UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- ----
X Quarterly Report Pursuant to Section 13 or 15(d) of
- ---- The Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 2004 Commission File Number 01-12073
EQUITY INNS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1550848
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer)
Incorporation or Organization Identification No.)
7700 Wolf River Boulevard, Germantown, TN 38138
--------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(901) 754-7774
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant: (1) 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 shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No .
----- -----
The number of shares of the Registrant's Common Stock, $.01 par value,
outstanding on May 3, 2004 was 45,446,213.
1 of 40
EQUITY INNS, INC.
INDEX
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2004
(unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations (unaudited) -
For the three months ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows (unaudited) -
For the three months ended March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 37
PART II. Other Information
Item 1. Legal Proceedings 38
Item 6. Exhibits and Reports on Form 8-K 38
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITY INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2004 2003
-------- ------------
(unaudited)
ASSETS
Investment in hotel properties, net $694,850 $681,478
Assets held for sale - 10,242
Cash and cash equivalents 10,115 8,201
Accounts receivable, net of doubtful
accounts of $200 and $200, respectively 6,706 5,069
Notes receivable, net 5,694 4,917
Deferred expenses, net 8,135 8,291
Deposits and other assets, net 7,290 6,083
-------- --------
Total assets $732,790 $724,281
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $347,838 $329,774
Accounts payable and accrued expenses 22,606 22,913
Distributions payable 6,998 6,939
Interest rate swap 1,737 931
Minority interests in Partnership 6,859 7,338
-------- --------
Total liabilities 386,038 367,895
-------- --------
Commitments and Contingencies
Shareholders' equity:
Preferred stock (Series B), 8.75%, $.01 par value,
10,000,000 shares authorized, 3,450,000 shares
issued and outstanding ($86,250 aggregate
liquidation preference) 83,524 83,524
Common Stock, $.01 par value, 100,000,000
shares authorized, 43,792,050 and 43,305,827
shares issued and outstanding 438 433
Additional paid-in capital 466,260 463,691
Treasury stock, at cost, 747,600 shares (5,173) (5,173)
Unearned directors' and officers' compensation (1,870) (123)
Distributions in excess of net earnings (194,690) (185,035)
Unrealized loss on interest rate swap (1,737) (931)
-------- --------
Total shareholders' equity 346,752 356,386
-------- --------
Total liabilities and shareholders' equity $732,790 $724,281
======== ========
The accompanying notes are an integral
part of these condensed consolidated financial statements.
3
EQUITY INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Three Months
Ended March 31,
-----------------------------
2004 2003
------- -------
(unaudited)
Revenue:
Room revenue $51,892 $49,650
Other hotel revenue 2,585 2,519
Other revenue 99 107
------- -------
Total revenues 54,576 52,276
Operating expenses:
Direct hotel expenses 31,642 30,352
Other hotel expenses 1,995 1,912
Depreciation 9,492 9,586
Property taxes, rental expense and insurance 4,429 4,725
General and administrative expenses:
Stock-based or non-cash compensation 159 132
Other general and administrative expenses 2,007 1,908
------- -------
Total operating expenses 49,724 48,615
------- -------
Operating income 4,852 3,661
Interest expense, net 6,740 7,449
------- -------
Loss from continuing operations
before minority interest and income taxes (1,888) (3,788)
Minority interests 107 49
Deferred income tax benefit - 2,342
------- -------
Loss from continuing operations (1,781) (1,397)
------- -------
Discontinued operations:
(Loss) gain on sale of hotel properties (320) 1,274
Income (loss) from discontinued operations (97) 82
------- -------
Income (loss) from discontinued operations (417) 1,356
------- -------
Net loss (2,198) (41)
Preferred stock dividends 1,887 1,633
------- -------
Net loss applicable to common shareholders $(4,085) $(1,674)
======= =======
Net income (loss) share data: Basic and diluted
income (loss) per share:
Continuing operations $ (0.09) $ (0.07)
Discontinued operations (0.01) 0.03
------- -------
Net loss per common share (0.10) $ (0.04)
======= =======
Weighted average number of common
shares outstanding - basic and diluted 42,881 40,513
======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
4
EQUITY INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months Ended
March 31,
----------------------------
2004 2003
------- --------
(unaudited)
Cash flows from operating activities:
Net loss $(2,198) $ (41)
Adjustments to net loss provided by operating activities:
Loss (gain) on sale of hotel properties 320 (1,274)
Depreciation 9,492 9,954
Amortization of loan costs and franchise fees 444 582
Stock-based or non-cash compensation 159 132
Income tax benefit - (2,342)
Minority interests (107) (49)
Changes in assets and liabilities:
Accounts receivable (1,637) (1,062)
Distributions payable 26 -
Deposits and other assets (1,207) 261
Accounts payable and accrued expenses 132 (808)
------- --------
Net cash provided by operating activities 5,424 5,353
------- --------
Cash flows from investing activities:
Improvements and additions to hotel properties (3,291) (2,691)
Acquisition of hotel properties (13,229) -
Cash paid for franchise applications (25) -
Net proceeds from sale of hotel properties 9,122 10,359
Proceeds from principal payments on note receivable 24 -
------- --------
Net cash provided by (used in) investing activities (7,399) 7,668
------- --------
Cash flows from financing activities:
Distributions paid (7,568) (7,050)
Cash paid for loan costs (264) (2)
Proceeds from borrowings 22,000 13,625
Payments on long-term debt (10,279) (16,303)
------- --------
Net cash provided by (used in) financing activities 3,889 (9,730)
------- --------
Net increase in cash 1,914 3,291
Cash and cash equivalents at beginning of period 8,201 5,916
------- --------
Cash and cash equivalents at end of period $10,115 $ 9,207
======= ========
The accompanying notes are an integral
part of these condensed consolidated financial statements.
