<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 0-24568
INNKEEPERS USA TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
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 October 26, 1998 was 34,182,427.
<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
September 30, 1998 (unaudited) and December 31, 1997 1
Consolidated Statements of Income for the
three and nine months ended September 30, 1998 (unaudited)
and 1997 (unaudited) 2
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 (unaudited)
and 1997 (unaudited) 3
Notes to Consolidated Financial Statements 4
JF HOTEL
Combined Balance Sheets at September 30,
1998 (unaudited) and December 31, 1997 13
Combined Statements of Income for the
three and nine months ended September 30, 1998 (unaudited)
and 1997 (unaudited) 14
Combined Statements of Cash Flows for
the nine months ended September 30, 1998 (unaudited)
and 1997 (unaudited) 15
Notes to Combined Financial Statements 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 30
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
</TABLE>
<PAGE> 3
INNKEEPERS USA TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties:
Land and improvements ................................... $ 89,434 $ 71,508
Buildings and improvements .............................. 556,027 449,813
Furniture and equipment ................................. 79,513 63,439
Renovations in process .................................. 19,321 14,837
Hotels under development ................................ 158 1,911
--------- ---------
744,453 601,508
Accumulated depreciation ................................ (58,671) (35,865)
--------- ---------
Net investment in hotel properties ...................... 685,782 565,643
Cash and cash equivalents .................................. 1,206 4,228
Restricted cash and cash equivalents ....................... 7,520 6,748
Due from Lessees ........................................... 13,991 4,417
Deferred expenses, net ..................................... 4,260 5,235
Deposits under purchase agreements ......................... 1,000 5,050
Other assets ............................................... 1,119 1,286
--------- ---------
Total assets ................................. $ 714,878 $ 592,607
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt ............................................. $ 171,494 $ 160,455
Accounts payable and other accrued expenses ................ 8,003 4,461
Distributions payable ...................................... 12,989 10,501
Deferred Percentage Lease revenue .......................... 17,916
Minority interest in Partnership ........................... 61,692 74,552
--------- ---------
Total liabilities ............................ 272,094 249,969
--------- ---------
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
September 30, 1998 ................................... 115,750
Common Shares, $.01 par value, 100,000,000 shares
authorized, 34,182,427 and 32,848,608 shares
issued and outstanding at September 30,1998 and
December 31, 1997, respectively ...................... 342 328
Additional paid-in capital .............................. 363,156 355,828
Unearned compensation ................................... (1,847) (1,812)
Distributions in excess of net earnings ................. (34,617) (11,706)
--------- ---------
Total shareholders' equity ................... 442,784 342,638
--------- ---------
Total liabilities and shareholders' equity ... $ 714,878 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Percentage Lease revenue $32,343 $20,424 $61,236 $47,736
Other revenue 217 407 581 964
------- ------- ------- -------
Total revenue 32,560 20,831 61,817 48,700
------- ------- ------- -------
Expenses:
Depreciation 7,739 5,608 22,806 12,607
Amortization of franchise costs 19 16 55 49
Ground rent 114 112 339 288
Interest expense 3,286 2,845 12,008 7,291
Amortization of loan origination
fees 269 391 784 795
Real estate and personal
property taxes and property
insurance 2,291 1,695 7,051 3,948
General and administrative 842 679 2,786 1,697
Amortization of unearned
compensation 129 237 426 294
------- ------- ------- -------
Total expenses 14,689 11,583 46,255 26,969
------- ------- ------- -------
Income before minority interest
and extraordinary loss 17,871 9,248 15,562 21,731
Minority interest, common ( 1,084) (736) (392) (1,316)
Minority interest, preferred ( 1,173) (1,159) (3,520) (3,393)
Extraordinary loss (2,760)
------- ------- ------- -------
Net income (Note 2) 15,614 7,353 8,890 17,022
Preferred share dividends (2,496) (3,688)
