<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 Plaza (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 August 1, 1999, was 34,676,586.
<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
June 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Income for the
three and six months ended June 30, 1999
and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 (unaudited) 3
Notes to Consolidated Financial Statements 4
INNKEEPERS HOSPITALITY
----------------------
Combined Balance Sheets at June 30, 1999
(unaudited) and December 31, 1998 12
Combined Statements of Income for the three and
six months ended June 30, 1999 and 1998
(unaudited) 13
Combined Statements of Cash Flows for the six
months ended June 30, 1999 and 1998
(unaudited) 14
Notes to Combined Financial Statements 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 31
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>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties:
Land and improvements $ 95,197 $ 90,103
Buildings and improvements 621,110 573,846
Furniture and equipment 94,317 87,828
Renovations in process 9,855 12,228
Hotels under development 259 216
--------- ---------
820,738 764,221
Accumulated depreciation (80,759) (65,923)
--------- ---------
Net investment in hotel properties 739,979 698,298
Cash and cash equivalents 4,002 2,642
Restricted cash and cash equivalents 7,428 6,893
Due from Lessees 14,074 10,699
Deferred expenses, net 3,732 4,191
Deposits under purchase agreements -- 1,000
Other assets 1,423 1,391
--------- ---------
Total assets $ 770,638 $ 725,114
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 241,380 $ 191,183
Accounts payable and accrued expenses 8,380 6,714
Distributions payable 13,077 13,023
Minority interest in Partnership 60,077 59,802
--------- ---------
Total liabilities 322,914 270,722
--------- ---------
Commitments and contingencies (Note 4)
Shareholders' equity:
Preferred Shares, $.01 par value, 20,000,000 shares
authorized, 4,630,000 shares issued and outstanding 115,750 115,750
Common Shares, $.01 par value, 100,000,000 shares
authorized, 34,676,586 and 34,541,586 shares issued
and outstanding at June 30, 1999 and
December 31, 1998, respectively 347 345
Additional paid-in capital 367,169 365,711
Unearned compensation (5,801) (4,901)
Distributions in excess of net earnings (29,741) (22,513)
--------- ---------
Total shareholders' equity 447,724 454,392
--------- ---------
Total liabilities and shareholders' equity $ 770,638 $ 725,114
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE> 4
INNKEEPERS USA TRUST
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Percentage Lease revenue $ 29,404 $ 26,457 $ 55,210 $ 50,137
Other revenue 306 188 515 364
-------- -------- -------- --------
Total revenue 29,710 26,645 55,725 50,501
-------- -------- -------- --------
Expenses:
Depreciation 9,380 7,626 18,092 15,067
Amortization of franchise costs 19 18 37 36
Ground rent 114 113 228 225
Interest expense 4,314 3,917 8,274 8,722
Amortization of loan origination
fees 231 247 469 515
Real estate and personal
property taxes and property
insurance 2,955 2,405 5,932 4,760
General and administrative 767 818 1,922 1,944
Amortization of unearned
compensation 338 148 695 297
-------- -------- -------- --------
Total expenses 18,118 15,292 35,649 31,566
-------- -------- -------- --------
Income before minority interest
and extraordinary loss 11,592 11,353 20,076 18,935
Minority interest, common (341) (724) (546) (1,016)
Minority interest, preferred (1,174) (1,174) (2,347) (2,347)
Extraordinary loss -- -- -- (2,760)
-------- -------- -------- --------
Net income 10,077 9,455 17,183 12,812
Preferred share dividends (2,496) (1,192) (4,992) (1,192)
-------- -------- -------- --------
Net income applicable
to common shareholders $ 7,581 $ 8,263 $ 12,191 $ 11,620
======== ======== ======== ========
Earnings per share data:
Basic - before extraordinary loss $ 0.22 $ 0.25 $ 0.36 $ 0.44
Extraordinary loss -- -- -- (0.08)
-------- -------- -------- --------
Basic $ 0.22 $ 0.25 $ 0.36 $ 0.35
======== ======== ======== ========
Diluted - before extraordinary loss $ 0.22 $ 0.25 $ 0.36 $ 0.43
Extraordinary loss -- -- -- (0.08)
-------- -------- -------- --------
Diluted $ 0.22 $ 0.25 $ 0.36 $ 0.35
======== ======== ======== ========
</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)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
-------- ---------
(Unaudited) (Unaudited)
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,183 $ 12,812
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 19,293 15,915
Minority interests 2,893 3,363
Extraordinary loss -- 2,760
Changes in operating assets and liabilities:
Due from Lessees (3,375) (8,608)
Other assets (32) 391
Accounts payable and accrued expenses 1,666 2,249
-------- ---------
Net cash provided by operating activities 37,628 28,882
-------- ---------
Cash flows from investing activities:
Investment in hotel properties (57,957) (112,229)
Net deposits into restricted cash accounts (535) (1,813)
Payments for franchise fees -- (82)
Deposits under purchase agreements -- (1,250)
-------- ---------
Net cash used in investing activities (58,492) (115,374)
-------- ---------
Cash flows from financing activities:
Proceeds from long-term debt issuance 55,500 279,064
Payments on long-term debt (5,303) (275,732)
Dividend reinvestment plan and shelf registration costs paid (135) (32)
Distributions paid to unit holders (3,210) (3,932)
Distributions paid to shareholders (24,373) (17,812)
Redemption of units (27) (64)
Proceeds from issuance of preferred shares, net -- 111,848
Loan origination fees and costs paid (228) (2,611)
-------- ---------
Net cash provided by financing activities 22,224 90,729
-------- ---------
Net increase in cash and cash equivalents 1,360 4,237
Cash and cash equivalents at beginning of period 2,642 4,228
-------- ---------
Cash and cash equivalents at end of period $ 4,002 $ 8,465
======== =========
Supplemental cash flow information:
Interest paid $ 7,601 $ 8,799
======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RECENT DEVELOPMENTS
ORGANIZATION
Innkeepers USA Trust ("Innkeepers") is a self-administered real estate
investment trust ("REIT"), which at June 30, 1999, owned interests in
67 hotels with an aggregate of 8,138 rooms/suites (the "Hotels")
through its general partnership interest in Innkeepers USA Limited
Partnership (with its subsidiary partnerships, the "Partnership" and
collectively with Innkeepers, the "Company"). The Hotels are comprised
of 44 Residence Inn by Marriott hotels, 12 Hampton Inn hotels, six
Summerfield Suites hotels, one TownePlace Suites by Marriott hotel, one
Comfort Inn hotel, one Courtyard by Marriott hotel, one Holiday Inn
Express hotel and one Sunrise Suites hotel. The Hotels are located in
23 states, with 11 hotels located in California.