5
Supplemental disclosure of non-cash investing and financing activities:
For all stock issuances below, we value the anticipated award based on the
shares of common stock times the closing price of our common stock on date of
issuance.
During January 2004, we issued to two of our officers, 47,535 shares of common
stock at $9.26 per share under the 1994 Stock Incentive Plan in lieu of cash as
a performance bonus.
During January 2004, we sold one hotel in Jacksonville, Florida for $5.0
million, including the assumption of a non-cash note receivable for $800,000.
During February 2004, we issued 36,113 shares of common stock upon redemption of
Partnership units.
During February 2004, we issued to several key officers, 405,233 shares of
restricted common stock at $9.45 per share under the 1994 Stock Incentive Plan
as part of management's long-term incentive compensation.
During March 2004, we completed the purchase of a Marriott Residence Inn hotel
and assumed $6.3 million in long-term debt.
During the quarter ended March 31, 2004, we declared approximately $5.7 million
in common stock and unit dividends. We paid these dividends on May 3, 2004.
During the quarter ended March 31, 2004, we issued 3,142 shares of common stock
at prices ranging from $9.05 to $9.17 per share to our independent directors in
lieu of cash as compensation.
During January 2003, we issued to one of our officers, 19,081 shares of common
stock at $5.88 per share under the 1994 Stock Incentive Plan in lieu of cash as
a performance bonus.
During January 2003, we issued 24,077 shares of common stock upon redemption of
Partnership units.
During the quarter ended March 31, 2003, we issued 4,370 shares of common stock
at prices ranging from $5.82 to $6.02 per share to our independent directors in
lieu of cash as compensation.
During the quarter ended March 31, 2003, we declared approximately $5.4 million
in common stock and unit dividends. We paid these dividends on May 1, 2003.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
6
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
Throughout this Form 10-Q, the words "Company", "Equity Inns", "we", "our", and
"us" refer to Equity Inns, Inc., a Tennessee corporation, and its consolidated
subsidiaries, unless otherwise stated or the context requires otherwise.
1. Organization
Equity Inns is a hotel real estate investment trust ("REIT") for federal
income tax purposes. The Company, through its wholly owned subsidiary,
Equity Inns Trust (the "Trust"), is the sole general partner of Equity
Inns Partnership, L.P. (the "Partnership") and at March 31, 2004 owned an
approximate 97.5% interest in the Partnership.
Our hotel properties are leased to our wholly-owned taxable REIT
subsidiaries (the "TRS Lessees"). Our hotel properties are managed by
independent third parties. At March 31, 2004, the independent managers of
our hotels are as follows:
Number of Hotels
----------------
Interstate Hotels & Resorts, Inc. 48
Hilton Hotels Corporation 17
Prime Hospitality Corporation (subsidiaries) 18
Other 9
--
92
==
Our management agreements with Prime are structured to provide the TRS
Lessees minimum net operating income at each of our 18 AmeriSuites
hotels. In addition, the management agreements specify a net operating
income threshold for each of our 18 AmeriSuites hotels. As the manager,
the Prime subsidiaries can earn an incentive management fee of 25% of
hotel net operating income above the threshold, to a maximum of 6.5% of
gross hotel revenues. If the management fee exceeds 6.5% of gross hotel
revenue, the Prime subsidiaries may earn an additional fee of 10% on any
additional net operating income. If a hotel fails to generate net
operating income sufficient to reach the threshold, Prime's subsidiaries
are required to contribute 25% of the shortfall in net operating income
to the Company. We record such shortfall contributions as a reduction of
base management fees which are included as a component of direct hotel
expenses in our accompanying condensed consolidated statements of
operations when all contingencies related to such amounts have been
resolved. In May 2003, we updated our current franchise contracts and
management agreements with Prime on all of our AmeriSuites hotels. The
minimum net operating income guarantee agreements were not extended
beyond their original terms and are set to expire in 2007 and 2008. Under
the new agreements, we extended the existing franchise agreements with
Prime to 2028 and the management agreements to 2010, as long as Prime
continues to be in compliance with the
7
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
1. Organization, Continued
minimum net operating income guarantees in the original agreements. For
each of the three months ended March 31, 2004 and 2003, we recorded
approximately $1.6 million in minimum income guarantees from Prime as a
reduction of our base management fee expense in the accompanying
condensed consolidated statements of operations. The management contracts
for our remaining hotels have terms ranging from one to ten years and
generally provide for payment of management fees ranging from 1.5% to
2.5% of hotel revenues and an incentive fee consisting of a percentage of
gross operating profits in excess of budget, as defined by the management
agreements.
These unaudited condensed consolidated 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 our
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. The
accompanying unaudited condensed consolidated financial statements
reflect, in the opinion of management, all adjustments necessary for a
fair presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature. The results of our
operations for the current three-month period are not necessarily
indicative of the results to be expected for the full year.
Certain prior period amounts have been reclassified to conform to the
current year presentation.
2. Summary of Significant Accounting Policies
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers and other borrowers to make
required payments. The allowance for doubtful accounts is maintained at a
level believed adequate by us to absorb estimated probable receivable
losses. Our periodic evaluation of the adequacy of the allowance is
primarily based on past receivable loss experience, known and inherent
credit risks, current economic conditions, and other relevant factors.