------- ------- ------- -------
Net income applicable
to common shareholders (Note 2) $13,118 $ 7,353 $ 5,202 $17,022
======= ======= ======= =======
Earnings per share data (Note 2):
Basic - before extraordinary loss $ 0.39 $ 0.25 $ 0.24 $ 0.69
Extraordinary loss (0.08)
------- ------- ------- -------
Basic $ 0.39 $ 0.25 $ 0.16 $ 0.69
======= ======= ======= =======
Diluted - before extraordinary loss $ 0.38 $ 0.25 $ 0.24 $ 0.69
Extraordinary loss (0.08)
------- ------- ------- -------
Diluted $ 0.38 $ 0.25 $ 0.16 $ 0.69
======= ======= ======= =======
</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>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,890 $ 17,022
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 24,071 13,745
Minority interest 3,912 4,709
Extraordinary loss 2,760
Changes in operating assets and liabilities:
Due from Lessees (9,574) (5,634)
Other assets 167 (124)
Accounts payable and other accrued expenses 3,542 1,681
Deferred Percentage Lease revenue 17,916
--------- ---------
Net cash provided by operating activities 51,684 31,399
--------- ---------
Cash flows from investing activities:
Investment in hotel properties (137,699) (157,997)
Net deposits into restricted cash accounts (772) (6,446)
Payments for franchise fees (82) (166)
Deposits under purchase agreements (1,000) (300)
--------- ---------
Net cash used in investing activities (139,553) (164,909)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 296,064 161,328
Payments on long-term debt (285,025) (161,748)
Dividend reinvestment plan and shelf registration costs paid (32) (81)
Distributions paid to unit holders (5,903) (3,103)
Distributions paid to common shareholders (29,025) (16,258)
Redemption of units (64)
Proceeds from issuance of common shares, net 135,438
Proceeds from issuance of preferred shares, net 111,570
Loan origination fees and costs paid (2,738) (3,515)
--------- ---------
Net cash provided by financing activities 84,847 112,061
--------- ---------
Net decrease in cash and cash equivalents (3,022) (21,449)
Cash and cash equivalents at beginning of period 4,228 40,339
--------- ---------
Cash and cash equivalents at end of period $ 1,206 $ 18,890
========= =========
Supplemental cash flow information:
Interest paid $ 12,043 $ 7,463
========= =========
</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 nine months ended September 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, CONTINUED
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 September 30, 1998, Innkeepers owned interests in 64 hotels
with an aggregate of 7,684 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 39 Residence Inn by Marriott
hotels, 12 Hampton Inn hotels, six Summerfield Suites hotels, three
Sierra Suites hotels, one Comfort Inn hotel, one hotel which is in the
process of being converted to a Courtyard by Marriott hotel, one
Holiday Inn Express hotel and one Sunrise Suites hotel. The Hotels are
located in 24 states, with ten hotels located in California.
The Company leases 54 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 and a trustee of the
Company is a director 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 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 may 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 currently intends to utilize
its New Line of Credit (as defined in Note 3) to fund the entire
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 pro-ceeds of the preferred
offering were used to repay borrowings outstanding under the New Line
of Credit. On September 2, 1998, the SEC declared effective a
registration statement covering the resale of Series A Preferred Shares
acquired in the 144A Offering or a subsequent exempt resale.
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 of approximately
$15,800,000 was funded through available cash and the New Line of
Credit.
On October 9, 1998, the Company purchased a 120-room Residence Inn by
Marriott hotel located in Atlanta (Peachtree Corners), Georgia under
its previously described agreement with Marriott. The purchase price of
approximately $11,100,000 was funded through available cash and the New
Line of Credit.
5
<PAGE> 8
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND RECENT DEVELOPMENTS, CONTINUED
On October 22, 1998, the Company sold its 3 Sierra Suites hotels, with
an aggregate of 315 rooms, to Sierra Hotel Associates, L.P. for
approximately $16.8 million in cash and the redemption of 233,612
Common Units. The Company recognized a gain of approximately $500,000
on the sale of these hotels.
