 14, 1998 (a)
Residence Inn - Bellevue, WA 120 January 14, 1998 (a)
Residence Inn - Tukwila, WA 144 January 14, 1998 (a)
Residence Inn - Lake Oswego, OR 112 January 14, 1998 (a)
Sierra Suites - Westborough, MA 113 June 22, 1998 (b)
</TABLE>
(a) Aggregate purchase price of $83,000,000
(b) Total estimated development costs are approximately $7,900,000.
16
<PAGE> 19
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
THE HOTELS
The following chart summarizes information regarding the Hotels at June 30,
1998.
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Upscale extended-stay hotels:
Residence Inn 38 4,385
Summerfield Suites 6 759*
Sunrise Suites 1 96
--- -------
45 5,240
-- -----
Mid-priced extended-stay hotels:
Sierra Suites 3 315
-- -------
Limited service hotels:
Hampton Inn 12 1,527
Comfort Inn 1 127
Holiday Inn Express 1 204
-- -------
14 1,858
-- ------
Full service hotels:
Sheraton Inn 1 139
-- -------
Total 63 7,552
== =====
</TABLE>
* contains a total of 1,057 bedrooms
17
<PAGE> 20
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Average daily rate ("ADR"), occupancy and revenue per available room ("RevPAR")
for 62 of the Hotels are presented in the following table. Results were excluded
for such comparison for one hotel which was not open in 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 Lessees and third party management and
improving industry conditions. 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>
Three Months Ended Six Months Ended
June 30, % June 30, %
1997 1998 Inc.(dec) 1997 1998 Inc.(dec)
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Portfolio(1)
- --------------------------------
Average Daily Rate $91.13 $ 98.24 7.8 $90.66 $ 98.65 8.8
Occupancy 82.95% 82.31% (.8) 80.27% 80.21% (.1)
RevPAR $75.59 $ 80.86 7.0 $72.78 $ 79.12 8.7
By Type
- --------------------------------
Upscale Extended Stay Hotels (2)
Average Daily Rate $99.21 $107.50 8.4 $97.49 $107.11 9.9
Occupancy 86.71% 84.75% (2.3) 84.48% 83.11% (1.6)
RevPAR $86.03 $ 91.10 5.9 $82.36 $ 89.01 8.1
Limited Services Hotels (3)
Average Daily Rate $69.42 $ 74.91 7.9 $70.26 $ 75.68 7.7
Occupancy 73.29% 75.42% 2.9 69.20% 71.82% 3.8
RevPAR $50.88 $ 56.50 11.1 $48.63 $ 54.36 11.8
</TABLE>
(1) 62 hotels (excludes one newly-developed hotel)
(2) 45 hotels
(3) 15 hotels (excludes one newly-developed hotel)
18
<PAGE> 21
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS
Adoption of EITF 98-9
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force (the "EITF") issued EITF number 98-9, "Accounting for Contingent Rent in
Interim Financial Periods" ("EITF 98-9"). EITF 98-9 provides that a lessor shall
defer recognition of contingent rental income in interim periods until specified
annual targets that trigger the contingent income are met. The Company has
reviewed the terms of its Percentage Leases and has determined that the
provisions of EITF 98-9 will impact the Company's current revenue recognition on
an interim basis, but will have no impact on the Company's annual Percentage
Lease revenue recognition or interim cash flow from its Lessees.
