<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, 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 November 1, 1999, was 34,676,586.
<PAGE> 2
INNKEEPERS USA TRUST
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
INNKEEPERS USA TRUST
Consolidated Balance Sheets at
September 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Income for the
three and nine months ended September 30, 1999
and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 (unaudited) 3
Notes to Consolidated Financial Statements 4
INNKEEPERS HOSPITALITY
Combined Balance Sheets at September 30, 1999
(unaudited) and December 31, 1998 12
Combined Statements of Income for the three and
nine months ended September 30, 1999 and 1998
(unaudited) 13
Combined Statements of Cash Flows for the nine
months ended September 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 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, December 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties:
Land and improvements $ 95,226 $ 90,103
Buildings and improvements 623,636 573,846
Furniture and equipment 97,438 87,828
Renovations in process 7,969 12,228
Hotels under development 3,161 216
--------- ---------
827,430 764,221
Accumulated depreciation (90,098) (65,923)
--------- ---------
Net investment in hotel properties 737,332 698,298
Cash and cash equivalents 616 2,642
Restricted cash and cash equivalents 12,601 6,893
Due from Lessees 15,334 10,699
Deferred expenses, net 4,061 4,191
Deposits under purchase agreements -- 1,000
Other assets 1,718 1,391
--------- ---------
Total assets $ 771,662 $ 725,114
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 242,424 $ 191,183
Accounts payable and accrued expenses 8,165 6,714
Distributions payable 13,072 13,023
Minority interest in Partnership 59,869 59,802
--------- ---------
Total liabilities 323,530 270,722
--------- ---------
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 September 30, 1999 and
December 31, 1998, respectively 347 345
Additional paid-in capital 367,153 365,711
Unearned compensation (5,473) (4,901)
Distributions in excess of net earnings (29,645) (22,513)
--------- ---------
Total shareholders' equity 448,132 454,392
--------- ---------
Total liabilities and shareholders' equity $ 771,662 $ 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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue:
Percentage Lease revenue $ 31,294 $ 29,015 $ 86,504 $ 79,152
Other revenue 490 217 1,005 581
-------- -------- -------- --------
Total revenue 31,784 29,232 87,509 79,733
-------- -------- -------- --------
Expenses:
Depreciation 9,339 7,739 27,431 22,806
Amortization of franchise costs 17 19 54 55
Ground rent 116 114 344 339
Interest expense 4,312 3,286 12,586 12,008
Amortization of loan origination
fees 233 269 702 784
Real estate and personal
property taxes and property
insurance 2,657 2,291 8,589 7,051
General and administrative 863 842 2,785 2,786
Amortization of unearned
compensation 328 129 1,023 426
-------- -------- -------- --------
Total expenses 17,865 14,689 53,514 46,255
-------- -------- -------- --------
Income before minority interest
and extraordinary loss 13,919 14,543 33,995 33,478
Minority interest, common (447) (630) (993) (1,646)
Minority interest, preferred (1,173) (1,173) (3,520) (3,520)
Extraordinary loss -- -- -- (2,760)
-------- -------- -------- --------
Net income 12,299 12,740 29,482 25,552
Preferred share dividends (2,496) (2,496) (7,488) (3,688)
-------- -------- -------- --------
Net income applicable
to common shareholders $ 9,803 $ 10,244 $ 21,994 $ 21,864
======== ======== ======== ========
Earnings per share data:
Basic - before extraordinary loss $ 0.29 $ 0.30 $ 0.65 $ 0.74
Extraordinary loss -- -- -- (0.08)
-------- -------- -------- --------
Basic $ 0.29 $ 0.30 $ 0.65 $ 0.66
======== ======== ======== ========
Diluted - before extraordinary loss $ 0.29 $ 0.30 $ 0.64 $ 0.73
Extraordinary loss -- -- -- (0.08)
-------- -------- -------- --------
Diluted $ 0.29 $ 0.30 $ 0.64 $ 0.65
======== ======== ======== ========
</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>
Nine Months Ended
September 30,
------------------------
1999 1998
--------- ---------
(Unaudited) (Unaudited)
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,482 $ 25,552
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 29,210 24,071
Minority interests 4,513 5,166
Extraordinary loss -- 2,760
Changes in operating assets and liabilities:
Due from Lessees (4,635) (9,574)
Other assets (327) 167
Accounts payable and accrued expenses 1,451 3,542
--------- ---------
Net cash provided by operating activities 59,694 51,684
--------- ---------
Cash flows from investing activities:
Investment in hotel properties (64,929) (137,699)
Net deposits into restricted cash accounts (5,708) (772)
Payments for franchise fees -- (82)
Deposits under purchase agreements -- (1,000)
--------- ---------
Net cash used in investing activities (70,637) (139,553)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt issuance 118,821 296,064
Payments on long-term debt (67,580) (285,025)
Dividend reinvestment plan and shelf registration costs paid (150) (32)
Distributions paid to unit holders (4,821) (5,903)
Distributions paid to shareholders (36,578) (29,025)
Redemption of units (27) (64)
Proceeds from issuance of preferred shares, net -- 111,570
Loan origination fees and costs paid (748) (2,738)
--------- ---------
Net cash provided by financing activities 8,917 84,847
--------- ---------
Net decrease in cash and cash equivalents (2,026) (3,022)
Cash and cash equivalents at beginning of period 2,642 4,228
--------- ---------
Cash and cash equivalents at end of period $ 616 $ 1,206
========= =========
Supplemental cash flow information:
Interest paid $ 12,436 $ 12,043
========= =========
</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 September 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, 5 each in Florida,
Washington and Michigan, and 4 each in Texas, Illinois and
Pennsylvania.