This evaluation is inherently subjective as it requires estimates
including the amounts and timing of future collections. If the financial
condition of our customers or other borrowers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
8
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
2. Summary of Significant Accounting Policies, Continued
Net Income Per Common Share
Basic earnings per common share from continuing operations are computed
by dividing income (loss) from continuing operations as adjusted for
gains or losses on the sale of hotel properties not included in
discontinued operations, for losses on redemptions of preferred stock,
and for dividends on preferred stock by the weighted average number of
shares of common stock outstanding. Diluted earnings per common share
from continuing operations are computed by dividing income (loss) from
continuing operations as adjusted for gains or losses on the sale of
hotel properties not included in discontinued operations and for
dividends on preferred stock by the weighted average number of shares of
common stock outstanding plus other potentially dilutive securities.
Potential dilutive securities included in the Company's calculation of
diluted earnings per share include shares issuable upon exercise of stock
options. All of the options to purchase shares of our common stock that
were outstanding during the three months ended March 31, 2004 and 2003
were not included in the computation of diluted EPS because their effect
would have been anti-dilutive.
Distributions
With the exception of the fourth quarter 2001, we have paid regular
quarterly cash distributions to shareholders. These distributions are
determined quarterly by our Board based on our operating results,
economic conditions, capital expenditure requirements, the Internal
Revenue Code's REIT annual distribution requirements, leverage
restrictions imposed by our Line of Credit and any other matters that our
Board deems relevant.
Stock-Based Compensation
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. We have
adopted a policy that applies the estimated fair value based method of
accounting for stock-based employee compensation prospectively to all
awards granted, modified or settled.
In January 2004, we issued 405,233 shares of restricted common stock to
certain key executives of our Company. These grants vest between three
and five years after the date of issuance, if certain performance
measures have been achieved by the Company. The vesting
9
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
2. Summary of Significant Accounting Policies, Continued
of the restricted stock is based on cumulative funds from operations
("FFO") and total shareholder return targets as determined by our Board.
The executives will be entitled to vote these restricted stock shares and
will also receive dividends on the common shares over the vesting period.
Based on management's estimated fair value of these restricted stock
grants, we record compensation expense ratably over the respective
vesting periods.
Segment Reporting
We consider each of our hotels to be an operating segment, none of which
meets the threshold for a reportable segment as prescribed by SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." We allocate resources and assess operating performance
based on each individual hotel.
3. Investment in Hotel Properties
During the three months ended March 31, 2004, we invested approximately
$19.6 million related to previously announced acquisitions that were
completed during the quarter. We funded these acquisitions primarily
through our Line of Credit and the assumption of $6.3 million in
long-term debt.
During the three months ended March 31, 2004, we invested $3.3 million to
fund capital improvements in our hotels, including replacement of
carpets, drapes, renovation of common areas and improvements of hotel
exteriors. We expect to fund an aggregate of approximately $17.0 million
throughout 2004 for capital improvements with $3.5 million representing
one- time upgrades, related to brand initiatives, to certain of our hotel
properties. We intend to fund such improvements out of future cash flows
from operations, current cash balances and borrowings under our Line of
Credit.
During the three months ended March 31, 2004, we sold three hotels for
approximately $10.9 million, including approximately $9.1 million in cash
(after selling costs of approximately $980,000) and an increase to an
existing note receivable of $800,000. We utilized the net proceeds to pay
down existing long-term debt. In conjunction with these sales, we
recorded a loss of approximately $320,000 as part of discontinued
operations in our accompanying condensed consolidated statement of
operations.
We classify certain assets as held for sale based on management having
the authority and intent of entering into commitments for sale
transactions expected to close in the next twelve months. When we
identify an asset as held for sale, we estimate the net realizable value
of such asset. If the net realizable value of the asset is less than the
carrying amount of the asset, we establish
10
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
3. Investment in Hotel Properties, Continued
a reserve for the estimated loss. Depreciation is no longer recorded once
we have identified an asset as held for sale. Net realizable value is
estimated as the amount at which the asset could be sold (fair value)
less costs to sell. We have determined fair value by using prevailing
market conditions, appraisals or current estimated net sales proceeds
from pending offers, as appropriate. We only allocate to discontinued
operations interest on debt that is to be assumed by the buyer and
interest on debt that is required to be repaid as a result of the
disposal transaction.
4. Notes Receivable
Notes receivable consist of the following at March 31, 2004 and December
31, 2003 (in thousands):
2004 2003
------ ------
HM-NM, Inc. $4,359 $3,582
Officers of the Company 1,335 1,335
------ ------
$5,694 $4,917
====== ======
In 2003, we sold our AmeriSuites hotel in Jacksonville, Florida to HM-NM,
Inc. for a purchase price of approximately $6.0 million, $4.0 million of
which was in the form of a 15-month note bearing interest at 7.75% per
annum. Additionally, in 2004 we sold a Hampton Inn hotel located in
Jacksonville, Florida to HM-NM, Inc. for a purchase price of
approximately $5.0 million, including an additional $800,000 increase to
the note receivable discussed above. The entire note is secured by the
land, building and furniture and fixtures of the AmeriSuites hotel
located at 8277 Western Way Circle, Jacksonville, Florida. Accordingly,
as the sale of both hotels was negotiated concurrently, coupled with the
initial minimum investment required by SFAS No. 66, "Accounting for Sales
of Real Estate," we have deferred a gain of approximately $420,000 until
we collect the note receivable.
