UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 Number)
306 Royal Poinciana Way, Telephone (561) 835-1800
Palm Beach, Florida 33480 (Registrant's telephone number
(Address of principal executive offices) including area code)
N/A
(former name)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such short period that the Registrant was
required to file such report), and (ii) has been subject to such filing
requirements for the past 90 days.
X Yes No
----- -----
The number of common shares of beneficial interest, $.01 par value, outstanding
on May 1, 2000, was 34,676,586.
<PAGE>
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
March 31, 2000 (unaudited) and December 31, 1999 1
Consolidated Statements of Income for the
three months ended March 31, 2000 and
1999 (unaudited) 2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited) 3
Notes to Consolidated Financial Statements 4
INNKEEPERS HOSPITALITY
Combined Balance Sheets at March 31, 2000
(unaudited) and December 31, 1999 6
Combined Statements of Income for the
three months ended March 31, 2000 and 1999
(unaudited) 7
Combined Statements of Cash Flows for
the three months ended March 31, 2000 and 1999
(unaudited) 8
Notes to Combined Financial Statements 9
Item 2. Management's Decision and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
</TABLE>
i
<PAGE>
Innkeepers USA Trust
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, 2000 December 31,
(unaudited) 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in hotel properties:
Land and improvements $ 95,891 $ 95,891
Buildings and improvements 628,359 628,266
Furniture and equipment 102,476 102,392
Renovations in process 2,273 456
Hotels under development 6,212 4,366
--------------------------------------------------------------------------------------------------
835,211 831,371
Accumulated depreciation (109,095) (99,487)
--------------------------------------------------------------------------------------------------
Net investment in hotel properties 726,116 731,884
Cash and cash equivalents 7,691 4,404
Restricted cash and cash equivalents 14,050 12,272
Due from Lessees 13,577 12,484
Deferred expenses, net 3,809 3,965
Other assets 1,558 1,691
--------------------------------------------------------------------------------------------------
Total assets $766,801 $766,700
--------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $247,335 $243,875
Accounts payable and accrued expenses 7,435 6,844
Distributions payable 13,066 13,067
Deferred rent revenue 12,965 --
Minority interest in Partnership 58,667 59,457
--------------------------------------------------------------------------------------------------
Total liabilities 339,468 323,243
--------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred shares, $0.01 par value, 20,000,000 shares
authorized, 4,630,000 shares issued and outstanding 115,750 115,750
Common shares, $0.01 par value, 100,000,000 shares
authorized, 34,676,586 issued and outstanding 347 347
Additional paid-in capital 367,187 367,191
Unearned compensation (4,816) (5,144)
Distributions in excess of net earnings (51,135) (34,687)
--------------------------------------------------------------------------------------------------
Total shareholders' equity 427,333 443,457
--------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $766,801 $766,700
--------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
Innkeepers USA Trust
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------
2000 1999 * 1999
(unaudited) (unaudited) (unaudited)
(proforma)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Percentage Lease revenue $ 15,494 $25,806 $ 14,320
Other revenue 377 209 209
--------------------------------------------------------------------------------------------------------------------
Total revenue 15,871 26,015 14,529
--------------------------------------------------------------------------------------------------------------------
Expenses:
Depreciation 9,608 8,712 8,712
Amortization of franchise costs 17 18 18
Ground rent 115 114 114
Interest expense 4,688 3,960 3,960
Amortization of loan origination fees 267 238 238
Real estate and personal property taxes and property insurance 3,028 2,977 2,977
General and administrative 1,192 1,155 1,155
Amortization of unearned compensation 328 357 357
--------------------------------------------------------------------------------------------------------------------
Total expenses 19,243 17,531 17,531
--------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest (3,372) 8,484 (3,002)
Minority interest, common 303 (205) 284
Minority interest, preferred (1,173) (1,173) (1,173)
--------------------------------------------------------------------------------------------------------------------
Net income (loss) (4,242) 7,106 (3,891)
Preferred share dividends (2,496) (2,496) (2,496)
--------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shareholders $ (6,738) $ 4,610 $ (6,387)
--------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share data:
Basic $ (0.20) $ 0.14 $ (0.19)
--------------------------------------------------------------------------------------------------------------------
Diluted $(0.20) $0.13 $(0.19)
------------------------------------------------------------------------------------------------------------------
* Amended from previous filing, see Note 2.