The Company leases 60 of the Hotels to Innkeepers Hospitality, Inc. (or
other entities under common ownership, collectively the "IH Lessee")
and seven of the Hotels to affiliates of Wyndham International, Inc.
(the "Summerfield Lessee" and collectively with the IH 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 IH Lessee. 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 IH Lessee included in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998 (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 8, 1999, the Company purchased two Residence Inn by Marriott
hotels located in Chicago (Rosemont), Illinois and Richmond
(Northwest), Virginia with an aggregate of 296 rooms for a cash price
of approximately $31,268,000. The purchase price was funded through the
Company's $250,000,000 line of credit (the "Line of Credit") and
available cash.
4
<PAGE> 7
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND RECENT DEVELOPMENTS, CONTINUED
On March 12, 1999, the Company purchased a 112-room Residence Inn by
Marriott hotel located in Detroit (Livonia), Michigan for a cash price
of approximately $10,200,000. The purchase price was funded through the
Line of Credit and available cash. This purchase completes the
acquisition of six Residence Inn by Marriott hotels announced by the
Company in April 1998.
On June 1, 1999, the Company opened a 95-room TownePlace Suites by
Marriott hotel located in Horsham, Pennsylvania which is operated by
Marriott, as defined in Note 4. This hotel's cost of approximately
$8,000,000 was funded through the Line of Credit and available cash.
On March 11, 1996, an entity controlled by the Chief Executive Officer
of the Company (the "Seller") purchased a vacant parcel of land in
Tysons Corner, Virginia for $915,000. The Seller then began the process
of obtaining the governmental approvals necessary to build a hotel on
the land and incurred costs of approximately $70,000 in such efforts.
In September 1997, the Seller contracted to sell the land to
Summerfield Hotel Corporation ("Summerfield") for $2,400,000.
Summerfield then continued the process of obtaining the governmental
approvals and incurred costs of approximately $200,000. In October
1998, Summerfield failed to close on the purchase of the land and
forfeited its deposit under the purchase agreement. The Seller received
several offers from unrelated buyers to purchase the land for amounts
approximating the Summerfield price between October 1998 and May 1999
and on May 26, 1999, the Company entered into a contract to purchase
the land for $2,400,000 from the Seller. The Company anticipates
developing a 120-room Residence Inn by Marriott hotel on the land at a
cost of approximately $11,600,000 and anticipates opening the hotel
during the fourth quarter of 2000. The land and development costs are
expected to be funded through the Line of Credit and available cash.
On July 22, 1999, the Company entered into a commitment with a bank
(the "Bank") for a new collateralized term loan (the "Fourth Term
Loan"). The Fourth Term Loan is expected to have a principal amount of
$58,000,000, bear interest at a fixed rate of 7.16%, have interest only
payments for the first three years, have principal amortization
beginning in the fourth year calculated over a 22-year period, and is
anticipated to be collateralized by eight hotels. The Fourth Term Loan
is expected to close by the end of September 1999 and the net proceeds
are anticipated to be used to reduce borrowings outstanding under the
Line of Credit. If the company fails to close on the Fourth Term Loan,
the Company could become responsible for certain costs of the Bank,
including (i) due diligence costs pertaining to the proposed collateral
hotels, (ii) the costs of unwinding any interest rate hedge instruments
entered into by the Bank and (iii) legal fees.
2. RESTATEMENT OF 1998 INTERIM RESULTS
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
provided that a lessor should defer recognition of contingent rental
income in interim periods until specified annual targets that trigger
the contingent income are met. The Company reviewed the terms of its
Percentage Leases and determined that the provisions of
5
<PAGE> 8
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. RESTATEMENT OF 1998 INTERIM RESULTS, CONTINUED
EITF 98-9 impacted the Company's revenue recognition on an interim
basis, but had 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 of 1998 in accordance with the
new pronouncement.
On November 19, 1998, the EITF rescinded EITF 98-9 and allowed
companies to recognize revenue on the basis used prior to the issuance
of EITF 98-9. Therefore, the Company has restated the three and six
months ended June 30, 1998 to recognize Percentage Lease revenue on the
basis used prior to the issuance of EITF 98-9.
The following table presents the effects of the reversal of EITF 98-9
on the three and six months ended June 30, 1998 (in thousands, except
per share data):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
---------------------------------------- ----------------------------------------
As As As As
Reported Adjustments Restated Reported Adjustments Restated
-------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Percentage Lease Revenue $ 15,557 $10,900 $26,457 $ 28,893 $21,244 $50,137
Net income (loss) applicable
to common shareholders (1,770) 10,033 8,263 (7,916) 19,536 11,620
Basic and diluted
earnings (loss) per share (0.05) 0.30 0.25 (0.24) 0.59 0.35
</TABLE>
6
<PAGE> 9
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $ 10,077,000 $ 9,455,000 $ 17,183,000 $ 12,812,000
Preferred share dividends (2,496,000) (1,192,000) (4,992,000) (1,192,000)
------------ ------------ ------------ ------------
Net income applicable
to common shareholders 7,581,000 8,263,000 12,191,000 11,620,000
Extraordinary loss -- -- -- 2,760,000
------------ ------------ ------------ ------------
Net income applicable
to common shareholders
before extraordinary loss $ 7,581,000 $ 8,263,000 $ 12,191,000 $ 14,380,000
============ ============ ============ ============
Denominator:
Denominator for basic
earnings per share -
weighted average shares 34,070,133 32,979,064 34,067,114 32,918,982
Effect of dilutive securities:
Stock options 19,199 242,611 24,672 279,636
Restricted shares 78,104 13,412 76,502 16,869
------------ ------------ ------------ ------------
Denominator for diluted
earnings per share - adjusted
weighted average shares 34,167,436 33,235,087 34,168,288 33,215,487
============ ============ ============ ============
Earnings per share data:
Basic - before extraordinary loss $ 0.22 $ 0.25 $ 0.36 $ 0.44
Extraordinary loss -- -- -- (0.08)
------------ ------------ ------------ ------------
Basic $ 0.22 $ 0.25 $ 0.36 $ 0.35
============ ============ ============ ============
Diluted - before extraordinary loss $ 0.22 $ 0.25 $ 0.36 $ 0.43
Extraordinary loss -- -- -- (0.08)
------------ ------------ ------------ ------------
Diluted $ 0.22 $ 0.25 $ 0.36 $ 0.35
============ ============ ============ ============
</TABLE>
7
<PAGE> 10
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Pursuant to the Partnership's partnership agreement, limited partners
who hold common units of limited partnership interest in the
Partnership ("Common Units") have redemption rights ("Redemption
Rights") which enable them to redeem each of their Common Units for
cash at the then-current fair market value of a common share or, at
Innkeepers' option, one common share. Substantially all of the
Redemption Rights are currently effective. The aggregate number of
Common Units outstanding was 1,598,117 and 1,777,218 at June 30, 1999
and 1998, respectively.