On November 6, 1998, the Company purchased a 150-room Residence Inn by
Marriott hotel located in San Jose, California under its previously
described agreement with Marriott. The purchase price of approximately
$20,800,000 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") released EITF issue 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 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 and third quarters 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 nine
months ended September 30, 1998 and 1997 (in thousands, except per
share data).
6
<PAGE> 9
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. CHANGE IN ACCOUNTING PRINCIPLE, CONTINUED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRO FORMA AMOUNTS - EITF 98-9
APPLIED(A):
Percentage Lease revenue $32,343 $23,331 $61,236 $36,209
Net income applicable to
common shareholders 13,118 10,270 5,202 6,322
Basic and diluted
earnings per share 0.38 0.35 0.16 0.25
PRO FORMA AMOUNTS - EITF 98-9
NOT APPLIED(B):
Percentage Lease revenue 29,015 20,424 79,152 47,736
Net income applicable to
common shareholders 10,244 7,353 21,864 17,022
Basic and diluted
earnings per share 0.30 0.25 0.65 0.69
</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.
7
<PAGE> 10
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. LONG-TERM DEBT
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 September
30, 1998, 26 of the Company's hotel properties collateralize its
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 and at
September 30, 1998 borrowings under the New Line of Credit bore
interest at approximately 7.0%. At September 30, 1998, the Company had
approximately $209,000,000 in additional borrowing capacity under the
New Line of Credit, subject to borrowing base availability as defined
under the loan agreement. 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 the 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.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three and nine months ended September 30,
1998 and 1997:
8
<PAGE> 11
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. EARNINGS PER SHARE, CONTINUED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $15,614,000 $ 7,353,000 $8,890,000 $17,022,000
Preferred share dividends (2,496,000) (3,688,000)
----------- ----------- ---------- -----------
Net income applicable
to common shareholders 13,118,000 7,353,000 5,202,000 17,022,000
Extraordinary loss 2,760,000
----------- ----------- ---------- -----------
Net income applicable
to common shareholders
before extraordinary loss $13,118,000 $ 7,353,000 $7,962,000 $17,022,000
=========== =========== ========== ===========
Denominator:
Denominator for basic
earnings per share -
weighted average shares 34,035,451 29,142,559 3,295,209 24,616,887
Effect of dilutive securities:
Stock options 72,557 276,389 210,610 213,842
Restricted shares 3,154 27,106 12,297 11,492
----------- ----------- ---------- -----------
Denominator for diluted
earnings per share - adjusted
weighted average shares 34,111,162 29,446,054 3,518,116 24,842,221
=========== =========== ========== ===========
Earnings per share data:
Basic - before extraordinary loss $ 0.39 $ 0.25 $ 0.24 $ 0.69
Extraordinary loss (0.08)
----------- ----------- ---------- -----------
Basic $ 0.39 $ 0.25 $ 0.16 $ 0.69
=========== =========== ========== ===========
Diluted - before extraordinary loss $ 0.38 $ 0.25 $ 0.24 $ 0.69
Extraordinary loss (0.08)
----------- ----------- ---------- -----------
Diluted $ 0.38 $ 0.25 $ 0.16 $ 0.69
=========== =========== ========== ===========
</TABLE>
9
<PAGE> 12
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. COMMITMENTS AND CONTINGENCIES
Pursuant to the Partnership's 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
Innkeepers' option, common shares on a one-for-one basis. The
Redemption Rights for units outstanding at September 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
Innkeepers' 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 September 30, 1998.
The Company pays regular quarterly distributions on its common shares
and Common 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,
Inc. ("RIBM"). The franchise and management agreements require the
Lessees to pay fees based on percentages of hotel revenue. The Company
has guaranteed certain of the JF Lessee's obligations under the
franchise licenses and the RIBM management agreements, generally in
exchange for certain rights to substitute replacement lessees if the
Company terminates the related Percentage Lease.