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
2
<PAGE>
Innkeepers USA Trust
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
2000 1999
(unaudited) (unaudited)
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,242) $7,106
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 10,220 9,325
Minority interests 870 1,378
Deferred rent revenue 12,965 -
Changes in operating assets and liabilities:
Due from Lessees (1,093) (1,451)
Other assets 133 (159)
Accounts payable and accrued expenses 591 993
---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,444 17,192
---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in hotel properties (3,840) (46,899)
Net deposits into restricted cash accounts (1,778) (96)
---------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,618) (46,995)
---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from debt issuance 7,000 47,000
Payments on debt (3,540) (309)
Dividend reinvestment plan and shelf registration costs paid (5) (133)
Distributions paid to unit holders (1,610) (1,605)
Distributions paid to shareholders (12,205) (12,167)
Redemption of units (51) (27)
Loan origination fees and costs paid (128) (150)
---------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (10,539) 32,609
---------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,287 2,806
Cash and cash equivalents at beginning of period 4,404 2,642
---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $7,691 $ 5,448
---------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $4,211 $3,330
---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
3
<PAGE>
Innkeepers USA Trust
Notes to Consolidated Financial Statements
1. ORGANIZATION
Organization
Innkeepers USA Trust ("Innkeepers") is a self-administered real estate
investment trust ("REIT"), which at March 31, 2000, owned interests in 67 hotels
with an aggregate of 8,138 rooms/suites (the "Hotels") through its 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"). An officer of the Company is the majority the shareholder 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 (the "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, 1999 (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. CHANGE IN ACCOUNTING PRINCIPLE
On December 3, 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides that a lessor shall defer recognition of
contingent rental income in interim periods until specified annual targets that
trigger the contingent income are met. The Company has reviewed the terms of its
Percentage Leases and has determined that the provisions of SAB 101 will impact
the Company's current revenue recognition on an interim basis, but will have no
impact on the Company's annual Percentage Lease revenue recognition or interim
cash flow from its Lessees. The Company adopted the provisions of SAB 101 as a
change in accounting principle and recorded the results of the 2000 first
quarter in accordance with the new pronouncement. The effect of this change on
the three months ended March 31, 2000 statement of operations was to decrease
total revenue by approximately $12,965,000, net income applicable to common
shareholders by approximately $12,408,000 and net income applicable to common
shareholders by $0.37 per basic and diluted share. The proforma effect of this
change on the three months ended March 31, 1999 statement of operations was to
decrease total revenue by approximately $11,486,000, net income applicable to
common shareholders by approximately $10,997,000 and net income applicable to
common shareholders by $0.33 per basic share and $0.32 per diluted share.
4
<PAGE>
The Company filed its first quarter 2000 Form 10-Q reflecting the 1999
proforma statements of operations as the 1999 restated historical financial
information. The Company has re-filed its first quarter 2000 Form 10-Q to
reflect the 1999 statement of operations as originally filed in the first
quarter 1999 Form 10-Q and included the 1999 proforma statement of operations as
proforma financial information.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the three months ended March 31, 2000 and 1999 (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Net income (loss) $ (4,242) $ 7,106
Preferred share dividends (2,496) (2,496)
-------------------------------------------------------------------------------------------
Net income (loss) applicable to common shareholders $ (6,738) $ 4,610
-------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -- weighted
average shares 34,192,451 34,064,095
Effect of dilutive securities:
Stock options -- 30,144
Restricted shares 156 74,900
-------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -- adjusted
weighted average shares and assumed conversions 34,192,607 34,169,139
-------------------------------------------------------------------------------------------
Earnings (loss) per share data:
Basic $ (0.20) $ 0.14
-------------------------------------------------------------------------------------------
Diluted $ (0.20) $ 0.13
-------------------------------------------------------------------------------------------
</TABLE>
The Series A Preferred Shares and most of the options granted are
anti-dilutive and not included in the calculation of diluted earnings (loss) per
share.