Additionally, limited partners who hold preferred units of limited
partnership interest in the Partnership ("Class B Preferred Units" and
collectively with the Common Units, "Units") have Redemption Rights
which enable them to redeem each of their Preferred Units for cash at
the then-current fair market value of a common share or, at Innkeepers'
option, one common share. The Class B 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 aggregate
number of Class B Preferred Units outstanding was 4,063,329 at June 30,
1999 and 1998.
The Company pays regular quarterly distributions on its common shares
and Common Units and the current quarterly distribution is $0.28 per
share or unit ($1.12 on an annualized basis). Quarterly preferred
distributions are payable on each Class B Preferred Unit, and are based
on the dividends payable on the common shares (the minimum annual
distribution is $1.10 and the maximum is $1.155). The current quarterly
preferred distribution rate is $0.28875 for each Class B Preferred Unit
($1.155 on an annualized basis).
In May 1998, the Company issued 4,630,000 8.625% Series A cumulative
convertible preferred shares of beneficial interest (the "Series A
Preferred Shares"). The Series A Preferred Shares are convertible into
1.4811 common shares at any time and, therefore, the Company has
reserved 6,857,493 common shares for issuance upon conversion. The
Series A Preferred Shares may be redeemed 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 Hotels are operated under franchise or management agreements with
the Lessees as Residence Inn by Marriott, Summerfield Suites, Sunrise
Suites, Hampton Inn, Courtyard by Marriott, TownePlace Suites by
Marriott, Holiday Inn Express or Comfort Inn hotels. The Company has
paid the cost of obtaining or transferring certain franchise license
agreements to the IH Lessee. For certain hotels which did not require a
franchise transfer fee, the Company has advanced to the IH Lessee the
working capital deposit required under the IH Lessee's management
agreements with wholly-owned subsidiaries of Marriott International,
Inc. ("Marriott"). The franchise and management agreements require the
Lessees to pay fees based on percentages of hotel revenue.
8
<PAGE> 11
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS,
CONTINUED
The Company has guaranteed certain of the IH Lessee's obligations under
the franchise licenses and is secondarily liable for certain of the IH
Lessee's obligations under the Marriott management agreements,
generally in exchange for certain rights to substitute replacement
lessees if the Company terminates the related Percentage Lease.
Under the Percentage Leases, the Company generally is obligated to pay
the costs of certain capital improvements, real estate and personal
property taxes and property insurance for the Hotels. Additionally, the
Company must 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 expenditures at the Hotels. The Second Term Loan and Third Term
Loan 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.
For the six months ended June 30, 1999 and 1998, Percentage Lease
revenue consisted of base rents of $29,557,000 and $27,581,000,
respectively, and percentage rents in excess of base rents of
$25,653,000 and $22,556,000, respectively. The Lessees have future
minimum base rent commitments to the Company under the Percentage Lease
agreements. Minimum future base rent revenue under the Percentage Lease
agreements, assuming no further increases in base rent pursuant to
increases in the Consumer Price Index, are as follows through the year
2012 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1999 $ 60,677
2000 60,677
2001 60,677
2002 60,677
2003 60,677
Thereafter 337,589
--------
$640,974
========
</TABLE>
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 Company's consolidated indebtedness was approximately
$241,380,000, or 29.4% of its investment in hotels, at cost, at June
30, 1999.
The Company has two fifty-year term ground leases expiring July 2034
and May 2035, respectively, and a 98-year term ground lease expiring
October 2084, on the land underlying three of its hotel properties.
Minimum annual rent payable under these leases is approximately
$460,000 in the aggregate.
9
<PAGE> 12
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS,
CONTINUED
The Company has paid $50,000 to the IH Lessee for shared personnel and
services in each of the six month periods ended June 30, 1999 and 1998.
This amount has been recorded in general and administrative expense in
the statements of income.
The Company places substantially all of its insurance with a full
service commercial insurance broker that has developed a specialty in
brokering insurance for hotels. The broker is a private company of
which Jack P. DeBoer, a trustee of the Company, owns 47% of the stock.
For the year ended December 31, 1998, the gross amount of premiums paid
by the Company for insurance placed by this broker was approximately
$930,000.
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 offering
in 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 IH 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.