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. 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 September 24, 1999, the Company closed on a new collateralized term
loan (the "Fourth Term Loan"). The Fourth Term Loan has a principal
amount of $58,000,000 and bears interest at a fixed rate of 7.16%.
Interest only payments are due for the first three years, principal
amortization begins in the fourth year calculated over a 22-year period
and the Fourth Term Loan is collateralized by eight hotels. The net
proceeds of the Fourth Term Loan were used to reduce borrowings
outstanding under the Line of Credit.
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 EITF 98-9
impacted the Company's revenue recognition on an interim basis, but had
no impact
5
<PAGE> 8
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. RESTATEMENT OF 1998 INTERIM RESULTS, CONTINUED
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 amended 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 nine months
ended September 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 amendment of EITF 98-9
on the three and nine months ended September 30, 1998 (in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
--------------------------------- ---------------------------------
As As As As
Reported Adjustments Restated Reported Adjustments Restated
-------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Percentage Lease Revenue $32,343 $(3,328) $29,015 $61,236 $17,916 $79,152
Net income applicable to
common shareholders 13,118 (2,874) 10,244 5,202 16,662 21,864
Diluted earnings per
share 0.38 (0.08) 0.30 0.16 0.49 0.65
</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 nine months ended September 30,
1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $ 12,299,000 $ 12,740,000 $ 29,482,000 $ 25,552,000
Preferred share dividends (2,496,000) (2,496,000) (7,488,000) (3,688,000)
------------ ------------ ------------ ------------
Net income applicable
to common shareholders 9,803,000 10,244,000 21,994,000 21,864,000
Extraordinary loss -- -- -- 2,760,000
------------ ------------ ------------ ------------
Net income applicable
to common shareholders
before extraordinary loss $ 9,803,000 $ 10,244,000 $ 21,994,000 $ 24,624,000
============ ============ ============ ============
Denominator:
Denominator for basic
earnings per share -
weighted average shares 34,070,133 34,035,451 34,068,120 33,295,209
Effect of dilutive securities:
Stock options 811 72,557 16,718 210,610
Restricted shares 64,344 3,154 72,449 12,297
------------ ------------ ------------ ------------
Denominator for diluted
earnings per share - adjusted
weighted average shares 34,135,288 34,111,162 34,157,287 33,518,116
============ ============ ============ ============
Earnings per share data:
Basic - before extraordinary loss $ 0.29 $ 0.30 $ 0.65 $ 0.74
Extraordinary loss -- -- -- (0.08)
------------ ------------ ------------ ------------
Basic $ 0.29 $ 0.30 $ 0.65 $ 0.66
============ ============ ============ ============
Diluted - before extraordinary loss $ 0.29 $ 0.30 $ 0.64 $ 0.73
Extraordinary loss -- -- -- (0.08)
------------ ------------ ------------ ------------
Diluted $ 0.29 $ 0.30 $ 0.64 $ 0.65
============ ============ ============ ============
</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 1,580,845 and 1,777,218 at September 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
September 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
8
<PAGE> 11
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS, CONTINUED
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.
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, a total of 5.0% of gross revenues
from such Hotels. The Fourth Term Loan requires that the Company make
available for such purposes, at the Hotels collateralizing that loan, a
total of 4.5% of room revenues from such Hotels, subject to adjustment
as described in the loan agreement.
