<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 March 31, 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 May 1, 1998 was 33,114,422.
<PAGE> 2
INNKEEPERS USA TRUST
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
INNKEEPERS USA TRUST
Consolidated Balance Sheets at
March 31, 1998 (unaudited) and December 31, 1997 1
Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (unaudited) 3
Notes to Consolidated Financial Statements 4
JF HOTEL
Combined Balance Sheets at March 31, 1998
(unaudited) and December 31, 1997 11
Combined Statements of Income for the
three months ended March 31, 1998 and 1997 (unaudited) 12
Combined Statements of Cash Flows for
the three months ended March 31, 1998 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 23
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
</TABLE>
<PAGE> 4
INNKEEPERS USA TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties:
Land and improvements $ 86,338 $ 71,508
Buildings and improvements 530,649 449,813
Furniture and equipment 72,357 63,439
Renovations in process 12,916 14,837
Hotels under development 3,372 1,911
--------- --------
705,632 601,508
Accumulated depreciation (43,306) (35,865)
--------- ---------
Net investment in hotel properties 662,326 565,643
Cash and cash equivalents 5,642 4,228
Restricted cash and cash equivalents 6,782 6,748
Due from Lessees 11,313 4,417
Deferred expenses, net 4,748 5,235
Deposits under purchase agreements 250 5,050
Other assets 1,072 1,286
--------- --------
Total assets $ 692,133 $592,607
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 265,119 $160,455
Accounts payable and other accrued expenses 4,878 4,461
Distributions payable 11,243 10,501
Minority interest in Partnership 70,931 74,552
--------- --------
Total liabilities 352,171 249,969
--------- --------
Commitments and contingencies (Note 4)
Shareholders' equity:
Preferred Shares, $.01 par value, 20,000,000 shares
authorized, no shares issued or outstanding
Common Shares, $.01 par value, 100,000,000 shares
authorized, 33,113,211 and 32,848,608 shares
issued and outstanding at March 31, 1998 and
December 31, 1997, respectively 331 328
Additional paid-in capital 359,375 355,828
Unearned compensation (2,124) (1,812)
Distributions in excess of net earnings (17,620) (11,706)
--------- --------
Total shareholders' equity 339,962 342,638
--------- --------
Total liabilities and shareholders' equity $ 692,133 $592,607
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE> 5
INNKEEPERS USA TRUST
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Percentage Lease revenue $ 23,680 $ 12,380
Other revenue 176 345
-------- --------
Total revenue 23,856 12,725
-------- --------
Expenses:
Depreciation 7,441 3,217
Amortization of franchise costs 18 17
Ground rent 112 88
Interest expense 4,805 1,997
Amortization of loan origination fees 268 256
Real estate and personal
property taxes and property insurance 2,355 1,129
General and administrative 1,126 430
Amortization of unearned compensation 149 10
-------- --------
Total expenses 16,274 7,144
-------- --------
Income before minority interest
and extraordinary loss 7,582 5,581
Minority interest, common (292) (234)
Minority interest, preferred (1,173) (1,117)
Extraordinary loss (2,760)
-------- --------
Net income $ 3,357 $ 4,230
======== ========
Basic earnings per share before
extraordinary loss $ 0.19 $ 0.19
Basic earnings per share 0.10 0.19
Diluted earnings per share before
extraordinary loss 0.18 0.19
Diluted earnings per share 0.10 0.19
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 6
INNKEEPERS USA TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except supplemental non-cash financing activities)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,357 $ 4,230
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,876 3,500
Minority interest, common and preferred 1,465 1,351
Extraordinary loss 2,760
Changes in operating assets and liabilities:
Due from Lessees (6,896) (3,227)
Deferred expenses, net (1,087)
Other assets 214 10
Accounts payable and other accrued expenses 417 101
--------- ---------
Net cash provided by operating activities 9,193 4,878
--------- ---------
Cash flows from investing activities:
Investment in hotel properties (99,133) (34,600)
Net deposits into restricted cash accounts (34) (4,300)
Payments for franchise fees (27)
Deposits under purchase agreements (250)
--------- ---------
Net cash used in investing activities (99,444) (38,900)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 268,330 5,120
Payments on long-term debt (163,666) (26)
Dividend reinvestment plan and shelf registration costs paid (24) (121)
Distributions paid to Unit holders (1,961) (195)
Distributions paid to common shareholders (8,541) (5,022)
Loan origination fees and costs paid (2,473) (420)
--------- ---------
Net cash provided (used) by financing activities 91,665 (664)
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,414 (34,686)
Cash and cash equivalents at beginning of period 4,228 40,339
--------- ---------
Cash and cash equivalents at end of period $ 5,642 $ 5,653
========= =========
Supplemental cash flow information:
Interest paid $ 4,936 $ 1,726
========= =========
</TABLE>
Supplemental non-cash financing activities:
The Company issued 369,816 Common Units with a deemed value at the time of
issuance of $4,920,000 for the acquisition of two hotel properties during the
three months ended March 31, 1997.