4. SUBSEQUENT EVENTS
In May 2000, Frederic M. Shaw, the Company's former Executive Vice
President and Chief Operating Officer filed suit against the Company and certain
officers of the Company. The suit alleges that he was wrongfully terminated and
also alleges various other related claims against the Company. The Company
believes that the disposition of these claims will not have a material adverse
effect on the Company's results of operations or financial position.
On May 8, 2000 the Company closed on an amended $130,000,000 line of
credit (the "Amended Line of Credit"). The Amended Line of Credit has terms,
conditions and covenants substantially similar to those of the Line of Credit,
except that the size of the facility has been reduced to $130,000,000 and the
maturity date has been extended to May 2003.
5
<PAGE>
Innkeepers Hospitality
Combined Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(unaudited)
----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,734 $17,849
Marketable securities 2,673 2,690
Accounts receivable, net 8,274 4,848
Prepaid expenses 413 538
-------------------------------------------------------------------------------------------
Total current assets 28,094 25,925
Other assets 93 104
-------------------------------------------------------------------------------------------
Total assets $28,187 $26,029
-------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,438 $ 3,734
Accrued expenses 3,859 3,879
Payable to Manager 5,683 5,159
Due to Partnership 12,421 11,735
-------------------------------------------------------------------------------------------
Total current liabilities 26,401 24,507
Other long-term liabilities 937 937
-------------------------------------------------------------------------------------------
Total liabilities 27,338 25,444
-------------------------------------------------------------------------------------------
Shareholders' equity:
Common shares, $1 par value, 8,000 shares authorized, issued and
outstanding 8 8
Additional paid-in capital 290 290
Unrealized loss on marketable securities (770) (753)
Retained earnings 1,321 1,040
-------------------------------------------------------------------------------------------
Total shareholders' equity 849 585
-------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $28,187 $26,029
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
6
<PAGE>
Innkeepers Hospitality
Combined Statements of Income
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------
2000 1999
(unaudited) (unaudited)
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross operating revenue:
Rooms $ 52,179 $ 46,250
Food and beverage 91 13
Telephone 1,565 1,373
Other 978 891
-------------------------------------------------------------------------------------------------
Gross operating revenue 54,813 48,527
Departmental expenses:
Rooms 10,733 9,160
Food and beverage 71 1
Telephone 455 447
Other 463 425
-------------------------------------------------------------------------------------------------
Total departmental profit 43,091 38,494
-------------------------------------------------------------------------------------------------
Unallocated operating expenses:
General and administrative 3,836 3,681
Franchise and marketing fees 3,172 2,935
Advertising and promotions 2,490 2,248
Utilities 2,126 2,156
Repairs and maintenance 2,240 2,182
Management fees 1,263 1,083
-------------------------------------------------------------------------------------------------
Total unallocated operating expenses 15,127 14,285
-------------------------------------------------------------------------------------------------
Gross profit 27,964 24,209
Insurance (175) (219)
Lessee overhead (1,094) (776)
Percentage lease expense (25,174) (21,997)
-------------------------------------------------------------------------------------------------
Net income 1,521 1,217
Other comprehensive income - unrealized
losses on marketable securities (17) (369)
-------------------------------------------------------------------------------------------------
Comprehensive income $ 1,504 $ 848
-------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
7
<PAGE>
Innkeepers Hospitality
Combined Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
(unaudited) (unaudited)
--------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,521 $ 1,217
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 11 20
Changes in operating assets and liabilities:
Accounts receivable (3,426) (2,776)
Prepaid expenses 125 62
Accounts payable 704 493
Accrued expenses (20) 412
Payable to Manager 524 3,022
Due to Partnership 686 459
-----------------------------------------------------------------------------------------
Net cash provided by operating activities 125 2,909
-----------------------------------------------------------------------------------------
Cash flows from investing activities:
Advances from Partnership -- 165
Purchase of marketable securities, net -- (990)
-----------------------------------------------------------------------------------------
Net cash used in investing activities -- (825)
-----------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions paid (1,240) (174)
-----------------------------------------------------------------------------------------
Net cash used in financing activities (1,240) (174)
-----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,115) 1,910
Cash and cash equivalents at beginning of period 17,849 13,562
-----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 16,734 $15,472
-----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
8
<PAGE>
Innkeepers Hospitality
Notes to Combined Financial Statements
1. ORGANIZATION
Organization
Innkeepers Hospitality, 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 subsidiaries
(collectively the "Partnership," and together with Innkeepers, the "Company").