The Company's Percentage Leases provide for rent equal to the greater of (i)
fixed annual base rent or (ii) rent based on percentages of room revenues at
each of the hotels ("Percentage Rent"). The Company's Percentage Leases are
structured to provide Percentage Rent equal to a certain percentage (generally
30%) of a specified level of room revenues which is expressed on an annual basis
(the "Threshold"), and a certain higher percentage (generally 68%) of room
revenues in excess of the Threshold. Prior to EITF 98-9 the Company, in
accordance with industry practice, recognized Percentage Lease revenue in
interim periods equal to Percentage Rent payments due under the Percentage
Leases. Under the terms of the Percentage Leases, Percentage Rent is calculated
by applying the percentage rent formula to year-to-date room revenue using a
prorated portion of the Threshold (i.e., 25% for the first quarter, 50% for the
second quarter, etc.). Thus, "higher tier" percentage rent was recognized as
income, and collected from the Company's Lessees, in interim periods before room
revenues exceeded the Threshold. EITF 98-9 clarifies that meeting the Threshold
is a contingency that must be met before higher tier percentage rent can be
recognized as current income. This will generally result in base rent being
recognized as revenue in the first and second quarters and percentage rents
already collected or due from the Lessees being deferred and recognized as
revenue in the third and/or fourth quarters. The adoption of EITF 98-9 had no
effect on the Percentage Rent payments due under the Percentage Leases.
The Company adopted the provisions of EITF 98-9 as a change in accounting
principle, restated the first quarter results of 1998 and recorded the results
of the second quarter in accordance with the new pronouncement. The Company was
not required to, and did not, restate the 1997 amounts in the accompanying
statements of income. However, the effects of adopting the provisions of EITF
98-9 on the 1997 amounts is reflected in Note 2 to the financial statements. The
effect of the change as reflected in Note 2 on the three months ended March 31,
1998 and 1997 was to: decrease Percentage Lease revenue by $10,344,000 and
$6,389,000, respectively; decrease minority interest, common by $841,000 and
$336,000, respectively; and decrease net income applicable to common
shareholders by $9,503,000 and $6,053,000, respectively. The effect of the
change on the three months ended June 30, 1998 and 1997 was to: decrease
Percentage Lease revenue by $10,900,000 and $8,045,000, respectively; decrease
minority interest, common by $867,000 and $481,000, respectively; and decrease
net income applicable to common shareholders by $10,033,000 and $7,564,000,
respectively.
At June 30, 1998 "deferred Percentage Lease revenue" of $21,244,000 represents
Percentage Rent collected or due from the Lessees under the terms of the
Percentage Leases which the Company expects to recognize as Percentage Lease
revenue in the third and/or fourth quarters of 1998. The Company's quarterly
distributions are based on Percentage Rent collected or due from the Lessees as
opposed to Percentage Lease revenue recognized.
19
<PAGE> 22
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The following is a discussion of the results of operations of the Company.
Comparison of the Three Months Ended June 30, 1998 ("1998") to the Three Months
Ended June 30, 1997 ("1997")
The increase in Percentage Lease revenue for 1998 from 1997 is attributable to
the RevPAR growth of approximately 7.0% at the Company's Hotels and the number
of hotels owned increasing from 35 at April 1, 1997 to 47 at June 30, 1997 to 62
at April 1, 1998 and to 63 at June 30, 1998 offset by the change in the
Company's revenue recognition policy as discussed previously. Included in
deferred Percentage Lease revenue at June 30, 1998 is $10,900,000 of second
quarter percentage rents collected or due from the Lessees which management
expects the Company to recognize as Percentage Lease revenue in the third and
fourth quarters of 1998. For comparability purposes only, assuming that amounts
included in deferred Percentage Lease revenue at June 30, 1998 were earned at
June 30, 1998, the Company would have had revenues for 1998 of $26,645,000,
consisting of $26,457,000 of Percentage Lease revenue from the Lessees and
$188,000 of other revenue, compared with $15,144,000, $14,932,000 and $212,000,
respectively, for 1997.
Depreciation, amortization of franchise costs, amortization of loan origination
fees, and amortization of unearned compensation ("Depreciation and
Amortization") were $8,039,000 in the aggregate for 1998 compared with
$3,993,000 for 1997. The increase in Depreciation and Amortization was primarily
due to the increase in the number of hotels owned as discussed previously. Also
contributing to the increase in Depreciation and Amortization was the
depreciation of renovations completed at the Hotels and amortization of the
restricted share awards in 1998.
Real estate and personal property taxes and property insurance were $2,405,000
for 1998 compared with $1,124,000 for 1997. This increase was primarily due to
the increase in the number of hotels owned as discussed previously and the
reassessment of the taxable value of certain Hotels for real estate tax
assessment purposes.