The Lessee's Marriott management agreements require the Company to
set-aside between 2% and 5% of room revenue for certain capital
expenditures at the Marriott managed hotels (the "FF&E Escrow"). The
Marriott management agreements also require the Company to fund certain
capital expenditures in addition to the FF&E Escrow. The Lessee's
Marriott management and franchise agreements require the Company to
maintain its Marriott hotels in accordance with its brand standard
which may require the Company to spend amounts in addition to the
previously described requirements.
For the nine months ended September 30, 1999 and 1998, Percentage Lease
revenue consisted of base rents of $44,851,000 and $42,910,000,
respectively, and percentage rents in excess of base rents of
$41,653,000 and $36,242,000, 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):
9
<PAGE> 12
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS, CONTINUED
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1999 $ 60,677
2000 60,677
2001 60,677
2002 60,677
2002 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
$242,424,000, or 29.3% of its investment in hotels, at cost, at
September 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.
The Company has paid $75,000 to the IH Lessee for shared personnel and
services in each of the nine month periods ended September 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 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 three
months and nine months ended September 30, 1999, the gross amount of
premiums paid by the Company for insurance placed by this broker was
approximately $230,000 and $700,000, respectively.
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.
10
<PAGE> 13
INNKEEPERS USA TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. PRO FORMA FINANCIAL INFORMATION (UNAUDITED), CONTINUED
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.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Percentage Lease revenue $ 87,036 $ 85,906
Other revenue 1,005 581
-------- --------
Total revenue 88,041 86,487
-------- --------
Expenses:
Depreciation 27,581 25,259
Amortization of franchise costs 54 55
Ground rent 344 339
Interest expense 12,838 13,813
Amortization of loan origination fees 702 784
Real estate and personal property taxes
and property insurance 8,633 8,384
General and administrative 2,785 2,786
Amortization of unearned compensation 1,023 426
-------- --------
Total expenses 53,960 51,846
-------- --------
Income before minority interest 34,081 34,641
Minority interest, common (1,015) (1,158)
Minority interest, preferred (3,520) (3,520)
-------- --------
Net income 29,546 29,963
Preferred share dividends (7,488) (7,488)
-------- --------
Net income applicable to
common shareholders $ 22,058 $ 22,475
======== ========
Diluted earnings per share $ 0.65 $ 0.66
======== ========
</TABLE>
11
<PAGE> 14
INNKEEPERS HOSPITALITY
COMBINED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- -------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,809 $13,562
Marketable securities 2,724 2,366
Accounts receivable, net 11,235 4,384
Prepaid expenses 331 443
-------- -------
Total current assets 41,099 20,755
Other assets 113 158
-------- -------
Total assets $ 41,212 $20,913
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,504 $ 4,139
Accrued expenses 3,576 3,466
Payable to Manager 13,555 2,442
Due to Partnership 14,211 9,882
-------- -------
Total current liabilities 36,846 19,929
Other long-term liabilities 937 745
-------- -------
Total liabilities 37,783 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 (719) 26
Retained earnings 4,141 206
-------- -------
Total shareholders' equity 3,429 239
-------- -------
Total liabilities and shareholders' equity $ 41,212 $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 Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross operating revenue:
Rooms $ 55,674 $ 48,359 $ 156,065 $ 136,660
Food and beverage 35 13 89 290
Telephone 1,670 1,392 4,582 4,069
Other 1,027 875 2,953 2,548
-------- -------- --------- ---------
Gross operating revenue 58,406 50,639 163,689 143,567
-------- -------- --------- ---------
Departmental expenses:
Rooms 11,519 9,982 32,227 27,371
Food and beverage 51 35 103 322
Telephone 548 418 1,524 1,375
Other 463 375 1,318 1,057
-------- -------- --------- ---------
Total departmental expenses 12,581 10,810 35,172 30,125
-------- -------- --------- ---------
Total departmental profit 45,825 39,829 128,517 113,442
-------- -------- --------- ---------
Unallocated operating expenses:
General and administrative 4,085 3,721 11,784 10,643
Franchise fees 3,367 3,052 9,534 8,672
Advertising and promotions 2,485 2,229 7,227 6,308
Utilities 2,097 1,854 6,023 5,353
Repairs and maintenance 2,144 2,077 6,412 5,940
Management fees 1,147 626 3,408 2,315
-------- -------- --------- ---------
Total unallocated operating
expenses 15,325 13,559 44,388 39,231
-------- -------- --------- ---------
Gross profit 30,500 26,270 84,129 74,211
Insurance (230) (172) (698) (681)
Lessee overhead (752) (672) (2,257) (1,814)