The principal shareholder of the IH Lessee is Jeffrey H. Fisher, who is the
Chairman, Chief Executive Officer and President of the Company. The IH Lessee
leased 60 hotels (the "IH Leased Hotels") from the Company at March 31, 2000.
The IH Lessee operates 31 of the Hotels, wholly-owned subsidiaries of Marriott
International, Inc. ("Marriott") operate 27 of the Hotels, and an unaffiliated
party operates two of the Hotels.
These unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (the "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, 1999 (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. SUBSEQUENT EVENT
In May 2000, Frederic M. Shaw, the minority shareholder of the IH Lessee and the
IH Lessee's former President, filed suit against the IH Lessee, Mr. Fisher and
another employee of the IH Lessee. The suit alleges that he was wrongfully
terminated and also alleges various other related claims against the IH Lessee.
The IH Lessee believes that the disposition of the claims will not have a
material adverse effect on the IH Lessee's results of operations or financial
position.
9
<PAGE>
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, 1999.
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 included in the
Company's Annual Report on Form 10-K for the year ending December 31, 1999.
The Hotels
The following chart sets forth certain information with respect to the Hotels at
March 31, 2000:
Franchise Affiliation Number of Number of
Hotels Rooms/Suites
-----------------------------------------------------------------------------
Upscale Extended-Stay
Residence Inn by Marriott 44 5,194
Summerfield Suites 6 759
Sunrise Suites 1 96
-----------------------------------------------------------------------------
51 6,049
-----------------------------------------------------------------------------
Mid-Priced
Hampton Inn 12 1,527
Courtyard by Marriott 1 136
TownePlace Suites by Marriott 1 95
Comfort Inn 1 127
Holiday Inn Express 1 204
-----------------------------------------------------------------------------
16 2,089
-----------------------------------------------------------------------------
67 8,138
-----------------------------------------------------------------------------
10
<PAGE>
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 (TownePlace Suites by Marriott - Horsham, PA)
which was not open during the first quarter of 1999. 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.
Three Months ended
March 31, Percentage
------------------------- increase
2000 1999 (decrease)
-------------------------------------------------------------------------------
Portfolio (1)
------------------------------------
ADR $105.32 $99.76 5.6%
Occupancy 76.5% 77.9% (1.8)
RevPAR $80.52 $77.68 3.7
By Type
------------------------------------
Upscale Extended Stay Hotels (2)
ADR $109.62 $104.45 5.0
Occupancy 80.4% 81.5% (1.3)
RevPAR $88.17 $85.14 3.6
Limited Service Hotels (3)
ADR $88.00 $81.34 8.2
Occupancy 63.8% 66.2% (3.7)
RevPAR $56.13 $53.88 4.2
(1) 66 hotels, excludes one newly developed hotel
(2) 51 hotels
(3) 15 hotels, excludes one newly developed hotel
Results of Operations
Adoption of SAB 101
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides that a lessor shall defer recognition of
contingent rental income in interim periods until specified annual targets that
trigger the contingent income are met. The Company has reviewed the terms of its
Percentage Leases and has determined that the provisions of SAB 101 will impact
the Company's current revenue recognition on an interim basis, but will have no
impact on the Company's annual Percentage Lease revenue recognition or interim
cash flow from its Lessees.