Interest expense for 1998 was $3,917,000 compared with $2,449,000 for 1997.
Interest expense for 1998 consisted primarily of interest incurred on borrowings
outstanding under the Company's New Line of Credit, the term loans, and
borrowings under various mortgage notes. Interest expense for 1997 consisted
primarily of interest incurred on borrowings outstanding under the Previous Line
of Credit, two term loans and borrowings under various mortgage notes.
General and administrative expenses for 1998 were $818,000 compared with
$588,000 for 1997. This increase is due primarily to increases in certain
expenses as a result of the increase in the number of hotels owned and the
addition of new employees.
Net income (loss) applicable to common shareholders for 1998 was $(1,770,000),
or $(0.05) per diluted share, compared with $5,439,000, or $0.24 per diluted
share, for 1997. This decrease is due to the change in the Company's revenue
recognition policy as discussed previously.
20
<PAGE> 23
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Comparison of the Six Months Ended June 30, 1998 ("1998") to the Six Months
Ended June 30, 1997 ("1997")
The increase in Percentage Lease revenue for 1998 from 1997 is attributable to
the to the RevPAR growth of approximately 8.7% at the Company's Hotels and the
number of hotels owned increasing from 32 at January 1, 1997 to 47 at June 30,
1997, to 56 at January 1, 1998 and to 63 at June 30, 1998 offset by the change
in the Company's revenue recognition as discussed previously. Included in
deferred Percentage Lease revenue at June 30, 1998 is $21,244,000 of first and
second quarter percentage rents collected or due from the Lessees which
management expects the Company to recognize as Percentage Lease revenue in the
third and fourth quarters of 1998. For comparability purposes only, assuming
that amounts included in deferred Percentage Lease revenue at June 30, 1998 were
earned at June 30, 1998, the Company would have had revenues for 1998 of
$50,501,000, consisting of $50,137,000 of Percentage Lease revenue from the
Lessees and $364,000 of other revenue, compared with $27,869,000, $27,312,000
and $557,000, respectively, for 1997.
Depreciation and Amortization was $15,915,000 in the aggregate for 1998 compared
with $7,493,000 for 1997. The increase in Depreciation and Amortization was
primarily due to the increase in the number of hotels owned as discussed
previously. Also contributing to the increase in Depreciation and Amortization
was the depreciation of renovations completed at the Hotels and amortization of
restricted share awards granted in 1998.
Real estate and personal property taxes and property insurance were $4,760,000
for 1998 compared with $2,253,000 for 1997. This increase was primarily due to
the increase in the number of hotels owned as discussed previously and the
reassessment of the taxable value of certain Hotels for real estate tax
assessment purposes.
Interest expense for 1998 was $8,722,000 compared with $4,446,000 for 1997.
Interest expense for 1998 consisted primarily of interest incurred on borrowings
outstanding under the Company's Previous Line of Credit, the New Line of Credit,
the term loans, and borrowings under various mortgage notes. Interest expense
for 1997 consisted primarily of interest incurred on borrowings outstanding
under the Previous Line of Credit, two term loans and borrowings under various
mortgage notes.
General and administrative expenses for 1998 were $1,944,000 compared with
$1,018,000 for 1997. This increase is due primarily to increases in certain
expenses as a result of the increase in the number of hotels owned and the
addition of new employees.
Net income (loss) applicable to common shareholders for 1998 was $(7,916,000),
or $(0.24) per diluted share (or $(0.16) per diluted share before the
extraordinary loss), compared with $9,669,000, or $0.43 per diluted share, for
1997. This decrease in the earnings per diluted share was due to the
extraordinary loss related to the extinguishment of the Company's Previous Line
of Credit and to the change in the Company's revenue recognition policy as
discussed previously.