At various times from January 1998 to July 2002, we have advanced loans
to our executive officers for income taxes relating to annual bonuses
taken in shares of our common stock and income taxes related to the
taxable value of vested restricted stock. At March 31, 2004, the
aggregate amount of notes receivable from our officers is approximately
$1.3 million. All notes are collateralized by the applicable shares of
common stock held by each officer and are non-interest bearing. These
11
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
4. Notes Receivable, Continued
notes are due and payable on the earlier of July 23, 2004 or 30 days
after the date of termination of any officer's employment with the
Company. We no longer provide loans to officers.
5. Debt
The following details our debt outstanding at March 31, 2004 and December
31, 2003 (in thousands):
Principal Balance
---------------------- Interest
3/31/04 12/31/03 Rate Maturity
-------- -------- ------------------- --------
Commercial Mortgage Bonds
Class A $ - $ 4,061 6.83% Fixed Nov 2006
Class B 47,839 50,600 7.37% Fixed Dec 2015
Class C 10,000 10,000 7.58% Fixed Feb 2017
-------- --------
57,839 64,661
Line of Credit 69,500 50,000 LIBOR plus Variable June 2006
Percentage
Mortgage 90,590 91,009 8.37% Fixed July 2009
Mortgage 66,625 66,891 8.25% Fixed Nov 2010
Mortgage 34,481 34,612 8.25% Fixed Nov 2010
Mortgage 10,750 10,750 LIBOR plus
285 pts. Variable August 2008
Mortgage 2,887 2,912 6.00% Fixed May 2008
Mortgage 5,369 5,431 10.00% Fixed Sept 2005
Mortgage 3,461 3,508 6.37% Fixed Nov 2016
Mortgage 6,336 - 8.70% Fixed Nov 2010
-------- --------
$347,838 $329,774
======== ========
We entered into a collateralized Line of Credit in June 2003 for $110.0
million, subject to certain restrictions. The Line of Credit bears
interest at LIBOR plus 2.25% to 3.0% per annum as determined by our
quarterly leverage and the facility matures in June 2006 but may be
extended at our option for an additional year. At March 31, 2004, the
interest rate on our Line of Credit was LIBOR (1.09% at March 31, 2004)
plus 2.75%. Fees ranging from .45% to .60% per annum, as determined by
our ratio of total indebtedness to EBITDA, are paid quarterly on the
unused portion of our Line of Credit. The Line of Credit maintains
certain restrictions regarding capital expenditures and other quarterly
financial covenants, including a test for cash available for dividend
payouts, a fixed charge test and a leverage test, among other covenants.
At March 31, 2004, we were in compliance with all covenants required by
our Line of Credit.
12
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
5. Debt, Continued
All of our debt is secured by our hotels. Our debt has maturity dates
that range from September 2005 to February 2017 with certain debt
requiring annual principal payments and certain debt representing term
maturities. The terms of our debt generally requires prepayment penalties
if repaid prior to maturity.
Certain of our loan agreements require quarterly deposits into separate
room renovation accounts for the amount by which 4% of revenues at our
hotels exceeds the amount expended by us during the year for replacement
of furniture, fixtures and equipment and capital improvements for our
hotels. For 2004, we expect that amounts expended will exceed, in the
aggregate, the amount required under the loan covenants. If, for any
reason, we do not meet the renovation requirements at the individual
hotel level, we could be required to fund such shortfalls into cash
escrow accounts.
Our Line of Credit has a stated borrowing capacity of $110.0 million.
This capacity is further limited to a stated percentage of the appraised
value of the assets pledged as collateral. The borrowing capacity of our
Line of Credit based on these appraised values is approximately $100.6
million at March 31, 2004.
6. Interest Rate Swap Contracts
In 2003, we entered into an interest rate swap agreement with a financial
institution on a notional amount of $25.0 million. The agreement expires
in November 2008. The agreement effectively fixes the interest rate on
the first $25.0 million of floating rate debt outstanding under the Line
of Credit at a rate of 3.875% per annum plus the interest rate spread on
the Line of Credit, thus reducing our exposure to interest rate
fluctuations. The notional amount does not represent amounts exchanged by
the parties, and thus is not a measure of exposure to us. The differences
to be paid or received by us under the interest rate swap agreement are
recognized as an adjustment to interest expense. The agreement is with a
major financial institution, which is expected to fully perform under the
terms of the agreement.
In 2003, we entered into an additional interest rate swap agreement with
a financial institution on a notional amount of $25.0 million. The
agreement expires in November 2006. The agreement effectively fixes the
interest rate on the second $25.0 million of floating rate debt
outstanding under the Line of Credit at a rate of 3.22% per annum plus
the interest rate spread on the Line of Credit, thus reducing our
exposure to interest rate fluctuations. The notional amount does not
represent amounts exchanged by the parties, and thus is not a measure of
exposure to us. The differences to be paid or received by us under the
interest rate swap agreement are recognized as an adjustment to interest
expense. The agreement is with a major financial institution, which is
expected to fully perform under the terms of the agreement.
13
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
7. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires the disclosure
of the components included in comprehensive income (loss). For the three
months ended March 31, 2004, we recorded comprehensive loss of
approximately $3.0 million, comprised of a net loss of approximately $2.2
million and the change in unrealized loss on our interest rate swap of
approximately $800,000.