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 7
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 March 31, 1998, Innkeepers owned interests in 62 hotels with
an aggregate of 7,439 rooms (the "Hotels") through its 82.7% 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, 2 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 nine
of the Hotels to affiliates of Summerfield Hotel Corporation (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. A trustee of the Company
is a principal owner of the Summerfield 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 fiscal 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.
4
<PAGE> 8
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND RECENT DEVELOPMENTS, CONTINUED
RECENT DEVELOPMENTS
On January 11, 1998, the Company purchased a 120-room Residence Inn by
Marriott hotel located in Bothell (Seattle Northeast), Washington for a
cash 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.
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
approximately $89.1 million in 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 May 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 intends to utilize its New Line of Credit (defined below)
to fund the cash portion of the purchase price of approximately $75.7
million and to issue Common Units for the balance of the purchase price
of approximately $13.4 million.
On May 12, 1998, the Company priced a 4,200,000 convertible preferred
share offering, which is expected to close on May 18, 1998. The
offering price was $25 per share resulting in gross proceeds of
$105,000,000.
2. 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 the $59,320,000 loan
which was assumed as described under "Recent Developments" 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
5
<PAGE> 9
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. LONG-TERM DEBT, CONTINUED
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.
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 and Second Term Loans"),
except that the interest rate is fixed at 7.02%. At February 19, 1998,
28 of the Company's hotel properties collateralize its long-term debt.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net income before extraordinary loss $ 6,117,000 $ 4,230,000
Net income 3,357,000 4,230,000
Denominator:
Denominator for basic
earnings per share -
weighted average shares 32,858,291 22,310,651
Effect of dilutive securities:
Stock options 316,661 168,689
Restricted shares 20,325 5,493
----------- -----------
Denominator for diluted
earnings per share -
adjusted weighted
average shares 33,195,277 22,484,833
=========== ===========
Basic earnings per share before
extraordinary loss $ 0.19 $ 0.19
Basic earnings per share 0.10 0.19
Diluted earnings per share before
extraordinary loss 0.18 0.19
Diluted earnings per share 0.10 0.19
</TABLE>
6
<PAGE> 10
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. 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 become (or became)
effective as follows (without regard to redemptions which may have
previously occurred):
<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
1,572,861 June 20, 1998
365,086 June 20, 1999
---------
2,849,806
=========
</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 March 31, 1998.
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, Sunrise 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
hotels which do 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
7
<PAGE> 11
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. COMMITMENTS AND CONTINGENCIES, CONTINUED
with Residence Inn by Marriott. The franchise and management agreements
require the Lessees to pay fees based on a percentage of hotel revenue.
The Company has 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.
The Company has a Sierra Suites hotel in Westborough, Massachusetts
under development, which is expected to be completed in the second
quarter of 1998. The Company has committed to fund the development
costs of this hotel. An affiliate of Summerfield, which has been
engaged to develop the hotel, has guaranteed that the Company's
development costs will not exceed approximately $7,900,000.