The Company's Percentage Leases provide for rent equal to the greater of (i)
fixed annual base rent or (ii) rent based on percentages of annual room revenues
at each of the hotels ("Percentage Rent"). The Company's Percentage Leases are
structured to provide Percentage Rent equal to a certain percentage (generally
30%) of a specified level of room revenues which is expressed on an annual basis
(the "Threshold"), and a certain higher percentage (generally 68%) of room
revenues in excess of the Threshold. Prior to SAB 101 the Company, in accordance
with industry practice, recognized Percentage Lease revenue in interim periods
equal to Percentage Rent payments due under the Percentage Leases. Under the
terms of the Percentage Leases, Percentage Rent payments are calculated by
applying the percentage rent formula to year-to-date room revenue using a
prorated portion of the Threshold (i.e., 25% for the first quarter, 50% for the
second quarter, etc.). Thus, "higher tier" percentage rent was recognized as
income, and collected from the Company's Lessees, in interim periods before room
revenues exceeded the Threshold. SAB 101 clarifies that meeting the Threshold is
a contingency that must be met before higher tier percentage rent can be
recognized as current income. This will generally result
11
<PAGE>
in base rent being recognized as revenue in the first and second quarters and
percentage rents already collected or due from the Lessees being deferred and
recognized as revenue in the third and/or fourth quarters. The adoption of SAB
101 has no effect on the amount or timing of the Percentage Rent payments due
under the Percentage Leases.
The Company adopted the provisions of SAB 101 as a change in accounting
principle and recorded the results of the 2000 first quarter in accordance with
the new pronouncement. The effect of the change as reflected in Note 2 to the
financial statements on the three months ending March 31, 2000 and 1999 was to:
decrease Percentage Lease revenue by $12,965,000 and $11,486,000, respectively;
decrease minority interest, common by $557,000 and $489,000, respectively; and
decrease net income applicable to common shareholders by $12,408,000 and
$10,997,000, respectively.
At March 31, 2000 "deferred rent revenue" of $12,965,000 represents Percentage
Rent collected or due from the Lessees under the terms of the Percentage Leases
which the Company expects to recognize as Percentage Lease revenue in the third
and/or fourth quarters of 2000. The Company's quarterly distributions are based
on Percentage Rent collected or due from the Lessees as opposed to Percentage
Lease revenue recognized.
For comparability purposes only, assuming that the amount included in deferred
rent revenue at March 31, 2000 was earned at March 31, 2000, the Company would
have had Percentage Lease revenue of $28,459,000 from the Lessees compared with
$25,806,000 for 1999. This increase is due primarily to the RevPAR growth of
approximately 3.7% at the Company's hotels.
Comparison of the Three Months Ended March 31, 2000 ("2000") to the Three
Months Ended March 31, 1999 ("1999")
The decrease in Percentage Lease revenue for 2000 from 1999 is attributable to
the adoption of SAB 101 as of January 1, 2000. Included in deferred rent revenue
at March 31, 2000 is $12,965,000 of first quarter Percentage Rent collected or
due from the Lessees, which management expects the Company to recognize as
Percentage Lease revenue in the third and fourth quarters of 2000.
Depreciation, amortization of franchise costs, amortization of loan origination
fees, and amortization of unearned compensation ("Depreciation and
Amortization") were $10,220,000 in the aggregate for 2000 compared with
$9,325,000 for 1999. The increase in Depreciation and Amortization was primarily
due to the depreciation of renovations completed at the Hotels during 1999.