8. Income Taxes
The Company's income tax benefit related to our TRS Lessees consists of
the following for the three months ended March 31 (in thousands):
2004 2003
------ ------
Deferred tax benefit:
Federal $1,380 $2,095
State 162 247
------ ------
1,542 2,342
Less valuation allowance (1,542) -
------- ------
Total $ - $2,342
====== ======
The TRS Lessees' deferred income tax asset of approximately $18.3 million
is comprised primarily of the benefit of net operating loss carryforwards
that expire beginning in December 2021. At year-end 2003, we determined
that a valuation allowance was necessary for the entire deferred income
tax asset. Currently, we continue to believe that it is more likely than
not that the Company will not be able to realize our deferred income tax
asset, and thus we have recorded a valuation allowance for the current
balance. If we determine that the Company will be able to realize all or
part of our net deferred tax asset in the future, an adjustment to the
valuation allowance would be charged to income in the periods such
determination was made.
9. Discontinued Operations
In 2002, we adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 established
criteria beyond that previously specified in SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," to determine when a long-lived asset is classified as held
for sale, and it provides a single accounting model for the disposal of
long-lived assets. Due to the adoption of SFAS No. 144, we now report as
discontinued operations any assets held for sale (as defined by SFAS No.
144), and assets sold during the periods presented. We identify and
assess discontinued operations at the individual hotel operating level
because we
14
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
9. Discontinued Operations, Continued
can identify cash flows at this level. All results of these discontinued
operations, less applicable income taxes, are included as a separate
component of income in our accompanying condensed consolidated statements
of operations. This change has resulted in certain reclassifications of
the previously reported first quarter 2003 statement of operations.
We classify certain assets as held for sale based on management having
the authority and intent of entering into commitments for sale
transactions expected to close in the next twelve months. When we
identify an asset held for sale, we estimate the net realizable value of
such asset. If the net realizable value of the asset is less than the
carrying amount of the asset, we establish a reserve for the estimated
loss. Depreciation is no longer recorded once we have identified an asset
as held for sale. Net realizable value is estimated as the amount at
which the asset could be bought or sold (fair value) less costs to sell.
We have determined fair value by using prevailing market conditions,
appraisals or current estimated net sales proceeds from pending offers,
as appropriate. We only allocate to discontinued operations interest on
debt that is to be assumed by the buyer and interest on debt that is
required to be repaid as a result of the disposal transaction.
During the first quarter, we sold three hotels for approximately $10.9
million, including approximately $9.1 million in cash (after selling
costs of approximately $980,000) and an increase to an existing note
receivable of $800,000. The hotels sold were a 97-room Hampton Inn
located in Sarasota, Florida, a 122-room Hampton Inn located in
Jacksonville, Florida, and a 141-room Comfort Inn located in Arlington,
Texas. The average age of these hotels was approximately 17 years old. We
utilized the net proceeds to pay down existing long-term debt. These
sales represent the last of our hotels that were previously classified as
discontinued operations. The operations of these hotels are included in
the statement of operations under the heading, "Income (loss) from
discontinued operations." The components of income (loss) from
15
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
9. Discontinued Operations, Continued
discontinued operations are as follows for the three months ended March
31, 2004 and 2003 (in thousands):
Three Months Ended
March 31,
2004 2003
----- -------
Revenue:
Room revenue $ 322 $2,244
Other operating departments 11 80
Operating Costs:
Property operating costs (352) (1,460)
Other operating departments (25) (76)
Property taxes and insurance (34) (158)
Depreciation - (368)
Amortization of franchise fees - (3)
Interest (19) (177)
----- ------
Income (loss) from operations of discontinued operations (97) 82
(Loss) gain on sale of hotel properties (320) 1,274
----- ------
Income (loss) from discontinued operations $(417) $1,356
===== ======
In 2003, we sold our AmeriSuites hotel in Jacksonville, Florida for $6.0
million, including the assumption of a $4.0 million 15-month note
receivable bearing interest at 7.75% per annum. This sale was negotiated
concurrently with the sale of our Hampton Inn hotel in Jacksonville,
Florida, as discussed above. As part of the Hampton Inn sale, we
increased our note receivable to $4.8 million. The entire $4.8 million
note receivable is collateralized by the AmeriSuites hotel sold. Given
the initial minimum investment required by SFAS No. 66, "Accounting for
Sales of Real Estate," we have deferred a gain of approximately $420,000
until we collect the note receivable.
10. Commitments and Contingencies
Under our franchise agreements, we are periodically required to make
capital improvements in order to maintain our brand standards.
Additionally, under certain of our loan covenants, we are generally
obligated to fund 4% of total hotel revenues per quarter on a cumulative
basis, to a separate room renovation account for the ongoing replacement
or refurbishment of furniture, fixtures and equipment at our hotels. For
2004, we expect that amounts expended will exceed, in the aggregate, the
amount required under the loan covenants. If, for any reason, we do not
meet the renovation requirements at the individual hotel level, we could
be required to fund such shortfalls into cash escrow accounts.
16
EQUITY INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------
10. Commitments and Contingencies, Continued
We maintain agreements with certain senior officers that provide for
severance payments in the event of a change in control of Equity Inns. At
March 31, 2004, the maximum amount of compensation that would be payable,
under all agreements if a change of control occurred, would be
approximately $6.1 million.
We are involved in various legal actions arising in the ordinary course
of business. We do not believe that any of the pending actions will have
a material adverse effect on our business, financial condition or results
of operations.