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 at
the Hotels. The Second Term Loan requires that the Company make
available for such purposes, at the eight Hotels collateralizing that
loan, 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 $265,119,000, or 37.6% of its investment
in hotels, at cost, at March 31, 1998.
8
<PAGE> 12
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. 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 1996 and 1997 had occurred at the beginning of the periods presented
and all of the Hotels had been leased to the Lessees pursuant to
Percentage Leases throughout 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> 13
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Percentage Lease revenue $ 23,900 $21,084
Other revenue 176 345
-------- -------
Total revenue 24,076 21,429
-------- -------
Expenses:
Depreciation 7,441 6,654
Amortization of franchise costs 23 27
Ground rent 112 88
Interest expense 5,037 4,977
Amortization of loan origination fees 268 383
Real estate and personal property taxes
and property insurance 2,383 1,983
General and administrative 1,126 785
Amortization of unearned compensation 149 10
-------- --------
Total expenses 16,539 14,907
-------- --------
Income before minority interest and
extraordinary loss 7,537 6,522
Minority interest, common (285) (427)
Minority interest, preferred (1,173) (1,117)
-------- --------
Net income before extraordinary loss $ 6,079 $ 4,978
======== ========
Diluted earnings per share $ 0.18 $ 0.15
</TABLE>
10
<PAGE> 14
JF HOTEL
COMBINED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,090 $ 7,863
Marketable securities 1,947 1,775
Accounts receivable, net 6,462 3,090
Inventory 20 23
Prepaid expenses 249 351
------- -------
Total current assets 24,768 13,102
Other assets 169 180
------- -------
Total assets $24,937 $13,282
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,406 $ 3,061
Accrued expenses 2,990 2,055
Payable to Manager 2,794 2,025
Due to Partnership 9,805 3,791
------- -------
Total current liabilities 20,995 10,932
Other long-term liabilities 585 585
------- -------
Total liabilities 21,580 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 657 562
Retained earnings 2,697 1,200
------- -------
Total shareholders' equity 3,357 1,765
------- -------
Total liabilities and shareholders' equity $24,937 $13,282
======= =======
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
11
<PAGE> 15
JF HOTEL
COMBINED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Gross operating revenue:
Rooms $ 41,572 $ 25,533
Food and beverage 158 169
Telephone 1,311 964
Other 807 534
-------- --------
Gross operating revenue 43,848 27,200
Departmental expenses:
Rooms 7,653 4,867
Food and beverage 150 142
Telephone 447 344
Other 347 232
-------- --------
Total departmental profit 35,251 21,615
-------- --------
Unallocated operating expenses:
General and administrative 3,385 1,947
Franchise fees 2,694 1,993
Advertising and promotions 1,948 884
Utilities 1,897 1,328
Repairs and maintenance 1,830 1,220
Management fees 871 539
-------- --------
Total unallocated operating
expenses 12,625 7,911
-------- --------
Gross profit 22,626 13,704
Insurance (264) (205)
Lessee overhead (795) (623)
Percentage Lease payments (20,070) (12,380)
-------- --------
Net income 1,497 496
Other comprehensive income -
unrealized gains on marketable
securities 95
-------- --------
Comprehensive income $ 1,592 $ 496
======== ========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
12
<PAGE> 16
JF HOTEL
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,497 $ 496
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 12 11
Changes in operating assets and liabilities:
Accounts receivable (3,372) (814)
Inventory 3 58
Prepaid expenses 102 19
Other assets (1) 43
Accounts payable 2,345 531
Accrued expenses 935 (216)
Payable to Manager 769 1,828
Other liabilities (165)
Due to Partnership 6,014 3,227
-------- --------
Net cash provided by operating activities 8,304 5,018
-------- --------
Cash flows from investing activities:
Purchase of equipment (6)
Advances from affiliates 387
Purchase of marketable securities (77)
-------- --------
Net cash provided (used) by investing activities (77) 381
-------- --------
Net increase in cash and cash equivalents 8,227 5,399
Cash and cash equivalents at beginning of period 7,863 5,551
-------- --------
Cash and cash equivalents at end of period $ 16,090 $ 10,950
======== ========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
13
<PAGE> 17
JF HOTEL
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
JF Hotel, Inc., JF Hotel II, Inc., JF Hotel III, Inc., JF Hotel IV,
Inc., JF Hotel V, Inc., JF Hotel VI, Inc. and Royal Poinciana
Management, Inc. (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 March 31, 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 Hotels. The financial statements
of the 20 hotels operated by RIBM are maintained on a 52/53 week period
basis. The 1997 fiscal first quarter for the RIBM managed hotels ended
on March 28, 1997 and the 1998 fiscal first quarter for the RIBM
managed hotels ended on March 27, 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
fiscal 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 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.