Real estate and personal property taxes and property insurance remained
relatively constant in 2000 compared with 1999, $3,028,000 and $2,977,000,
respectively.
Interest expense for 2000 was $4,688,000 compared with $3,960,000 for 1999. This
increase is due primarily to increased borrowings for hotels purchased during
1999 and increases in the interest rates on the Company's variable rate debt.
General and administrative expenses remained relatively constant in 2000
compared with 1999, $1,192,000 and $1,155,000, respectively.
Net income (loss) applicable to common shareholders for 2000 was $(6,738,000),
or $(0.20) per diluted share, compared with $4,610,000, or $0.13 per diluted
share, for 1999. This change is due primarily to the factors discussed
previously.
Liquidity and Capital Resources
12
<PAGE>
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 external growth
objectives, and any other additional liquidity needs, primarily by borrowing on
its Line of Credit or other facilities, exchanging equity for hotel properties
or possibly accessing the capital markets if market conditions permit.
Cash Flow Analysis
Cash and cash equivalents (including restricted cash and cash
equivalents) at March 31, 2000 and 1999 were $21,741,000 and $12,437,000,
including approximately $6,405,000 and $3,427,000, 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
included approximately $7,645,000 and $3,562,000 at March 31, 2000 and 1999,
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 three months ended
March 31, 2000 and 1999 was $19,444,000 and $17,192,000, respectively.
Net cash used in investing activities was $5,618,000 for the three
months ended March 31, 2000. This was comprised primarily of (a) renovations at
certain hotels of approximately $2,000,000, (b) net deposits into restricted
cash accounts of approximately $1,780,000 and (c) development costs on the
Company's project in Tyson's Corner, Virginia of approximately $1,840,000.
Net cash used in investing activities was $46,995,000 for the three
months ended March 31, 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 and (b) renovations at
certain hotels of approximately $5,330,000.
Net cash used by financing activities was $10,539,000 for the three
months ended March 31, 2000, consisting primarily of borrowings under the Line
of Credit of approximately $7,000,000, which was offset by distributions paid of
approximately $13,815,000 and payments on debt of approximately $3,540,000.
Net cash provided by financing activities was $32,609,000 for the three
months ended March 31, 1999, consisting primarily of borrowings under the Line
of Credit of $47,000,000 offset by distributions paid of $13,772,000.
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 Series A Preferred Shares 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 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.
13
<PAGE>
Debt
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 bank funding commitments remaining under its
Line of Credit of approximately $190,000,000 at March 31, 2000. However, the
actual amount that can be borrowed is subject to borrowing base availability as
described in the loan agreement. On May 8, 2000 the Company closed on the
Amended Line of Credit. The Amended Line of Credit has terms, conditions and
covenants substantially similar to those of the Line of Credit, except that the
size of the facility has been reduced to $130,000,000 and the maturity date has
been extended to May 2003.
The following table summarizes certain information concerning the
Company's debt at March 31, 2000:
Investment in hotels, at cost $835,211,000
Debt 247,335,000
Percentage of debt to investment in hotels, at cost 29.6%
Percentage of fixed rate debt to total debt 76.1%
Weighted average implied interest rates on:
Fixed rate debt 7.45%
Variable rate debt 6.91%
Total debt 7.32%
Number of hotels properties:
Collateralized 34
Unencumbered 33
Certain debt coverage ratios for the Company are as follows for the
three months ended March 31, 2000: (a) interest coverage ratio (EBITDA divided
by interest expense) of 5.8x, (b) fixed charge coverage ratio (EBITDA divided by
fixed charges) of 2.6x, and (c) total debt to EBITDA of 2.4x. 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 at 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 March 31, 2000, a 100 basis point
increase in the LIBOR rate would increase annual interest charges $490,000.
In the future, the Company may seek to increase or decrease 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.