10
<PAGE> 13
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. COMMITMENTS AND CONTINGENCIES, CONTINUED
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 for 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, for 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 $171,494,000 or 23.0% of
its investment in hotels, at cost, at September 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.
11
<PAGE> 14
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Revenue:
Percentage Lease revenue (A) $ 61,465 $ 57,077
Other revenue 581 964
-------- --------
Total revenue 62,046 58,041
-------- --------
Expenses:
Depreciation 22,806 19,747
Amortization of franchise costs 71 75
Ground rent 339 288
Interest expense 9,563 9,490
Amortization of loan origination fees 784 1,049
Real estate and personal property taxes
and property insurance 7,079 6,041
General and administrative 2,786 2,205
Amortization of unearned compensation 426 294
-------- --------
Total expenses 43,854 39,189
-------- --------
Income before minority interest 18,192 18,852
Minority interest, common (352) (393)
Minority interest, preferred (3,520) (3,352)
-------- --------
Net income 14,320 15,107
Preferred share dividends (7,488) (7,488)
-------- --------
Net income applicable to
common shareholders $ 6,832 $ 7,619
======== ========
Diluted earnings per share $ 0.20 $ 0.22
======== ========
</TABLE>
(A) Recognized in accordance with EITF 98-9, see Note 2.
12
<PAGE> 15
JF HOTEL
COMBINED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $14,551 $ 7,863
Marketable securities 2,328 1,775
Accounts receivable, net 8,005 3,090
Inventory 77 23
Prepaid expenses 129 351
------- -------
Total current assets 25,090 13,102
Other assets 173 180
------- -------
Total assets $25,263 $13,282
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,824 $ 3,061
Accrued expenses 3,276 2,055
Payable to Manager 3,203 2,025
Due to Partnership 12,519 3,791
------- -------
Total current liabilities 23,822 10,932
Other long-term liabilities 585 585
------- -------
Total liabilities 24,407 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 44 562
Retained earnings 809 1,200
------- -------
Total shareholders' equity 856 1,765
------- -------
Total liabilities and shareholders' equity $25,263 $13,282
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
13
<PAGE> 16
JF HOTEL
COMBINED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ----- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross operating revenue:
Rooms $48,359 $31,483 $136,660 $85,214
Food and beverage 13 129 290 468
Telephone 1,392 1,055 4,069 3,049
Other 875 678 2,548 1,817
--------- --------- -------- ---------
Gross operating revenue 50,639 33,345 143,567 90,548
Departmental expenses:
Rooms 9,982 5,924 27,371 15,978
Food and beverage 35 134 322 424
Telephone 418 373 1,375 1,102
Other 375 299 1,057 820
-------- -------- -------- ---------
Total departmental profit 39,829 26,615 113,442 72,224
-------- -------- -------- ---------
Unallocated operating expenses:
General and administrative 3,721 2,135 10,643 6,128
Franchise fees 3,052 2,092 8,672 5,588
Advertising and promotions 2,229 1,353 6,308 3,759
Utilities 1,854 1,377 5,353 3,789
Repairs and maintenance 2,077 1,378 5,940 3,844
Management fees 626 1,092 2,315 2,025
-------- -------- -------- -------
Total unallocated operating
expenses 13,559 9,427 39,231 25,133
-------- -------- -------- ---------
Gross profit 26,270 17,188 74,211 47,091
Insurance (172) (174) (681) (543)
Lessee overhead (672) (411) (1,814) (1,692)
Percentage Lease payments (24,584) (15,727) (67,611) (41,909)
-------- -------- -------- ---------
Net income 842 876 4,105 2,947
Other comprehensive income -
unrealized gains (losses) on
marketable securities (104) 248 (518) 396
-------- -------- -------- ---------
Comprehensive income $ 738 $ 1,124 $ 3,587 $ 3,343
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
14
<PAGE> 17
JF HOTEL
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,105 $ 2,947
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 28 21
Changes in operating assets and liabilities:
Accounts receivable (4,915) (3,896)
Inventory (54) 43
Prepaid expenses 222 (3)
Other assets 50
Accounts payable 1,763 1,350
Accrued expenses 1,221 1,530
Payable to Manager 1,178 1,665
Other liabilities (211)
Due to Partnership 8,728 3,408
-------- --------
Net cash provided by operating activities 12,276 6,904
-------- --------