Percentage Lease payments (27,788) (24,584) (76,244) (67,611)
-------- -------- --------- ---------
Net income 1,730 842 4,930 4,105
Other comprehensive income -
unrealized losses on
marketable securities (530) (104) (745) (518)
-------- -------- --------- ---------
Comprehensive income $ 1,200 $ 738 $ 4,185 $ 3,587
======== ======== ========= =========
</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>
Nine Months Ended
September 30,
----------------------
1999 1998
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,930 $ 4,105
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 62 28
Changes in operating assets and liabilities:
Accounts receivable (6,851) (4,915)
Inventory -- (54)
Prepaid expenses 112 222
Accounts payable 1,365 1,763
Accrued expenses 110 1,221
Payable to Manager 11,113 1,178
Due to Partnership 4,329 8,728
-------- --------
Net cash provided by operating activities 15,170 12,276
-------- --------
Cash flows from investing activities:
Purchases of equipment (17) (21)
Advances from Partnership 192 --
Purchase of marketable securities (1,103) (1,071)
-------- --------
Net cash used in investing activities (928) (1,092)
-------- --------
Cash flows from financing activities:
Distributions (995) (4,496)
-------- --------
Net cash used in financing activities (995) (4,496)
-------- --------
Net increase in cash and cash equivalents 13,247 6,688
Cash and cash equivalents at beginning of period 13,562 7,863
-------- --------
Cash and cash equivalents at end of period $ 26,809 $ 14,551
======== ========
</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., formerly 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 September 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 $75,000 for shared personnel
and services in each of the nine month periods ended September 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 September 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 nine months ended
September 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 September 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 66 of the Hotels are presented in the following table. Results were excluded
for such comparison for one hotel which was not open during the first, second
and third 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 Nine Months Ended
September 30, % September 30, %
1998 1999 Inc.(dec) 1998 1999 Inc.(dec)
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Portfolio(1)
- ------------
Average Daily Rate $ 100.55 $ 103.82 3.25 $ 100.05 $ 101.42 1.37
Occupancy 82.40% 81.97% (0.53) 80.57% 80.37% (0.25)
RevPAR $ 82.86 $ 85.10 2.71 $ 80.61 $ 81.51 1.12
By Type
- -------
Upscale Extended Stay Hotels (2)
Average Daily Rate $ 107.23 $ 108.96 1.61 $ 107.15 $ 107.03 (0.11)
Occupancy 84.61% 85.30% 0.82 83.42% 83.77% 0.42
RevPAR $ 90.73 $ 92.95 2.44 $ 89.39 $ 89.66 0.31
Limited Services Hotels (3)
Average Daily Rate $ 77.69 $ 85.15 9.61 $ 76.73 $ 82.44 7.45
Occupancy 75.65% 71.78% (5.11) 72.44% 70.68% (2.43)
RevPAR $ 58.77 $ 61.12 4.00 $ 55.58 $ 58.27 4.84
</TABLE>
(1) 66 hotels (excludes one newly-developed hotel)
(2) 51 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 September 30, 1999 ("1999") to the Three
Months Ended September 30, 1998 ("1998")
The Company had revenues for 1999 of $31,784,000, consisting of $31,294,000 of
Percentage Lease revenue from the Lessees and $490,000 of other revenue,
compared with $29,232,000, $29,015,000 and $217,000, respectively, for 1998. The
increase in Percentage Lease revenue is due, primarily, to the number of hotels
owned increasing from 64 at July 1, 1998, and September 30, 1998, to 67 at July
1, 1999 and September 30, 1999. The increase in other revenue is due primarily
to earnings on increased restricted cash balances.
Depreciation, amortization of franchise costs, amortization of loan origination
fees, and amortization of unearned compensation ("Depreciation and
Amortization") were $9,917,000 in the aggregate for 1999 compared with
$8,156,000 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 October 1998.
Real estate and personal property taxes and property insurance were $2,657,000
for 1999 compared with $2,291,000 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 $4,312,000 compared with $3,286,000 for 1998. This
increase is due primarily to additional borrowings for hotel acquisitions
subsequent to September 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 applicable to common shareholders for 1999 was $9,803,000, or $0.29
per diluted share, compared with $10,244,000, or $0.30 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 Nine Months Ended September 30, 1999 ("1999") to the Nine
Months Ended September 30, 1998 ("1998")
The Company had revenues for 1999 of $87,509,000, consisting of $86,504,000 of
Percentage Lease revenue from the Lessees and $1,005,000 of other revenue,
compared with $79,733,000, $79,152,000 and $581,000, 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 64 at September 30, 1998 and
January 1, 1999, and to 67 at September 30, 1999. The increase in other revenue
is due primarily to earnings on increased restricted cash balances.