10
<PAGE> 13
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. PRO FORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Percentage Lease revenue $ 55,742 $ 54,937
Other revenue 515 364
-------- --------
Total revenue 56,257 55,301
-------- --------
Expenses:
Depreciation 18,242 16,799
Amortization of franchise costs 37 36
Ground rent 228 225
Interest expense 8,526 9,077
Amortization of loan origination fees 469 515
Real estate and personal property taxes
and property insurance 5,976 5,675
General and administrative 1,922 1,944
Amortization of unearned compensation 695 297
-------- --------
Total expenses 36,095 34,568
-------- --------
Income before minority interest 20,162 20,733
Minority interest, common (564) (656)
Minority interest, preferred (2,347) (2,347)
-------- --------
Net income 17,251 17,730
Preferred share dividends (4,992) (4,992)
-------- --------
Net income applicable to
common shareholders $ 12,259 $ 12,738
======== ========
Diluted earnings per share $ 0.36 $ 0.37
</TABLE>
11
<PAGE> 14
INNKEEPERS HOSPITALITY
COMBINED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,176 $13,562
Marketable securities 3,254 2,366
Accounts receivable, net 8,760 4,384
Prepaid expenses 210 443
-------- -------
Total current assets 29,400 20,755
Other assets 117 158
-------- -------
Total assets $ 29,517 $20,913
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,618 $ 4,139
Accrued expenses 4,456 3,466
Payable to Manager 4,464 2,442
Due to Partnership 12,878 9,882
-------- -------
Total current liabilities 26,416 19,929
Other long-term liabilities 910 745
-------- -------
Total liabilities 27,326 20,674
-------- -------
Commitments (Note 2)
Shareholders' equity:
Common shares, $1 par value, 7,000 shares
authorized, issued and outstanding 7 7
Unrealized gain (loss) on marketable securities (189) 26
Retained earnings 2,373 206
-------- -------
Total shareholders' equity 2,191 239
-------- -------
Total liabilities and shareholders' equity $ 29,517 $20,913
======== =======
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
12
<PAGE> 15
INNKEEPERS HOSPITALITY
COMBINED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- --------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross operating revenue:
Rooms $ 54,141 $ 46,729 $ 100,391 $ 88,301
Food and beverage 41 119 54 277
Telephone 1,539 1,366 2,912 2,677
Other 1,035 866 1,926 1,673
-------- -------- --------- --------
Gross operating revenue 56,756 49,080 105,283 92,928
Departmental expenses:
Rooms 11,548 9,736 20,708 17,389
Food and beverage 51 137 52 287
Telephone 529 510 976 957
Other 430 335 855 682
-------- -------- --------- --------
Total departmental profit 44,198 38,362 82,692 73,613
-------- -------- --------- --------
Unallocated operating expenses:
General and administrative 4,018 3,537 7,699 6,922
Franchise fees 3,232 2,926 6,167 5,620
Advertising and promotions 2,494 2,131 4,742 4,079
Utilities 1,770 1,602 3,926 3,499
Repairs and maintenance 2,086 2,033 4,268 3,863
Management fees 1,178 818 2,261 1,689
-------- -------- --------- --------
Total unallocated operating
expenses 14,778 13,047 29,063 25,672
-------- -------- --------- --------
Gross profit 29,420 25,315 53,629 47,941
Insurance (249) (245) (468) (509)
Lessee overhead (729) (347) (1,505) (1,142)
Percentage Lease payments (26,459) (22,957) (48,456) (43,027)
-------- -------- --------- --------
Net income 1,983 1,766 3,200 3,263
Other comprehensive income -
unrealized gains (losses) on
marketable securities 154 (509) (215) (414)
-------- -------- --------- --------
Comprehensive income $ 2,137 $ 1,257 $ 2,985 $ 2,849
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
13
<PAGE> 16
INNKEEPERS HOSPITALITY
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1999 1998
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,200 $ 3,263
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 41 24
Changes in operating assets and liabilities:
Accounts receivable (4,376) (4,991)
Inventory -- (30)
Prepaid expenses 233 298
Accounts payable 479 1,811
Accrued expenses 990 809
Payable to Manager 2,022 216
Due to Partnership 2,996 7,437
-------- --------
Net cash provided by operating activities 5,585 8,837
-------- --------
Cash flows from investing activities:
Purchases of equipment -- (19)
Advances from Partnership 165 --
Purchase of marketable securities (1,103) (1,035)
-------- --------
Net cash used in investing activities (938) (1,054)
-------- --------
Cash flows from investing activities:
Distributions (1,033) (1,131)
-------- --------
Net cash used in investing activities (1,033) (1,131)
-------- --------
Net increase in cash and cash equivalents 3,614 6,652
Cash and cash equivalents at beginning of period 13,562 7,863
-------- --------
Cash and cash equivalents at end of period $ 17,176 $ 14,515
======== ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
14
<PAGE> 17
INNKEEPERS HOSPITALITY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Innkeepers Hospitality, Inc., formally known as JF Hotel, Inc., and
other entities with identical ownership (collectively "IH" or the "IH
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 subsidiary partnerships
(collectively the "Partnership," and together with Innkeepers, the
"Company"). The IH Lessee leased 60 hotels (the "IH Leased Hotels")
from the Company at June 30, 1999.
The IH Lessee operates 31 of the IH Leased Hotels, wholly-owned
subsidiaries of Marriott International, Inc. ("Marriott") operate 27 of
the IH Leased Hotels, and an unaffiliated party operates two of the
Hotels.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto of the Company and the IH
Lessee included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (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 AND RELATED PARTY TRANSACTIONS
Marriott operates 27 of the IH Leased Hotels under management
agreements with the IH Lessee (the "Marriott Management Agreements").
The Marriott Management Agreements, generally, have an initial term of
13 years and provide for base fees and incentive fees which are based
on the performance of each Marriott managed hotel, as defined in the
Marriott Management Agreements. The payment of incentive fees is
subordinate to the IH Lessee's obligations under the Percentage Leases
at the Marriott managed hotels. The Marriott Management Agreements also
contain substantial penalties for early termination without cause.
Amounts due to Marriott under the Marriott Management Agreements are
included in "Payable to Manager" in the accompanying combined balance
sheets. The right to operate the 27 hotels as Residence Inn by Marriott
or TownePlace Suites by Marriott hotels is contained in the Marriott
Management Agreements. In lieu of a franchise fee, the Marriott
Management Agreements provide for a system fee of 5% of gross revenues
at the Marriott managed hotels. The system fee is included in
"Franchise fees" in the accompanying combined statements of income.
Two of the IH Leased Hotels are operated under management agreements
with an unaffiliated party with remaining terms of approximately two
years and providing for a base fee of 2% of gross revenues and an
incentive fee based on the performance of the hotels managed.