Cash flows from investing activities:
Purchase of equipment (21)
Repayment of advances 298
Purchase of marketable securities (1,071) (410)
-------- --------
Net cash used in investing activities (1,092) (112)
-------- --------
Cash flows from financing activities:
Dividends paid (4,496)
-------- --------
Net cash used in financing activities (4,496)
-------- --------
Net increase in cash and cash equivalents 6,688 6,792
Cash and cash equivalents at beginning of period 7,863 5,551
-------- --------
Cash and cash equivalents at end of period $ 14,551 $ 12,343
======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
15
<PAGE> 18
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 on September 30, 1994 and at
September 30, 1998 leased 54 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 21 of the JF Leased Hotels, and an
unaffiliated party operates two of the JF Leased Hotels.
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 21 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 in the RIBM Management Agreements. 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 without cause. 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 21 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.
16
<PAGE> 19
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.
17
<PAGE> 20
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 nine months ended
September 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 $7,900,000
Residence Inn - Gaithersburg, MD 132 July 10, 1998 (b)
</TABLE>
(a) Aggregate purchase price of $83,000,000
(b) Aggregate purchase price is $89,100,000, which includes five hotels which
have not yet been purchased as of September 30, 1998.
18
<PAGE> 21
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 September 30,
1998.
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Upscale extended-stay hotels:
Residence Inn 39 4,517
Summerfield Suites 6 759*
Sunrise Suites 1 96
-- -----
46 5,372
-- -----
Mid-priced extended-stay hotels:
Sierra Suites 3 315
-- -----
Limited service hotels:
Hampton Inn 12 1,527
Courtyard by Marriott 1 139
Comfort Inn 1 127
Holiday Inn Express 1 204
-- -----
14 1,997
-- -----
Total 64 7,684
== =====
</TABLE>
* contains a total of 1,057 bedrooms
19
<PAGE> 22
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 two hotels which were 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 Nine Months Ended
September 30, % September 30, %
------------- - ------------- -
1997 1998 Inc.(dec) 1997 1998 Inc.(dec)
---- ---- --------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Portfolio(1)
Average Daily Rate $93.88 $99.27 5.7 $91.78 $98.81 7.7
Occupancy 83.62% 83.56% (0.1) 81.40% 81.38% 0.0
RevPAR $78.50 $82.95 5.7 $74.71 $80.42 7.6
By Type
Upscale Extended Stay Hotels (2)
Average Daily Rate $101.60 $107.84 6.1 $98.91 $107.29 8.5
Occupancy 87.55% 86.60% (1.1) 85.51% 84.34% (1.4)
RevPAR $88.95 $93.39 5.0 $84.58 $90.48 7.0
Limited Services Hotels (3)
Average Daily Rate $73.06 $77.69 6.3 $71.25 $76.39 7.2
Occupancy 73.87% 75.68% 2.5 70.78% 73.13% 3.3
RevPAR $53.97 $58.80 9.0 $50.43 $55.86 10.8
</TABLE>
(1) 62 hotels (excludes two newly-developed hotels)
(2) 45 hotels (excludes one newly-developed hotel)
(3) 15 hotels
20
<PAGE> 23
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") released EITF issue 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
for financial reporting purposes 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 for those quarters 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 and third quarters 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, Note 2 to the financial statements
presents the pro forma effects of the application of EITF 98-9 on the 1997
financial statements. The effect of the change as reflected in Note 2 on the
three months ended September 30, 1998 and 1997 was to: increase Percentage Lease
revenue by $3,328,000 and $2,907,000, respectively; increase (decrease) minority
interest, common by $454,000 and ($10,000), respectively; and increase net
income applicable to common shareholders by $2,874,000 and $2,917,000,
respectively. The effect of the change on the nine months ended September 30,
1998 and 1997 was to: decrease Percentage Lease revenue by $17,916,000 and
$11,527,000, respectively; decrease minority interest, common by $1,254,000 and
$827,000, respectively; and decrease net income applicable to common
shareholders by $16,662,000 and $10,700,000, respectively.