21
<PAGE> 24
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is rent payments from the Lessees
under the Percentage Leases, and the Company is dependent on the Lessees to make
such payments to provide cash for debt service, distributions, capital
expenditures on its Hotels, and working capital. The Company believes that its
cash provided by operating activities will be adequate to meet some of its
liquidity needs. The Company currently expects to fund its growth objectives,
and any other additional liquidity needs, primarily by accessing the capital
markets, borrowing on its New Line of Credit or other facilities, and exchanging
equity for hotel properties.
Cash and cash equivalents (including restricted cash and cash equivalents) at
June 30, 1998 were $17,026,000, including approximately $2,507,000 which the
Company is required, under the Percentage Leases, to make available to the
Lessees for the replacement and refurbishment of furniture and equipment and
certain other capital expenditures. Additionally, cash and cash equivalents
include approximately $6,054,000 that is held in escrow to pay for insurance,
taxes, and capital expenditures for certain Hotels.
Net cash provided by operating activities for the six months ended June 30, 1998
and 1997 was $28,882,000 and $15,755,000, respectively.
Net cash used in investing activities was $115,374,000 for the six months ended
June 30, 1998. This was comprised primarily of the Company (a) acquiring a
Residence Inn by Marriott hotel in Bothell, Washington, for approximately
$11,750,000, (b) acquiring a portfolio of five Residence Inn by Marriott hotels
in Washington and Oregon for approximately $83,000,000, (c) costs incurred in
the development of the Sierra Suites hotel located in Westborough, Massachusetts
of approximately $3,500,000 and (d) renovations at certain hotels of
approximately $11,700,000.
Net cash provided by financing activities was $90,729,000 for the six months
ended June 30, 1998, consisting primarily of net proceeds from the Series A
Preferred Share offering of $111,848,000, net proceeds from long-term debt of
$3,332,000, distributions paid of $21,744,000 and loan origination fees and
costs paid of $2,611,000.
On May 18 and 27, 1998 the Company sold an aggregate of 4,630,000 8.625% Series
A cumulative convertible preferred shares of beneficial interest (the "Series A
Preferred Shares") at $25 per share in a private offering underwritten by Everen
Securities, Inc. The total underwriting discount was $3,796,600. The offering
was exempt from registration under Rule 144A. The Series A Preferred Shares are
convertible into 1.4811 common shares at any time. The Series A Preferred Shares
are redeemable by the Company after May 18, 2003 and have no stated maturity or
sinking fund requirements. The Series A Preferred Shares have a liquidation
preference of $25 per share and are entitled to annual dividends equal to the
greater of (i) $2.15624 per share ($0.53906 per share payable quarterly) or (ii)
the cash dividend paid or payable on the number of common shares into which a
Series A Preferred Share is then convertible. The net proceeds of the preferred
offering were used to repay borrowings outstanding under the New Line of Credit.
The Company pays regular quarterly distributions on its common shares and Common
Units and the current quarterly distribution is $0.28 per share. Quarterly
preferred distributions of $0.28875 are payable on each Preferred Unit. On or
after November 1, 1998, the holders of the Preferred Units may redeem their
units for cash or, at the election of Innkeepers, common shares on a one-for-one
basis. Under federal income tax law provisions applicable to REITs, the Company
is required to distribute at least 95% of its taxable income to maintain its
REIT status.
22
<PAGE> 25
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
The Company's consolidated indebtedness was 22.8% of its investment in hotels,
at cost, at June 30, 1998. At June 30, 1998, the Company had outstanding
indebtedness of approximately $163,787,000, of which approximately 81% bore
interest at a weighted average fixed rate of approximately 7.6%. In making
future investments in hotel properties, the Company may incur additional
indebtedness. The Company may also incur indebtedness to meet distribution
requirements imposed on a REIT under the Internal Revenue Code to the extent
that working capital and cash flow from the Company's investments are
insufficient to make such distributions. The Company's 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.