14
<PAGE>
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
some of the routine expenditures for furniture and equipment at the Hotels. It
is currently estimated that the Company will spend between $25,000,000 and
$28,000,000 in capital expenditures at the Hotels in 2000. 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.
The Company is developing a 120-room Residence Inn by Marriott Hotel
located in Tysons Corner, Virginia. The total cost of this project is
anticipated to be approximately $14 million and completion of the project is
anticipated in the fourth quarter of 2000. This hotel is expected to be leased
and operated by the IH Lessee. The 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 distribution 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, generally possess the ability to adjust room rates
quickly. However, competitive pressures have limited and may in the future limit
the ability of the Lessee and any third-party managers retained by the Lessee to
raise room rates in response to inflation.
Fund From Operations
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Funds From Operations ("FFO") is a widely used performance measure for
an equity REIT. FFO, as defined by the National Association of the Real Estate
Investment Trusts ("NAREIT"), is net income (loss) before minority interest
(determined in accordance with generally accepted accounting principals),
excluding gains (or losses) from sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. The Company has also made an adjustment for rent revenue deferred
under SAB 101. FFO is presented to assist investors in analyzing the performance
of the Company. The Company's method of calculating FFO may be different from
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. FFO (i) does not represent cash flows from operating activities as
defined by generally accepted accounting principles, (ii) is not indicative of
cash available to fund all cash flow and liquidity needs, including its ability
to make distributions, and (iii) should not be considered as an alternative to
net income (as determined in accordance with generally accepted accounting
principles) for purposes of evaluating the Company's operating performance.
The following table presents the Company's calculations of FFO and the
denominator for FFO per share for the three months ended March 31, 2000 and 1999
(in thousands, except share data):
2000 1999
--------------------------------------------------------------------------
Net income (loss) applicable to
common shareholders $ (6,738) $ 4,610
Minority interest, common (303) 205
Minority interest, preferred 1,173 1,173
Depreciation 9,608 8,712
Preferred share dividends 2,496 2,496
Deferred rent revenue 12,965 -
--------------------------------------------------------------------------
FFO $ 19,201 $ 17,196
--------------------------------------------------------------------------
Denominator for diluted
earnings per share 34,192,607 34,169,139
Weighted average
Common Units 1,559,515 1,540,096
Preferred Units 4,063,329 4,063,329
Convertible
preferred shares 6,857,493 6,857,493
--------------------------------------------------------------------------
Denominator for FFO
per share 46,672,944 46,630,057
--------------------------------------------------------------------------
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 favors or to reflect the impact
of actual future events or developments or such forward-looking statements.
16
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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 debt. At March 31, 2000, the Company had total
outstanding indebtedness of approximately $247,335,000. 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. At March 31, 2000, the
Company has no derivative or interest rate hedging instrument exposure.
Approximately 76.1% of the Company's outstanding debt was subject to fixed rates
with a weighted average implied interest rate of 7.45% at March 31, 2000. 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 March 31, 2000, the table presents principal
repayments and related weighted average interest rates by expected maturity
dates (in thousands):
<TABLE>
<CAPTION>
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------------------------------ --------- --------- --------- --------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Debt
Fixed rate $2,161 $6,081 $3,480 $4,577 $4,905 $167,131 $188,335 $188,335
Average interest rate 7.57% 6.32% 7.65% 7.57% 7.57% 7.48% 7.45%
Variable rate -- 49,000 -- -- -- 10,000 59,000 59,000
Average interest rate -- 7.58% -- -- -- 3.65% 6.91%
</TABLE>
The table incorporates only those exposures that exist as of March 31, 2000 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.
17
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INNKEEPERS USA TRUST
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
Registrant in the three months ending March 31, 2000
18
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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
/s/ Gregory M. Fay
July 17, 2000 ----------------------------------
--------------------------- Gregory M. Fay
Chief Accounting Officer
(Principal Accounting Officer)