At September 30, 1998 "deferred Percentage Lease revenue" of $17,916,000
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 fourth quarter 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 for financial reporting purposes.
21
<PAGE> 24
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 September 30, 1998 ("1998") to the Three
Months Ended September 30, 1997 ("1997")
The increase in Percentage Lease revenue for 1998 from 1997 is attributable to
RevPAR growth of approximately 5.7% at the Company's Hotels and the number of
hotels owned increasing from 47 at July 1, 1997 and September 30, 1997 to 63 and
64 at July 1, 1998 and September 30, 1998, respectively, and the change in the
Company's revenue recognition policy as discussed previously. Included in
deferred Percentage Lease revenue at September 30, 1998 is $17,916,000 of
percentage rents collected or due from the Lessees which management expects the
Company to recognize as Percentage Lease revenue in the fourth quarter of 1998.
For comparability purposes only, assuming that the provisions of EITF 98-9 were
not applied, the Company would have had revenues for 1998 of $29,232,000,
consisting of $29,015,000 of Percentage Lease revenue from the Lessees and
$217,000 of other revenue, compared with $20,831,000, $20,424,000 and $407,000,
respectively, for 1997.
Depreciation, amortization of franchise costs, amortization of loan origination
fees, and amortization of unearned compensation ("Depreciation and
Amortization") were $8,156,000 in the aggregate for 1998 compared with
$6,252,000 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 granted in 1998.
Real estate and personal property taxes and property insurance were $2,291,000
for 1998 compared with $1,695,000 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 $3,286,000 compared with $2,845,000 for 1997. This
increase is due primarily to increased borrowings for hotel acquisitions offset
by a reduction in the interest rate on the company's line of credit.
General and administrative expenses for 1998 were $842,000 compared with
$679,000 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 applicable to common shareholders for 1998 was $13,118,000, or $0.38
per diluted share, compared with $7,353,000, or $0.25 per diluted share, for
1997. This increase is due primarily to the change in the Company's revenue
recognition policy as discussed previously and the increased RevPAR at the
Company's hotels.
22
<PAGE> 25
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Comparison of the Nine Months Ended September 30, 1998 ("1998") to the Nine
Months Ended September 30, 1997 ("1997")
The increase in Percentage Lease revenue for 1998 from 1997 is attributable to
the to the RevPAR growth of approximately 7.6% at the Company's Hotels and the
number of hotels owned increasing from 32 at January 1, 1997 to 47 at September
30, 1997, to 56 at January 1, 1998 and to 64 at September 30, 1998 and the
change in the Company's revenue recognition as discussed previously. Included in
deferred Percentage Lease revenue at September 30, 1998 is $17,916,000 of
percentage rents collected or due from the Lessees which management expects the
Company to recognize as Percentage Lease revenue in the fourth quarter of 1998.
For comparability purposes only, assuming that amounts included in deferred
Percentage Lease revenue at September 30, 1998 were recognized at September 30,
1998, the Company would have had revenues for 1998 of $79,733,000, consisting of
$79,152,000 of Percentage Lease revenue from the Lessees and $581,000 of other
revenue, compared with $48,700,000, $47,736,000 and $964,000, respectively, for
1997.