15
<PAGE> 18
INNKEEPERS HOSPITALITY
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS, CONTINUED
The Company has reimbursed the IH Lessee $50,000 for shared personnel
and services in each of the six month periods ended June 30, 1999 and
1998, respectively. The Company has paid the cost of obtaining or
transferring certain franchise license agreements to the IH Lessee. For
certain hotels which did not require a franchise transfer fee, the
Company has advanced to the IH Lessee the working capital deposit
required under the Marriott Management Agreements. These advances are
included in "Other long-term liabilities" in the accompanying combined
balance sheets. Percentage Lease expense due to the Company, which
remains unpaid at June 30, 1999 and 1998, is included in "Due to
Partnership" in the accompanying combined balance sheets. The Company
has also guaranteed certain of the IH Lessee's obligations under its
franchise licenses (and is secondarily liable for certain of the IH
Lessee's obligations under the Marriott Management Agreements),
generally in exchange for certain rights to substitute a replacement
lessee as the franchisee (or as the party to the Marriott Management
Agreement) if the Company terminates the related Percentage Lease.
16
<PAGE> 19
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, 1998.
GENERAL
For background information relating to the Company and the IH 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 Innkeepers Hospitality appearing elsewhere
herein, and in the Company's Annual Report on Form 10-K for the year ending
December 31, 1998.
The Company acquired the following hotel properties during the six months ended
June 30, 1999:
<TABLE>
<CAPTION>
Number of Date Purchase
Hotel Suites/Rooms Acquired Price
- ----- ------------ --------------- --------
<S> <C> <C> <C>
Residence Inn-Richmond (Northwest), VA 104 January 8, 1999 (a)
Residence Inn-Chicago (Rosemont), IL 192 January 8, 1999 (a)
Residence Inn-Detroit (Livonia), MI 112 March 12, 1999 $10,200,000
TownePlace Suites - Horsham, PA 95 May 20, 1999 $ 8,000,000
</TABLE>
(a) Aggregate purchase price of $31,268,000
17
<PAGE> 20
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
THE HOTELS
The following chart summarizes information regarding the Hotels at June 30,
1999.
<TABLE>
<CAPTION>
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
- --------------------- ---------------- ------------
<S> <C> <C>
Upscale extended-stay hotels:
Residence Inn 44 5,194
Summerfield Suites 6 759*
Sunrise Suites 1 96
-- -----
51 6,049
Limited service hotels:
Hampton Inn 12 1,527
Courtyard by Marriott 1 136
TownePlace Suites 1 95
Comfort Inn 1 127
Holiday Inn Express 1 204
-- -----
16 2,089
Total 67 8,138
== =====
</TABLE>
* includes 298 two-bedroom suites
18
<PAGE> 21
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 five hotels which were not open during the first and
second quarters of 1998. Management believes that the operating results achieved
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 relatively stable industry
conditions. No assurance can be given that the trends reflected in the following
table will continue or that occupancy, ADR and RevPAR will not decrease due to
changes in national or local economic, hospitality or other industry conditions.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, % June 30, %
1998 1999 Inc.(dec) 1998 1999 Inc.(dec)
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Portfolio(1)
- --------------------------------
Average Daily Rate $ 99.61 $100.53 0.9 $ 99.76 $100.08 0.3
Occupancy 81.68% 81.31% (0.5) 79.58% 79.51% (0.1)
RevPAR $ 81.36 $ 81.74 0.5 $ 79.39 $ 79.57 0.2
By Type
- --------------------------------
Upscale Extended Stay Hotels(2)
Average Daily Rate $107.41 $106.82 (0.6) $107.10 $105.94 (1.1)
Occupancy 84.01% 84.02% 0.0 82.76% 82.92% 0.2
RevPAR $ 90.23 $ 89.75 (0.5) $ 88.64 $ 87.85 (0.9)
Limited Services Hotels(3)
Average Daily Rate $ 75.63 $ 80.83 6.9 $ 76.22 $ 81.06 6.4
Occupancy 75.25% 73.82% (1.9) 70.85% 70.13% (1.0)
RevPAR $ 56.91 $ 59.67 4.9 $ 54.00 $ 56.85 5.3
</TABLE>
(1) 62 hotels (excludes five newly-developed hotels)
(2) 47 hotels (excludes four newly-developed hotels)
(3) 15 hotels (excludes one newly-developed hotel)
19
<PAGE> 22
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the Company.
Comparison of the Three Months Ended June 30, 1999 ("1999") to the Three Months
Ended June 30, 1998 ("1998")
The Company had revenues for 1999 of $29,710,000, consisting of $29,404,000 of
Percentage Lease revenue from the Lessees and $306,000 of other revenue,
compared with $26,645,000, $26,457,000 and $188,000, respectively, for 1998. The
increase in Percentage Lease revenue is due, primarily, to the number of hotels
owned increasing from 62 at April 1, 1998, to 63 at June 30, 1998, to 66 at
April 1, 1999 and to 67 at June 30, 1999.
Depreciation, amortization of franchise costs, amortization of loan origination
fees, and amortization of unearned compensation ("Depreciation and
Amortization") were $9,968,000 in the aggregate for 1999 compared with
$8,039,000 for 1998. 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 $2,955,000
for 1999 compared with $2,405,000 for 1998. This increase was primarily due to
the increase in the number of hotels owned as discussed previously and increases
in assessed values of certain hotels for real estate tax purposes.
Interest expense for 1999 was $4,314,000 compared with $3,917,000 for 1998. This
increase is due primarily to additional borrowings for hotel acquisitions
subsequent to June 30, 1998 offset by a slight decrease in the interest rate on
the Line of Credit.
General and administrative expenses remained relatively constant in 1999 both in
absolute dollars and as a percentage of total revenue.
Net income for 1999 was $10,077,000, or $0.22 per diluted share, compared with
$9,455,000, or $0.25 per diluted share, for 1998 as a result of the items
discussed above.