Depreciation and Amortization were $29,210,000 in the aggregate for 1999
compared with $24,071,000 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 October 1998.
Real estate and personal property taxes and property insurance were $8,589,000
for 1999 compared with $7,051,000 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 $12,586,000 compared with $12,008,000 for 1998.
This increase was due to additional borrowings for hotel acquisitions subsequent
to September 30, 1998, offset by reduced borrowings outstanding under the Line
of Credit resulting from the application of the net proceeds from the Company's
May 1998 preferred share offering.
General and administrative expenses remained relatively constant in 1999 in
absolute dollars and declined slightly as a percentage of total revenue.
Net income applicable to common shareholders for 1999 was $21,994,000, or $0.64
per diluted share, compared with $21,864,000, or $0.65 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, offset by the
items described above.
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
21
<PAGE> 24
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
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.
Cash Flow Anaylsis
Cash and cash equivalents (including restricted cash and cash equivalents) at
September 30, 1999 and 1998 were $13,217,000 and $8,726,000, including
approximately $4,872,000 and $3,158,000, 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 $7,729,000 and $4,362,000, 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 nine months ended September
30, 1999 and 1998 was $59,694,000 and $51,684,000, respectively.
Net cash used in investing activities was $70,637,000 for the nine months ended
September 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, (c)
renovations at certain hotels of approximately $13,800,000, (d) net deposits
into restricted cash accounts of approximately $5,700,000 and (e) development
costs on the Company's project in Tyson's Corner, Virginia of approximately
$2,000,000.
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) cost incurred in the
development of a hotel 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 $8,917,000 for the nine months
ended September 30, 1999, consisting primarily of borrowings under the Line of
Credit of approximately $60,800,000, borrowings under the Fourth Term Loan (as
hereinafter defined) of $58,000,000, offset by distributions paid of
approximately $41,400,000 and payments on long-term debt of approximately
$67,600,000.
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
preferred share offering described below of approximately $111,500,000 and net
proceeds from the issuance of long-term debt of $11,039,000 offset by
distributions paid of $34,928,000 and loan fees and costs paid of approximately
$2,738,000.
22
<PAGE> 25
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Distributions/Dividends
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.
Financing
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.
The Company's consolidated indebtedness was 29.3% of its investment in hotels,
at cost, at September 30, 1999. At September 30, 1999, the Company had
outstanding indebtedness of approximately $242,424,000, of which approximately
78.1% bore interest at a weighted average implied fixed rate of approximately
7.45%. Based on the outstanding debt at September 30, 1999, the weighted average
implied interest rate on all of the Company's debt is 7.19%. At September 30,
1999, 34 of the Company's hotel properties collateralized certain long-term debt
and 33 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 $197,000,000 at September 30, 1999, subject to borrowing base
availability as described in the loan agreement.
Certain debt coverage ratios for the Company are as follows for the twelve
months ended September 30, 1999: (a) interest coverage ratio (EBITDA divided by
interest expense) of 6.1x, (b) fixed charge coverage ratio (EBITDA divided by
fixed charges) of 2.6x, and (c) total debt to EBITDA of 2.5x. 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.
23
<PAGE> 26
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
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 September 30, 1999, a 100 basis point
increase in the LIBOR rate would increase annual interest charges $430,000. 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 September 24, 1999, the Company closed on a new collateralized term loan (the
"Fourth Term Loan"). The Fourth Term Loan has a principal amount of $58,000,000,
bears interest at a fixed rate of 7.16%, interest only payments are due for the
first three years, principal amortization begins in the fourth year calculated
over a 22-year period, and is collateralized by eight hotels. The net proceeds
of the Fourth Term Loan were used to reduce borrowings outstanding under the
Line of Credit.
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 interest rate hedging instrument exposure or 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.
Other
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, a total of 5.0% of gross revenues from such Hotels.
The Fourth Term Loan requires that the Company make available for such purpose,
at the Hotels collateralizing that loan, a total of 4.5% of room revenues from
such Hotels, subject to adjustment as defined in the loan agreement. 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 $15,000,000 and
$20,000,000
24
<PAGE> 27
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
in capital expenditures at the Hotels in 1999 of which the Company has spent
approximately $13,800,000 through September 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 $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.