Depreciation and Amortization was $24,071,000 in the aggregate for 1998 compared
with $13,745,000 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 $7,051,000
for 1998 compared with $3,948,000 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 $12,008,000 compared with $7,291,000 for 1997.
This increase is due primarily to increased borrowings for hotel acquisitions
offset by a reduction in the interest rate of the Company's line of credit.
General and administrative expenses for 1998 were $2,786,000 compared with
$1,697,000 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 applicable to common shareholders for 1998 was $5,202,000, or $0.16
per diluted share (or $0.24 per diluted share before the extraordinary loss),
compared with $17,022,000, or $0.69 per diluted share, for 1997. This decrease
in the earnings per diluted share was due primarily 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.
23
<PAGE> 26
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 borrowing on its New Line
of Credit or other facilities, exchanging equity for hotel properties or by
accessing the capital markets.
Cash and cash equivalents (including restricted cash and cash equivalents) at
September 30, 1998 were $8,726,000, including approximately $3,158,000 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 $4,362,000 that is held in escrow to pay for insurance,
taxes, and capital expenditures for certain Hotels.
Net cash provided by operating activities for the nine months ended September
30, 1998 and 1997 was $51,684,000 and $31,399,000, respectively.
Net cash used in investing activities was $139,553,000 for the nine months ended
September 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 $5,900,000, (d) acquiring a Residence Inn by Marriott hotel in
Gaithersburg, Maryland for approximately $15,800,000 and (e) renovations at
certain hotels of approximately $18,800,000.
Net cash provided by financing activities was $84,847,000 for the nine months
ended September 30, 1998, consisting primarily of net proceeds from the Series A
Preferred Share offering of $111,570,000, net proceeds from long-term debt of
$11,039,000, distributions paid of $34,928,000 and loan origination fees and
costs paid of $2,738,000.
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.
On September 2, 1998, the SEC declared effective a registration statement
covering the resale of Series A Preferred Shares acquired in the 144A Offering
or a subsequent exempt resale.
24
<PAGE> 27
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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. The holders of Common Units may also 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.
The Company's consolidated indebtedness was 23.0% of its investment in hotels,
at cost, at September 30, 1998. At September 30, 1998, the Company had
outstanding indebtedness of approximately $171,494,000, of which approximately
77.6% 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 September 30, 1998, a one
percentage point increase in the LIBOR rate would increase annual interest
charges $285,000. 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.
25
<PAGE> 28
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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.
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.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any systems that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major system failures or
miscalculations. The Company and the JF Lessee have initiated a program to
address the challenges the Year 2000 may present to their systems and
applications. This program includes or will include computer systems and
applications operated by the Company or the JF Lessee, systems of third parties
upon whose data or functionality the Company or the JF Lessee rely (for example,
Marriott, the Summerfield Lessee, banks, credit card companies, utilities and
Patriot), and certain other systems or assets which contain date sensitive
technology.
26
<PAGE> 29
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
YEAR 2000 ISSUE, CONTINUED
Based upon its investigation to date, neither the Company nor the JF Lessee has
yet identified any material Year 2000 issues with respect to their systems. By
the end of the first quarter of 1999, management expects to substantially
complete (i) the assessment phase of the program and (ii) any necessary
modifications to their own systems, and necessary conversions to new software
and related testing. As part of the compliance program, the Company has
initiated communications with those third parties whose failure to timely
convert their systems could reasonably be expected to have an impact on the
Company's operations.
Although the Company does not believe the Year 2000 issue will have a material
impact on the Company's operations, there can be no guarantee that the
Company's, the JF Lessee's or any third party's Year 2000 remediation efforts
will by fully compliant. If non-compliance is extensive, this could have a
material effect on the Company's or the JF Lessee's business, financial
conditions, results of operation and liquidity. The Company has not hired any
external consultants or incurred any additional costs to address possible
remedial efforts in connection with computer software that could be affected by
the Year 2000 problem, although it may retain such consultants or incur
additional costs in the future as circumstances warrant. The use of the
Company's own information system personnel to address the Year 2000 problem has
not delayed other information systems projects or affected normal operations.