11. Subsequent Events
On April 7, 2004, we completed an offering of 2.4 million shares of
common stock that resulted in net proceeds of approximately $21.4
million. The proceeds will be used to fund approximately $16.0 million in
previously announced acquisitions, with the remaining funds being
utilized to pay down our Line of Credit.
On April 29, 2004, we completed the acquisition of two hotels, a 81-room
Marriott Courtyard hotel located in Gainesville, Florida and a 78-room,
Marriott Residence Inn hotel located in Tallahassee, Florida for
approximately $5.4 million in cash and the assumption of $9.7 million in
long-term debt.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains or incorporates by reference 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", "estimates",
"intends", "will", "anticipates", "expects" and words of similar import. Such
forward- looking statements relate to future events, the future financial
performance of our Company, and involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following: the ability of the Company to cope with domestic
economic and political disruption and Federal and state governmental regulations
or war, terrorism, states of emergency or similar activities; risk associated
with debt financing; hotel operating risks; the ability of the Company to
successfully implement our operating strategy; changes in economic cycles;
competition from other hospitality companies; and changes in the laws and
government regulations applicable to us. Readers should specifically consider
the various factors identified, or incorporated by reference in this report
including, but not limited to those discussed in the sections entitled "Growth
Strategy" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations," certain risk factors as discussed in our Current Report
on Form 8-K filed March 11, 2004, and in any other documents filed by us with
the Securities and Exchange Commission that could cause actual results to differ
from those implied by the forward-looking statements. We disclaim any obligation
to update any such factors or to publicly announce the result of any revisions
to any of the forward-looking statements contained herein to reflect future
events or developments.
BACKGROUND
Equity Inns is a Memphis-based, self-advised hotel real estate investment trust
("REIT") primarily focused on the upscale extended stay, all-suite and upscale
limited-service segments of the hotel industry. The Company, through its wholly
owned subsidiary, Equity Inns Trust (the "Trust"), is the sole general partner
of Equity Inns Partnership, L.P. (the "Partnership") and at March 31, 2004 owned
an approximate 97.5% interest in the Partnership. The Partnership and its
affiliates lease all of our hotels to wholly-owned taxable REIT subsidiaries of
the Company (the "TRS Lessees").
We commenced operations on March 1, 1994 upon completion of our initial public
offering and the simultaneous acquisition of eight Hampton Inn hotels with 995
rooms. Over the next ten years, we grew with a focus on both geographic and
brand diversity. We believe that diversity in our asset portfolio reduces
operational variance from year-to-year and results in less volatility as
compared to the overall hotel industry.
18
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
The following table illustrates our geographic presence by the number of hotels
at March 31, 2004.
Region
------------------
East North Central 15.2%
East South Central 14.1%
Middle Atlantic 6.5%
Mountain 10.9%
New England 5.4%
Pacific Northwest 2.2%
South Atlantic 27.2%
West North Central 7.6%
West South Central 10.9%
We believe that geographic diversity helps to limit our exposure to any one
market. At March 31, 2004, we owned a geographically diverse portfolio of 92
hotels with 11,832 rooms located in 34 states. Additionally, our property mix is
spread between suburban and urban locations, helping to insulate us from various
economic climates, including a depressed business travel climate.
Our hotel portfolio includes midscale limited service hotels, all-suite hotels,
premium extended stay hotels, and full service hotels. This array of product
offering allows us to diversify the asset portfolio in an effort to reduce risk
in various economic environments.
19
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
The following chart summarizes information regarding our franchise diversity at
March 31, 2004:
Number of Number of
Franchise Affiliation Hotel Properties Rooms/Suites
--------------------- ---------------- ------------
Midscale Limited Service Hotels:
Hampton Inn 45 5,686
Comfort Inn 1 104
-- ------
Sub-total 46 5,790
All-Suite Hotels:
AmeriSuites 18 2,291
Upscale Extended Stay Hotels:
Residence Inn 12 1,453
Homewood Suites 9 1,295
-- ------
Sub-total 21 2,748
Full Service Hotels:
Holiday Inn 4 557
Comfort Inn 1 177
Courtyard by Marriott 2 269
-- ------
Sub-total 7 1,003
-- ------
Total 92 11,832
== ======
20
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