20
<PAGE> 23
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Comparison of the Six Months Ended June 30, 1999 ("1999") to the Six Months
Ended June 30, 1998 ("1998")
The Company had revenues for 1999 of $55,725,000, consisting of $55,210,000 of
Percentage Lease revenue from the Lessees and $515,000 of other revenue,
compared with $50,501,000, $50,137,000 and $364,000, respectively, for 1998. The
increase in Percentage Lease revenue is due, primarily, to the number of hotels
owned increasing from 56 at January 1, 1998, to 63 at June 30, 1998 and January
1, 1999, and to 67 at June 30, 1999.
Depreciation and Amortization were $19,293,000 in the aggregate for 1999
compared with $15,915,000 for 1998. 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 $5,932,000
for 1999 compared with $4,760,000 for 1998. This increase was primarily due to
the increase in the number of hotels owned as discussed previously and increases
in assessed values of certain hotels for real estate tax purposes.
Interest expense for 1999 was $8,274,000 compared with $8,722,000 for 1998. This
decrease was due to the reduction in borrowings outstanding under the Line of
Credit resulting from the application of the net proceeds from the Company's May
1998 preferred share offering, offset by additional borrowings for hotel
acquisitions subsequent to June 30, 1998.
General and administrative expenses remained relatively constant in 1999 both in
absolute dollars and as a percentage of total revenue.
Net income for 1999 was $17,183,000, or $0.36 per diluted share, compared with
$12,812,000, or $0.35 per diluted share, for 1998. This increase was due
primarily to the extraordinary loss in 1998 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 at 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 Line of
Credit or other facilities, and exchanging equity for hotel properties or
possibly accessing the capital markets if market conditions permit.
21
<PAGE> 24
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Cash and cash equivalents (including restricted cash and cash equivalents) at
June 30, 1999 and 1998 were $11,430,000 and $17,026,000, including approximately
$3,716,000 and $2,507,000, respectively, 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 $3,712,000 and
$6,054,000, respectively, that is held in escrow to pay for insurance, taxes,
and capital expenditures for certain Hotels.
Net cash provided by operating activities for the six months ended June 30, 1999
and 1998 was $37,628,000 and $28,882,000, respectively.
Net cash used in investing activities was $58,492,000 for the six months ended
June 30, 1999. This was comprised primarily of the Company (a) acquiring three
Residence Inn by Marriott hotels located in Richmond (Northwest), Virginia,
Chicago (Rosemont), Illinois and Detroit (Livonia), Michigan for an aggregate of
approximately $41,468,000, (b) acquiring a TownePlace Suites by Marriott hotel
in Horsham, Pennsylvania for approximately $8,000,000 and (c) renovations at
certain hotels of approximately $8,950,000.
Net cash used in investing activities was $115,374,000 for the six months ended
June 30, 1998. This was comprised primarily of the Company (a) acquiring a
Residence Inn by Marriott hotel in Bothell, Washington, for approximately
$11,750,000, and (b) acquiring a portfolio of six Residence Inn by Marriott
hotels in Washington and Oregon for approximately $83,000,000 (c) cost incurred
in the development of a hotel of approximately $3,500,000 and (d) renovations at
certain hotels of approximatley $11,700,000.
Net cash provided by financing activities was $22,224,000 for the six months
ended June 30, 1999, consisting primarily of borrowings under the Line of Credit
of $55,500,000 offset by distributions paid of $27,583,000 and payments on
long-term debt of $5,303,000.
Net cash provided by financing activities was $90,729,000 for the six months
ended June 30, 1998, consisting primarily of net proceeds from the preferred
share offering described below of approximately $111,500,000 and net proceeds
from the issuance of long-term debt of $3,332,000 offset by distributions paid
of $21,744,000 and loan fees and costs paid of approximately $2,611,000.
In May 1998 the Company issued an aggregate of 4,630,000 8.625% Series A
cumulative convertible preferred shares of beneficial interest (the "Series A
Preferred Shares"). The Series A Preferred Shares are convertible into 1.4811
common shares at any time. The Series A Preferred Shares may be redeemed 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 Series A Preferred
Share offering of approximately $111,500,000 were used to repay borrowings
outstanding under the Line of Credit.
22
<PAGE> 25
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The Company pays regular distributions on its common shares and Common Units and
the current quarterly distribution is $0.28 per share or unit. Quarterly
preferred distributions of $0.28875 are payable on each Class B Preferred Unit.
The holders of the Common Units and Class B 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.
The Company's consolidated indebtedness was 29.4% of its investment in hotels,
at cost, at June 30, 1999. At June 30, 1999, the Company had outstanding
indebtedness of approximately $241,380,000, of which approximately 55% bore
interest at a weighted average fixed rate of approximately 7.6%. At June 30,
1999, 26 of the Company's hotel properties collateralized certain long-term debt
and 41 of the Company's hotel properties were unencumbered. 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 has additional borrowing capacity under its Line of Credit of
approximately $140,000,000 at June 30, 1999.
Certain debt coverage ratios for the Company are as follows for the twelve
months ended June 30, 1999: (a) interest coverage ratio (EBITDA divided by
interest expense) of 6.4x, (b) fixed charge coverage ratio (EBITDA divided by
fixed charges) of 2.7x, and (c) total debt to EBITDA of 2.6x. The Company
includes the following in fixed charges for purposes of calculating the fixed
charge coverage ratio: interest expense, dividends on the Series A Preferred
Shares, principal amortization and a furniture and equipment replacement reserve
calculated as 4% of room revenue at the Hotels.
The Company's 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 Line of Credit. Based on the borrowings
outstanding under the Line of Credit at June 30, 1999, a one percent increase in
the LIBOR rate would increase annual interest charges $995,000. In March 1999,
the Company entered into an interest rate cap agreement with a notional amount
of $100,000,000 and a term of one year. The agreement effectively caps the
interest rate on $100,000,000 of borrowings on the Line of Credit at 7.625%.