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.
14
<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 of 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 three months
ended March 31, 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)
</TABLE>
(a) Aggregate purchase price of $83,000,000
15
<PAGE> 19
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE HOTELS
The following chart summarizes information regarding the Hotels at March 31,
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 2 202
---- ------
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 62 7,439
==== =====
</TABLE>
* contains a total of 1,057 bedrooms
16
<PAGE> 20
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average daily rate ("ADR"), occupancy and revenue per available room ("RevPAR")
for 61 of the Hotels are presented in the following table. Results were excluded
for such comparison for one hotel which was closed for renovation during the
first quarter of 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
March 31, %
1997 1998 Inc (dec)
----- ---- ---------
<S> <C> <C> <C>
Portfolio (1)
- --------------------------------
Average Daily Rate $90.15 $ 99.09 9.9
Occupancy 77.5% 78.1% .7
RevPAR $69.89 $ 77.34 10.7
By Type
- --------------------------------
Upscale Extended Stay Hotels (2)
Average Daily Rate $95.66 $106.70 11.5
Occupancy 82.2% 81.5% (.9)
RevPAR $78.65 $ 86.90 10.5
Limited Service Hotels (3)
Average Daily Rate $71.26 $76.58 7.5
Occupancy 64.9% 68.0% 4.8
RevPAR $46.26 $52.11 12.6
</TABLE>
(1) 61 hotels (excludes one hotel closed during the first quarter of 1997 due
to renovation)
(2) 45 hotels
(3) 14 hotels (excludes one hotel closed during the first quarter of 1997 due
to renovation)
17
<PAGE> 21
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the Company.
Comparison of the Three Months Ended March 31, 1998 ("1998") to the Three Months
Ended March 31"1997) ("1997")
The Company had revenues for 1998 of $23,856,000, consisting of $23,680,000 of
Percentage Lease revenue from the Lessees and $176,000 of other revenue,
compared with $12,725,000, $12,380,000 and $345,000, respectively, for 1997. The
increase in Percentage Lease revenue is due, primarily, to the strong RevPAR
growth at the Company's Hotels and the number of hotels owned increasing from 32
at January 1, 1997, to 35 at March 31, 1997, and to 62 at March 31, 1998.
Depreciation, amortization of franchise costs, amortization of loan origination
fees, and amortization of unearned compensation ("Depreciation and
Amortization") were $7,876,000 in the aggregate for 1998 compared with
$3,500,000 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 $2,355,000
for 1998 compared with $1,129,000 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 $4,805,000 compared with $1,997,000 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, one term loan and borrowings under various
mortgage notes.
General and administrative expenses for 1998 were $1,126,000 compared with
$430,000 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.
18
<PAGE> 22
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net income for 1998 was $3,357,000, or $0.10 per diluted share, compared with
$4,230,000, or $0.19 per diluted share, for 1997. This decrease was due to the
extraordinary loss related to the extinguishment of the Company's Previous Line
of Credit.
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
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 at March 31, 1998 were $12,424,000, including
approximately $1,535,000 which the Company is required, under the Percentage
Leases, to make available to the Lessees for the replacement and refurbishment
of furniture and equipment. Additionally, cash and cash equivalents include
approximately $5,247,000 that is held in escrow to pay for insurance, taxes, and
capital expenditures for certain Hotels.