The following table sets forth certain information for the three months ended
March 31, 2004 with respect to our hotels:
Three Months Ended March 31, 2004
---------------------------------- Revenue
Number Average Per
Date of Room Daily Available
Opened Rooms Revenue(1) Occupancy Rate Room (2)
------ ------ ---------- --------- ------- ---------
Hampton Inn:
Albany, New York 1986 154 $ 931 67.1% $99.52 $66.74
Ann Arbor, Michigan 1986 150 538 55.3% $71.46 $39.68
Atlanta (Northlake), Georgia 1988 130 379 49.4% $65.40 $32.32
Austin, Texas 1987 122 448 64.9% $62.72 $40.69
Baltimore (Glen Burnie), Maryland 1989 116 658 76.4% $82.35 $62.89
Beckley, West Virginia 1992 108 536 77.2% $70.55 $54.50
Birmingham (Mountain Brook),
Alabama 1987 131 636 70.1% $76.75 $53.78
Birmingham (Vestavia), Alabama 1986 123 400 55.0% $65.49 $36.03
Chapel Hill, North Carolina 1986 122 440 61.3% $65.14 $39.93
Charleston, South Carolina 1985 125 488 73.2% $59.10 $43.23
Chattanooga, Tennessee 1988 168 580 64.5% $59.18 $38.19
Chicago (Gurnee), Illinois 1988 134 326 44.8% $59.59 $26.72
Chicago (Naperville), Illinois 1987 130 464 55.5% $71.79 $39.84
Cleveland, Ohio 1987 123 259 38.4% $60.30 $23.18
College Station, Texas 1986 135 562 71.3% $64.65 $46.12
Colorado Springs, Colorado 1985 128 207 33.5% $53.19 $17.83
Columbia, South Carolina 1985 121 399 57.5% $63.62 $36.58
Columbus, Georgia 1986 119 462 66.6% $64.56 $42.98
Columbus (Dublin), Ohio 1988 123 375 49.0% $68.38 $33.54
Dallas (Addison), Texas 1985 160 432 54.0% $55.20 $29.83
Dallas (Richardson), Texas 1987 130 379 57.7% $55.48 $32.01
Denver (Aurora), Colorado 1985 132 231 36.0% $53.80 $19.39
Detroit (Madison Heights), Michigan 1987 124 579 59.6% $86.18 $51.33
Detroit (Northfield), Michigan 1989 125 552 60.6% $79.97 $48.49
Fayetteville, North Carolina 1986 122 574 86.3% $60.42 $52.12
Gastonia, North Carolina 1989 109 320 59.1% $54.51 $32.23
Indianapolis, Indiana 1987 129 504 58.2% $73.67 $42.90
Kansas City (Overland Park), Kansas 1991 134 503 55.6% $74.16 $41.23
Kansas City, Missouri 1987 120 520 59.1% $80.61 $47.62
Knoxville, Tennessee 1991 118 464 74.9% $57.70 $43.19
Little Rock (North), Arkansas 1985 123 295 44.3% $59.57 $26.40
Louisville, Kentucky 1986 119 275 40.2% $63.71 $25.58
Memphis (Poplar),Tennessee 1985 126 575 64.2% $78.94 $50.65
Memphis (Sycamore View), Tennessee 1984 117 235 45.2% $49.35 $22.30
Meriden, Connecticut 1988 125 466 52.7% $78.28 $41.29
Milford, Connecticut 1986 148 479 52.7% $67.48 $35.54
Morgantown, West Virginia 1991 108 493 69.0% $73.33 $50.61
Nashville (Briley Parkway),
Tennessee 1987 120 384 62.2% $56.99 $35.45
Norfolk, Virginia 1990 119 503 77.3% $61.20 $47.28
Pickwick, Tennessee 1994 50 149 52.8% $61.81 $32.66
San Antonio (Bowie), Texas 1995 169 948 65.6% $93.98 $61.64
Scottsdale, Arizona 1996 126 938 73.2% $111.84 $81.84
Scranton, Pennsylvania 1994 129 548 60.9% $76.66 $46.70
State College, Pennsylvania 1987 120 340 45.1% $68.99 $31.33
St. Louis (Westport), Missouri 1987 122 403 51.6% $70.40 $36.31
21
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
Three Months Ended March 31, 2004
---------------------------------- Revenue
Number Average Per
Date of Room Daily Available
Opened Rooms Revenue(1) Occupancy Rate Room (2)
------ ------ ---------- --------- ------- ---------
Marriott Courtyard
Houston, Texas 2002 176 1,223 71.0% $107.51 $76.37
Tallahassee, Florida (3) 2000 93 556 82.3% $99.65 $82.05
Comfort Inn:
Jacksonville Beach, Florida 1973 177 1,106 77.6% $88.49 $68.65
Rutland, Vermont 1985 104 446 60.8% $77.52 $47.17
Residence Inn:
Boise, Idaho 1986 104 586 75.9% $81.50 $61.89
Burlington, Vermont 1988 96 447 62.3% $82.08 $51.13
Colorado Springs, Colorado 1984 96 453 70.2% $73.92 $51.89
Minneapolis (Eagan), Minnesota 1988 120 535 65.2% $75.16 $49.03
Oklahoma City, Oklahoma 1982 135 694 77.6% $72.51 $56.23
Omaha, Nebraska 1981 80 485 80.8% $82.53 $66.67
Portland, Oregon 1990 168 776 57.4% $88.41 $50.76
Princeton, New Jersey 1988 208 1,287 86.8% $78.33 $68.02
Somers Point, New Jersey 1988 120 585 53.9% $99.37 $53.56
Tampa, Florida (3) 1998 102 77 82.3% $105.57 $86.88
Tinton Falls, New Jersey 1988 96 662 80.0% $94.72 $75.80
Tucson, Arizona 1985 128 1,071 90.0% $102.24 $91.99
Holiday Inn:
Bluefield, West Virginia 1980 120 473 75.4% $57.48 $43.34
Charleston (Mt. Pleasant), South
Carolina 1988 158 571 53.4% $74.37 $39.74
Oak Hill, West Virginia 1983 119 229 41.5% $50.86 $21.12
Winston-Salem, North Carolina 1969 160 282 37.8% $51.02 $19.26
Homewood Suites:
Augusta, Georgia 1997 65 397 73.7% $91.02 $67.05
Chicago, Illinois 1999 235 1,680 66.4% $119.25 $79.21
Cincinnati (Sharonville), Ohio 1990 111 479 65.3% $72.64 $47.40
Hartford, Connecticut 1990 132 743 58.4% $105.89 $61.83
Memphis (Germantown), Tennessee 1996 92 486 68.4% $84.80 $58.01
Orlando, Florida 1999 252 1,872 85.2% $95.82 $81.65
Phoenix, Arizona 1996 124 1,086 80.8% $119.14 $96.24
San Antonio, Texas 1996 123 759 79.1% $85.67 $67.79
Seattle, Washington 1998 161 1,158 72.0% $109.74 $79.06
22
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
Three Months Ended March 31, 2004