On July 22, 1999, the Company entered into a commitment with a bank (the "Bank")
for a new collateralized term loan (the "Fourth Term Loan"). The Fourth Term
Loan is expected to have a principal amount of $58,000,000, bear interest at a
fixed rate of 7.16%, have interest only payments for the first three years, have
principal amortization beginning in the fourth year calculated over a 22-year
period, and is anticipated to be collateralized by eight hotels. The Fourth Term
Loan is expected to close by the end of September 1999 and the net proceeds are
anticipated to be used to reduce borrowings outstanding under the Line of
Credit. If the company fails to close on the Fourth Term Loan, the Company could
become responsible for certain costs of the Bank, including (i) due diligence
costs pertaining to the proposed
23
<PAGE> 26
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
collateral hotels, (ii) the costs of unwinding any interest rate hedge
instruments entered into by the Bank and (iii) legal fees.
In the future, the Company may seek to increase the amount of its credit
facilities, negotiate additional credit facilities, or issue corporate debt
instruments, all in compliance with the Company's 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 no forward equity commitments.
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. Approximately $106,000,000 remains available
for issuance under the shelf registration statement.
The Percentage Leases require the Company to make available to the Lessees an
amount equal to 4.0% of room revenues from the Hotels, on a monthly basis, for
the periodic replacement or refurbishment of furniture and equipment and certain
other capital expenditures at the Hotels. The Second and Third Term Loans
require that the Company make available for such purposes, at the Hotels
collateralizing those loans, an additional 1.0% (for a total of 5.0%) of room
revenues from such Hotels. The Company intends to cause the expenditure of
amounts in excess of such obligated amounts if necessary to comply with the
reasonable requirements of any franchise agreement and otherwise to the extent
that the Company deems such expenditures to be in the best interests of the
Company.
Management believes that the amounts required to be made available by the
Company under the Percentage Lease agreements will be sufficient to meet most of
the routine expenditures for furniture and equipment at the Hotels. It is
currently estimated that the Company will spend between $20,000,000 and
$25,000,000 in capital expenditures at the Hotels in 1999 of which the Company
has spent approximately $8,950,000 through June 30, 1999. 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 Line of Credit.
On March 11, 1996, an entity controlled by the Chief Executive Officer of the
Company (the "Seller") purchased a vacant parcel of land in Tysons Corner,
Virginia for $915,000. The Seller then began the process of obtaining the
governmental approvals necessary to build a hotel on the land and incurred costs
of approximately $70,000 in such efforts. In September 1997, the Seller
contracted to sell the land to Summerfield Hotel Corporation ("Summerfield") for
$2,400,000. Summerfield then continued the process of obtaining the governmental
approvals and incurred costs of approximately $200,000. In October 1998,
Summerfield failed to close on the purchase of the land and forfeited its
deposit under the purchase agreement. The Seller received several offers from
unrelated buyers to purchase the land for amounts approximating the Summerfield
price between October 1998 and May 1999 and on May 26, 1999, the Company entered
into a contract to purchase the land for $2,400,000 from the Seller. The Company
anticipates developing a 120-room Residence Inn by Marriott hotel on the land at
a cost of approximately
24
<PAGE> 27
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
$11,600,000 and anticipates opening the hotel during the fourth quarter of 2000.
The land and development costs are expected to be funded through the Line of
Credit and available cash.
Management has become aware of certain financial difficulties at the Summerfield
Lessee. While the full extent of the financial difficulties of the Summerfield
Lessee is not known, management of the Company believes that near term liquidity
problems may continue to exist at the Summerfield Lessee. However, the
Summerfield Lessee has paid to the Company all amounts owed to the Company at
June 30, 1999. The Summerfield Lessee also has a $5,533,484 irrevocable Letter
of Credit pledged as collateral for amounts owed to the Company under the
Percentage Leases.
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 Line of Credit.
INFLATION
Operators of hotels, including the Lessees and any third-party managers retained
by the Lessees, in general possess the ability to adjust room rates quickly.
However, competitive pressures have limited and may in the future limit the
ability of the Lessees and any third-party managers retained by the Lessees to
raise room rates in response to inflation.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather then 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 a major system failures or
miscalculations. The Company and the Lessees have initiated programs 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 Lessees, systems of third parties upon whose data or
functionality the Company or the Lessees rely (for example: Marriott,
Promus,Wyndham International, Inc., banks, credit card companies, and
utilities), and certain other systems or assets which contain date sensitive
technology.
The Company's and its Lessees' and managers' primary focus has been on assessing
and upgrading the functionality of hotel-level systems. The Company believes
based on information that it has received from the various franchisors of the
hotels, that the franchisors have devoted substantial resources to the Year 2000
issue. The franchiors specify many of the systems utilized by the hotels in the
processes related to check-in, check-out, credit card receivables (the primary
source of payment in the hotels) and occupancy tracking. These systems are
commonly referred to as the "front-desk" systems. While not directly responsible
for servicing these systems, the franchisors have assessed and required or
suggested upgrades
25
<PAGE> 28
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
to those system elements which they believe are required in response to the Year
2000 issue. The Company is in the process of upgrading those system elements
where required, and assessing the necessity of upgrading system elements where
suggested. The franchisors have expressly disclaimed responsibility for
identifying or assessing all of the systems or functions that may be affected by
the Year 2000 issue. However, the franchisors have circulated to franchisees a
series of detailed publications (varying in number and detail by franchisor)
forming what the Company believes is a comprehensive action plan for assessing
and upgrading as necessary all mission critical systems and equipment at the
hotels. In addition, the franchisees have been required to report to the
franchisors on the progress of their efforts to address the Year 2000 issue.
These plans and reports, supplemented or modified by certain elements developed
by the Company, have formed the core of the Company's effort on the Year 2000
issue.
Based upon its investigation to date, neither the Company nor the Lessees have
yet identified any material Year 2000 issues with respect to their systems. By
the end of the third quarter of 1999, management expects to have substantially
completed (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 or will initiate communications with certain 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 Lessees' or any third party's Year 2000 remediation efforts will
be fully compliant. If noncompliance is extensive, this could have a material
effect on the Company's or the Lessees' 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. Conflicts regarding
the time demands on its and its Lessees' information systems' personnel of Year
2000 remediation efforts and maintaining/supporting normal operations may cause
delays or create issues in one or both functions. 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 Lessees intend to establish contingency plans to handle
certain unknown or potential material issues that may arise from the Year 2000
issue. The franchisors generally have circulated contingency plans (again
varying in detail by franchisor) which cover areas of critical functionality and
health and safety issues at the hotels. The Company and its Lessess currently
are assessing the feasibility of these and other contingency plans, both at the
hotel level and for centralized systems and functions, including their cost and
applicability to the Company. The Company currently believes that franchisor
plans, supplemented or modified as determined by the Company and as necessary to
address systems and functions not covered by those plans, will form the core of
the Company's contingency planning for the Year 2000 issue. The Company expects
any contingency plans to be completed in the third quarter of 1999.