Net cash provided by operating activities for the three months ended March 31,
1998 and 1997 was $9,193,000 and $4,878,000, respectively.
Net cash used in investing activities was $99,444,000 for the three months ended
March 31, 1998. This was comprised primarily of the Company (a) acquiring a
Residence Inn by Marriott hotel in Bothell, Washington, for approximately
$11,750,000, and (b) acquiring a portfolio of six Residence Inn by Marriott
hotels in Washington and Oregon for approximately $83,000,000.
Net cash provided by financing activities was $91,665,000 for the three months
ended March 31, 1998, consisting primarily of net proceeds from long-term debt
of $104,664,000 and distributions paid of $10,502,000.
The Company pays regular quarterly distributions on its common shares 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.
19
<PAGE> 23
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's consolidated indebtedness was 37.6% of its investment in hotels,
at cost, at March 31, 1998. At March 31, 1998, the Company had outstanding
indebtedness of approximately $265,119,000, of which approximately 49% bore
interest at a fixed rate. 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 30-day 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 March 31, 1998, a one
percent increase in the LIBOR rate would increase annual interest charges
$1,250,000. In March 1998, the Company entered into an interest rate cap
agreeement 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.
On May 12, 1998, the Company priced a 4,200,000 convertible preferred share
offering, which is expected to close on May 18, 1998. The offering price was
$25 per share resulting in gross proceeds of $105,000,000.
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 at the
Hotels. The Second Term Loan requires that the Company make available for such
purposes, at the eight Hotels collateralizing that loan, 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
20
<PAGE> 24
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
with the reasonable requirements of any franchise agreement and otherwise to the
extent that the Company deems such expenditures to be in the best interests of
the Company.
Management believes that the amounts required to be made available 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.
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") a widely used and
appropriate measure of performance for an equity REIT. FFO, as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), 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.
21
<PAGE> 25
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents the Company's calculation of FFO and FFO per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
Three Months
ended March 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Net income $ 3,357 $ 4,230
Minority interest, common 292 234
Minority interest, preferred 1,173 1,117
Extraordinary loss 2,760
Depreciation 7,441 3,217
----------- -----------
FFO $ 15,023 $ 8,798
----------- -----------
Denominator for diluted
earnings per share 33,195,277 22,484,833
Weighted average
Common Units 2,947,316 1,113,289
Weighted average
Preferred Units 4,063,329 4,063,329
----------- -----------
Denominator for
FFO per share 40,205,922 27,661,451
----------- -----------
FFO per share $ 0.37 $ 0.32
=========== ===========
</TABLE>
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.
22
<PAGE> 26
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.
23
<PAGE> 27
INNKEEPERS USA TRUST
PART II - OTHER INFORMATION
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 a portfolio of
eight Residence Inn by Marriott hotels on December 30,
1997 and a portfolio of five Residence Inn by Marriott
hotels on January 14, 1998 was filed on January 22, 1998.
24
<PAGE> 28
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
May 15, 1998 /s/ Gregory M. Fay
- ------------ ----------------------------------
Gregory M. Fay
Vice-President of Accounting
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INNKEEPERS USA TRUST FOR THE THREE MONTHS ENDED MARCH
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,642
<SECURITIES> 0
<RECEIVABLES> 11,313
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 705,632
<DEPRECIATION> 43,306
<TOTAL-ASSETS> 692,133
<CURRENT-LIABILITIES> 16,121
<BONDS> 265,119
0
0
<COMMON> 331
<OTHER-SE> 339,631
<TOTAL-LIABILITY-AND-EQUITY> 692,133
<SALES> 0
<TOTAL-REVENUES> 23,856
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,073
<INCOME-PRETAX> 6,117
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,117
<DISCONTINUED> 0
<EXTRAORDINARY> (2,760)
<CHANGES> 0
<NET-INCOME> 3,357
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>