Management does not consider the incurred or estimated costs of its compliance
program to be material. This assessment could differ materially if either the
scope or schedule progress with its compliance program is significantly altered.
The Company and the JF Lessee will establish a contingency plan to handle any
unknown or potential issues that may arise from the Year 2000 issue. The Company
expects this contingency plan to be completed in the third quarter of 1999. The
Company's and the JF Lessee's critical applications include its reservations
systems, credit card transmission and payment systems, utilities, payroll,
accounts payable and receivable and other financial applications. Should any or
all of the critical applications fail to perform properly subsequent to January
1, 2000, other than utilities, the Company will resort to temporary manual
processing, which is not expected to have a material adverse impact on its
operations in the short-term.
This discussion includes forward-looking statements of the Company's efforts and
managements expectations relating to Year 2000 readiness. The Company's ability
to achieve Year 2000 readiness and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and costs of programming and testing resources, vendors' ability to install or
modify proprietary hardware and software, unanticipated problems identified in
the ongoing Year 2000 readiness review and problems that may not be identifiable
despite reasonable efforts.
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 ("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. The Company implemented EITF
98-9 during the second quarter of 1998 and has made an additional adjustment to
NAREIT defined FFO. The Company calculates FFO as described previously with an
adjustment for
27
<PAGE> 30
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
FUNDS FROM OPERATIONS, CONTINUED
Percentage Lease revenue deferred in accordance with EITF 98-9. The Company
believes that this additional adjustment of 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. 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 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 Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income applicable to
common shareholders $ 13,118 $ 7,353 $ 5,202 $ 17,022
Minority interest, common 1,084 736 392 1,316
Minority interest, preferred 1,173 1,159 3,520 3,393
Extraordinary loss 2,760
Depreciation 7,739 5,608 22,806 12,607
Preferred share dividends 2,496 3,688
Deferred Percentage Lease revenue (3,328) 17,916
------------ ----------- ----------- -----------
FFO $ 22,282 $ 14,856 $ 56,284 $ 34,338
============ =========== =========== ===========
Denominator for diluted
earnings per share 34,111,162 29,446,054 33,518,116 24,842,221
Weighted average
Common Units 1,777,218 3,149,752 2,516,567 1,911,523
Weighted average
Preferred Units 4,063,329 4,063,329 4,063,329 4,063,329
Weighted average convertible
preferred shares 6,857,493 3,372,514
------------ ----------- ----------- -----------
Denominator for FFO
per share 46,809,202 36,659,135 43,470,526 30,817,073
============ =========== =========== ===========
FFO per share $ 0.48 $ 0.41 $ 1.29 $ 1.11
============ =========== =========== ===========
</TABLE>
28
<PAGE> 31
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.
29
<PAGE> 32
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.
30
<PAGE> 33
INNKEEPERS USA TRUST
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit - 27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - None
31
<PAGE> 34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INNKEEPERS USA TRUST
November 12, 1998 /s/ Gregory M. Fay
- ----------------- ----------------------------------------
Gregory M. Fay
Vice President of Accounting
(Chief Accounting Officer)
32
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,206
<SECURITIES> 0
<RECEIVABLES> 13,991
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 744,453
<DEPRECIATION> 58,671
<TOTAL-ASSETS> 714,878
<CURRENT-LIABILITIES> 0
<BONDS> 171,494
0
115,750
<COMMON> 342
<OTHER-SE> 326,692
<TOTAL-LIABILITY-AND-EQUITY> 714,878
<SALES> 61,236
<TOTAL-REVENUES> 61,817
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,792
<INCOME-PRETAX> 15,562
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,562
<DISCONTINUED> 0
<EXTRAORDINARY> (2,760)
<CHANGES> 0
<NET-INCOME> 5,202
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