26
<PAGE> 29
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The Company's and the Lessees' critical applications include its reservations
systems, credit card transmission, security systems, payment systems, credit
card transmission, 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 intends that it and its Lessees will resort to temporary manual
processing, which will slow operations but is not expected to have a material
adverse impact on its operations in the long-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. 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.
27
<PAGE> 30
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The following presents the Company's calculation of FFO and FFO per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income applicable to
common shareholders $ 7,581 $ 8,263 $ 12,191 $ 11,620
Minority interest, common 341 724 546 1,016
Minority interest, preferred 1,174 1,174 2,347 2,347
Extraordinary loss -- -- -- 2,760
Depreciation 9,380 7,626 18,092 15,067
Preferred share dividends 2,496 1,192 4,992 1,192
----------- ----------- ----------- -----------
FFO $ 20,972 $ 18,979 $ 38,168 $ 34,002
=========== =========== =========== ===========
Denominator for diluted
earnings per share 34,167,436 33,235,087 34,168,288 33,215,487
Weighted average
Common Units 1,564,714 2,838,020 1,552,473 2,892,364
Weighted average
Preferred Units 4,063,329 4,063,329 4,063,329 4,063,329
Weighted average
Preferred shares 6,857,493 3,184,689 6,857,493 1,601,143
----------- ----------- ----------- -----------
Denominator for FFO
per share 46,652,972 43,321,125 46,641,583 41,772,323
=========== =========== =========== ===========
FFO per share $ 0.45 $ 0.44 $ 0.82 $ 0.81
=========== =========== =========== ===========
</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
The Company's primary market risk exposure is to changes in interest rates on
its Line of Credit and long-term debt. At June 30, 1999, the Company had
outstanding total indebtedness of approximately $241,380,000. The Company's
interest rate risk objective is to limit the impact of interest rate
fluctuations on earnings and cash flows and to lower its overall borrowing
costs. To achieve this objective, the Company manages its exposure to
fluctuations in market interest rates for its borrowings through the use of
fixed rate debt instruments to the extent that reasonably favorable rates are
obtainable with such arrangements and may enter into derivative financial
instruments such as interest rate swaps, caps and treasury locks to mitigate its
interest rate risk on a related financial instrument or to effectively lock the
interest rate on a portion of its variable debt. The Company does not enter into
derivative or interest rate transactions for speculative purposes. Approximately
55% of the Company's outstanding debt was subject to fixed rates with a weighted
average interest rate of 7.6% at June 30, 1999. The Company regularly reviews
interest rate exposure on its outstanding borrowings in an effort to minimize
the risk of interest rate fluctuations.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations outstanding at June 30, 1999, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates:
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
(IN THOUSANDS)
----------------------------------------------------------------------------
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Long-Term Debt:
Fixed Rate $1,101 $2,700 $ 3,118 $6,218 $ 3,489 $115,304 $131,930 $131,930
Average Interest Rate 7.75% 7.60% 7.58% 6.40% 7.69% 7.64% 7.58%
Variable Rate - - 99,450 - - 10,000 109,450 109,450
Average Interest Rate - - 6.51% - - 3.50% 6.23%
</TABLE>
The table incorporates only those exposures that exist as of June 30, 1999 and
does not consider exposures or positions which could arise after that date. In
addition, because firm commitments are not represented in the table above, the
information presented therein has limited predictive value. As a result, the
Company's ultimate realized gain or loss with respect to interest rate
fluctuations will depend on the exposures that arise during the future period,
prevailing interest rates, and the Company's hedging strategies at that time.
There is inherent rollover risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or predictable
because of the variability of future interest rates and the Company's financing
requirements.
30
<PAGE> 33
INNKEEPERS USA TRUST
PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A. The Annual Meeting of Shareholders was held on May 5, 1999
for the following purposes:
- To elect two Class II trustees to serve on the Board
of Trustees until the annual meeting of shareholders
in 2002 or until their successors have been duly
elected and qualified ("Proposal One"); and
- To consider and vote upon a proposal to amend the
Company's Declaration of Trust to provide, in effect,
that the Board of Trustees may, without shareholder
approval, increase or decrease the aggregate number
of shares of beneficial interest in the Company or
the number of shares of beneficial interest of any
class that the Company is authorized to issue
("Proposal Two").
Under Proposal One, shareholders voted to elect two Class II trustees,
Mr. Miles Berger, with 29,864,270 shares voted for Mr. Berger (222,541
votes withheld authority), and Mr. C. Gerald Goldsmith, with 29,858,270
shares voted for Mr. Goldsmith (228,541 votes withheld authority).
Under Proposal Two, the shareholders defeated the proposal amendment to
the Company's Declaration of Trust with 11,053,622 shares voted for,
18,895,961 shares voted against and 6,633,144 shares abstaining from
voting.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit - 27.1 Financial Data Schedule
(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
August 12, 1999 /s/ Gregory M. Fay
- --------------- ------------------------------------
Gregory M. Fay
Vice-President of Accounting
(Principal Accounting Officer)
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INNKEEPERS USA TRUST FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,430
<SECURITIES> 0
<RECEIVABLES> 14,074
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 820,738
<DEPRECIATION> (80,759)
<TOTAL-ASSETS> 770,638
<CURRENT-LIABILITIES> 0
<BONDS> 241,380
0
115,750
<COMMON> 347
<OTHER-SE> 331,627
<TOTAL-LIABILITY-AND-EQUITY> 770,638
<SALES> 55,210
<TOTAL-REVENUES> 55,725
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,743
<INCOME-PRETAX> 20,076
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,183
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.36
</TABLE>