The Company's New Line of Credit bears interest based on the LIBOR rate and
increases or decreases in the LIBOR rate will increase or decrease the Company's
cost of borrowings outstanding under the New Line of Credit. Based on the
borrowings outstanding under the New Line of Credit at June 30, 1998, a one
percentage point increase in the LIBOR rate would increase annual interest
charges $205,000. In March 1998, the Company entered into an interest rate cap
agreement with a notional amount of $125,000,000 and a term of one year. The
agreement effectively caps the interest rate on $125,000,000 of borrowings on
the New Line of Credit at 7.625%.
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
management or the Board of Trustees of the Company deems prudent.
The Company has a shelf registration statement for $250,000,000 of common
shares, preferred shares or warrants to purchase shares of the Company. The
shelf registration statement was declared effective by the Securities and
Exchange Commission on April 11, 1997. The terms and conditions of the
securities issued thereunder are determined by the Company based on market
conditions at the time of issuance. In July and August of 1997, the Company
issued 10,284,000 common shares, raising gross proceeds of $143,976,000 and
leaving $106,024,000 available under the shelf registration statement.
The Percentage Leases require the Company to make available to the Lessees an
amount equal to 4.0% of room revenues from the Hotels, on a monthly basis, for
the periodic replacement or refurbishment of furniture and equipment and certain
other capital expenditures at the Hotels. The Second and Third Term Loans
require that the Company make available for such purposes, at the Hotels
collateralizing those loans, an additional 1.0% (for a total of 5.0%) 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 interests of the
Company.
23
<PAGE> 26
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
Management believes that the amounts required to be made available by the
Company will be sufficient to meet required expenditures for furniture and
equipment at the Hotels. The Company currently intends to pay for the cost of
capital improvements and any additional furniture and equipment requirements
from undistributed cash or, to the extent that undistributed cash is
insufficient to pay such costs, the New Line of Credit.
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 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 New Line of Credit.
As discussed previously, the Company has adopted the provisions of EITF 98-9
during the second quarter of 1998. This will generally result in base rent being
recognized as revenue in the first and second quarters and percentage rents
already collected or due from the Lessees being deferred and recognized as
revenue in the third and/or fourth quarters. Historically, the Company has
recorded Percentage Lease revenue in interim periods on a basis similar to that
used to determine the Lessees' quarterly Percentage Rent payments. The Lessees
will continue to pay their Percentage Rent in accordance with the Percentage
Leases and the Company intends to continue to make regular quarterly
distributions to its shareholders.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is a widely used measure of performance for an
equity REIT. FFO, as defined by the National Association of Real Estate
Investment Trusts, is income (loss) before minority interest (determined in
accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. FFO is presented to assist investors in
analyzing the performance of the Company. The Company's method of calculating
FFO may be different from methods used by other REITs and, accordingly, may not
be comparable to such other REITs. FFO (i) does not represent cash flows from
operating activities as defined by generally accepted accounting principles,
(ii) is not indicative of cash available to fund all cash flow and liquidity
needs, including its ability to make distributions, and (iii) should not be
considered as an alternative to net income (as determined in accordance with
generally accepted accounting principles) for purposes of evaluating the
Company's operating performance.
The Company implemented EITF 98-9 during the second quarter of 1998 and has
further presented "Adjusted FFO." Adjusted FFO is FFO calculated as described
previously with an adjustment for Percentage Lease revenue deferred in
accordance with EITF 98-9. The Company believes that Adjusted FFO will enable
readers of its financial statements to more fully understand the fundamentals of
its business and operations because the adoption of EITF 98-9 had no effect on
the Percentage Rent payments due under the Percentage Leases.