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
25
<PAGE> 28
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Company or the Lessees rely (for example: Marriott, Promus, Wyndham, 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 franchisors 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 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. 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 are generally effective action
plans for assessing and upgrading as necessary certain 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.
Neither the Company nor the Lessees have yet identified any material Year 2000
issues with respect to their systems. The Company has substantially completed
(i) the assessment phase of the program and (ii) any necessary modifications to
its systems, and necessary conversions to new software and related testing. As
part of the compliance program, the Company has attempted to initiate
communications with some, but not all, third parties whose failure to timely
convert their systems could reasonably be expected to have an impact on the
Company's operations. In addition to third parties who have not been contacted,
there are instances where parties have failed to respond, or have responded
generically that they are in compliance but with substantial qualifications. The
Company expects to address the services provided by such vendors in its
contingency plans, unless viable alternatives are deemed economically
unfeasible, unnecessary due to the probability of compliance or non-existent.
The Company does not believe the Year 2000 issue will have a material impact on
the Company's operations. However, 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 material 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.
26
<PAGE> 29
INNKEEPERS USA TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
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 Lessees 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 some, but not
all, elements of the franchisor plans will be central to the Company's
contingency planning for the Year 2000 issue. The Company expects any
contingency plans to be completed by the middle of the fourth quarter of 1999.
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income applicable to
common shareholders $ 9,803,000 $10,244,000 $21,994,000 $21,864,000
Minority interest, common 447,000 630,000 993,000 1,646,000
Minority interest, preferred 1,173,000 1,173,000 3,520,000 3,520,000
Extraordinary loss -- -- -- 2,760,000
Depreciation 9,339,000 7,739,000 27,431,000 22,806,000
Preferred share dividends 2,496,000 2,496,000 7,488,000 3,688,000
----------- ----------- ----------- -----------
FFO $23,258,000 $22,282,000 $61,426,000 $56,284,000
=========== =========== =========== ===========
Denominator for diluted
earnings per share 34,135,288 34,111,162 34,157,287 33,518,116
Weighted average
Common Units 1,592,297 1,777,218 1,565,894 2,516,567
Weighted average
Preferred Units 4,063,329 4,063,329 4,063,329 4,063,329
Weighted average
Preferred shares 6,857,493 6,857,493 6,857,493 3,372,514
----------- ----------- ----------- -----------
Denominator for FFO
per share 46,648,407 46,809,202 46,644,003 43,470,526
=========== =========== =========== ===========
FFO per share $ 0.50 $ 0.48 $ 1.32 $ 1.29
=========== =========== =========== ===========
</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 September 30, 1999, the Company had
outstanding total indebtedness of approximately $242,424,000. The Company's
interest rate risk objectives are to limit the impact of interest rate
fluctuations on earnings and cash flows and to lower its overall borrowing
costs. To achieve these objectives, 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. The Company 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 78.1% of the Company's outstanding debt was
subject to fixed rates with a weighted average interest rate of 7.45% at
September 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 long-term debt
obligations outstanding at September 30, 1999, the table presents principal
repayments 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>
Long-Term Debt:
Fixed Rate $ 595 $ 2,700 $ 3,118 $ 6,400 $ 4,630 $ 171,981 $ 189,424 $ 189,424
Average Interest Rate 7.78% 7.60% 7.58% 6.42% 7.56% 7.48% 7.45%
Variable Rate -- -- 3,000 -- -- 10,000 53,000 53,000
Average Interest Rate -- -- 6.90% -- -- 3.50% 6.25%
</TABLE>
The table incorporates only those exposures that existed as of September 30,
1999 and does not consider exposures or positions which could arise after that
date. 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 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
November 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 NINE MONTHS ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,217
<SECURITIES> 0
<RECEIVABLES> 15,334
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 827,430
<DEPRECIATION> (90,098)
<TOTAL-ASSETS> 771,662
<CURRENT-LIABILITIES> 0
<BONDS> 242,424
0
115,750
<COMMON> 347
<OTHER-SE> 332,035
<TOTAL-LIABILITY-AND-EQUITY> 771,662
<SALES> 86,504
<TOTAL-REVENUES> 87,509
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,288
<INCOME-PRETAX> 33,995
<INCOME-TAX> 0
<INCOME-CONTINUING> 33,995
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,482
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.64
</TABLE>