24
<PAGE> 27
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The following presents the Company's calculation of FFO, Adjusted FFO, FFO per
share and Adjusted FFO per share (in thousands, except share and per share
data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss) applicable to
common shareholders $ (1,770) $ 5,439 $ (7,916) $ 9,669
Minority interest, common (143) 346 (692) 580
Minority interest, preferred 1,174 1,117 2,347 2,234
Extraordinary loss 2,760
Depreciation 7,626 3,782 15,067 6,999
Preferred share dividends 1,192 1,192
------------ ----------- ------------ -----------
FFO 8,079 10,684 12,758 19,482
Deferred Percentage Lease revenue 10,900 21,244
------------ ----------- ------------ -----------
Adjusted FFO $ 18,979 $ 10,684 $ 34,002 $ 19,482
============ =========== ============ ===========
Denominator for diluted
earnings per share 33,235,087 22,520,824 33,215,487 22,502,829
Weighted average
Common Units 2,838,020 1,449,148 2,892,364 1,282,146
Weighted average
Preferred Units 4,063,329 4,063,329 4,063,329 4,063,329
Weighted average
Preferred shares 3,184,689 1,601,143
------------ ----------- ------------ -----------
Denominator for FFO and
Adjusted FFO per share 43,321,125 28,033,301 41,772,323 27,848,304
============ =========== ============ ===========
FFO per share $ 0.19 $ 0.38 $ 0.31 $ 0.70
============ =========== ============ ===========
Adjusted FFO per share $ 0.44 $ 0.38 $ 0.81 $ 0.70
============ =========== ============ ===========
</TABLE>
25
<PAGE> 28
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
containing the words "believes", "anticipates", "expects" and words of similar
import. Such forward-looking statements relate to future events and the future
financial performance of the Company, and involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from the results or
achievements expressed or implied by such forward-looking statements. The
Company is not obligated to update any such factors or to reflect the impact of
actual future events or developments on such forward-looking statements.
26
<PAGE> 29
INNKEEPERS USA TRUST
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Rule 305 of the Securities and
Exchange Commission's Regulation S-K, the quantitative and qualitative
disclosures called for by Rule 305 are inapplicable to the Company at
this time.
27
<PAGE> 30
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 6, 1998 for the
following purposes:
- To elect (a) two Class I trustees to serve on the Board of
Trustees until the annual meeting of shareholders in 2001 or
until their successors have been duly elected and qualified and
(b) one Class III trustee to serve on the Board of Trustees until
the annual meeting of the shareholders in 2000 or until his
successor has been duly elected and qualified ("Proposal One");
and
- To consider and vote upon a proposal to amend the Company's
Declaration of Trust to provide, in effect, that nothing
contained therein will prohibit the settlement of any transaction
entered into through the facilities of any national securities
exchange registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or on the national market system of
a national securities association registered under the Exchange
Act ("Proposal Two").
Under proposal one, shareholders voted to elect two Class I trustees,
Mr. Jack P. DeBoer, with 29,050,658 shares voted for Mr. DeBoer (61,652
votes withheld authority), and Mr. Bruce Zenkel, with 29,049,608 shares
voted for Mr. Zenkel (62,702 votes withheld authority), and one Class
III trustee, Mr. Rolf E. Ruhfus, with 29,005,893 shares voted for Mr.
Ruhfus (106,417 votes withheld authority).
Under proposal two, the shareholders voted to amend the Company's
Declaration of Trust with 28,997,643 shares voted for, 37,988 shares
voted against and 76,679 shares abstaining from voting.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on June 17, 1998 reporting
the sale of 4,630,000 8.625% Series A Cumulative Convertible
Preferred Shares of Beneficial Interest by Innkeepers USA
Trust.
28
<PAGE> 31
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 14, 1998 /s/ Gregory M. Fay
- --------------- --------------------------------------------
Gregory M. Fay
Vice President of Accounting and
Chief Accounting Officer
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INNKEEPERS USA TRUST FOR THE SIX MONTHS ENDED JUNE 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,465
<SECURITIES> 0
<RECEIVABLES> 13,025
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 719,037
<DEPRECIATION> (50,932)
<TOTAL-ASSETS> 704,668
<CURRENT-LIABILITIES> 40,390
<BONDS> 163,787
0
115,750
<COMMON> 342
<OTHER-SE> 323,370
<TOTAL-LIABILITY-AND-EQUITY> 704,668
<SALES> 0
<TOTAL-REVENUES> 29,257
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,237
<INCOME-PRETAX> (2,309)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,309)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,760)
<CHANGES> 0
<NET-INCOME> (6,724)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