---------------------------------- Revenue
Number Average Per
Date of Room Daily Available
Opened Rooms Revenue(1) Occupancy Rate Room (2)
------ ------ ---------- --------- ------- ---------
AmeriSuites:
Albuquerque, New Mexico 1997 128 650 81.1% $68.76 $55.77
Baltimore, Maryland 1996 128 616 62.5% $84.57 $52.88
Baton Rouge, Louisiana 1997 128 491 56.9% $74.12 $42.16
Birmingham, Alabama 1997 128 558 74.5% $64.32 $47.90
Cincinnati (Blue Ash), Ohio 1990 127 214 32.8% $56.72 $18.57
Cincinnati (Forest Park), Ohio 1992 126 329 41.2% $69.83 $28.76
Columbus, Ohio 1994 126 346 42.0% $71.86 $30.16
Flagstaff, Arizona 1993 117 364 58.4% $58.62 $34.22
Indianapolis, Indiana 1992 126 414 47.9% $75.45 $36.11
Las Vegas, Nevada 1998 202 1,321 85.3% $84.23 $71.86
Kansas City (Overland Park), Kansas 1994 126 353 49.7% $62.01 $30.79
Memphis (Wolfchase), Tennessee 1996 128 353 46.2% $65.60 $30.30
Miami, Florida 1996 126 699 89.2% $68.38 $60.97
Miami (Kendall), Florida 1996 67 549 85.1% $105.98 $90.15
Minneapolis, Minnesota 1997 128 566 64.7% $75.22 $48.63
Nashville, Tennessee 1997 128 401 51.4% $67.03 $34.46
Richmond, Virginia 1992 126 445 59.7% $65.06 $38.83
Tampa, Florida 1994 126 842 80.1% $91.79 $73.52
------ ------- ----- ------ ------
Consolidated Totals/Weighted 11,832 $51,892 63.2% $77.89 $49.20
average for all Hotels ====== ======= ===== ====== ======
Sold Hotels (4)
Jacksonville, Florida 1986 122 $ 30 55.9% $56.14 $31.37
Arlington, Texas 1985 141 216 36.3% $52.26 $18.95
Sarasota, Florida 1987 97 76 64.7% $57.35 $37.13
(1) Amounts in thousands.
(2) Determined by multiplying occupancy times the average daily rate.
(3) Represents a partial period of operations, as these hotels were purchased
during 2004.
(4) Operations of these hotels are classified as discontinued operations in our
accompanying consolidated statements of operations.
Approximately 93% of our hotel portfolio is comprised of the following leading
franchise brands: Homewood Suites and Hampton Inn by Hilton, Residence Inn and
Courtyard by Marriott and AmeriSuites by Prime Hospitality. We believe that
multiple brands at the midscale and upscale levels, without food and beverage,
help to insulate our asset portfolio against the volatility of individual brand
results relative to industry revenue per available room ("RevPAR") performance.
Descriptions of each of our major brands are as follows:
Homewood Suites by Hilton:
A premier upscale extended stay hotel, focusing on extended stay, corporate
transient and family travelers. Rated the #1 extended stay hotel brand by JD
Powers in 2003.
Hampton Inn by Hilton:
A premier midscale without food and beverage hotel chain with over 1,000
locations.
23
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
Residence Inn by Marriott:
A premier upscale extended stay hotel, focusing on extended stay, corporate
transient and family travelers. Rated the #2 extended stay hotel brand by JD
Powers in 2003.
Courtyard by Marriott:
An upscale full service hotel designated as the hotel designed by business
travelers for business travelers.
AmeriSuites by Prime Hospitality:
An upscale all-suite hotel, billed as America's most affordable all-suite
hotel.
Approximately 74% of our hotels are branded by Hilton and Marriott, which both
provide national marketing support and frequent stay programs that continue to
drive additional revenue. We believe that better brands generate premium RevPAR
over their peers and focusing on these premium generating brands is another
factor in our strategy to limit risk in the volatility of our hotel portfolio.
In order to qualify as a REIT, we cannot operate hotels and, consequently, we
outsource the management of our hotels to leading independent management
companies. By utilizing third-party managers with relatively short-term
contracts providing for strong operating incentive management fees, we believe
that we have better control over the operating results of our hotels. At March
31, 2004, our hotel managers are as follows:
Number of Hotels
----------------
Interstate Hotels & Resorts, Inc. 48
Hilton Hotels Corporation 17
Prime Hospitality Corporation (subsidiaries) 18
Others 9
--
92
==
GROWTH STRATEGY
The Company's business objectives are to increase funds from operations and
dividends, while enhancing shareholder value primarily through (i) aggressive
asset management and the strategic investment of capital in its diversified
hotel portfolio, primarily with mid-scale and upscale properties in urban and
suburban areas, (ii) selectively acquiring hotels that have been underperforming
due to the lack of sufficient capital improvements, poor management or franchise
affiliation, and (iii) selectively disposing of hotels that have reached their
earnings potential or may, in management's judgment, suffer adverse changes in
their local market, or require large capital
24
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
outlays. This process is ongoing, and activity could potentially increase given
a more fluid marketplace.
COMPETITION
The hotel industry is highly competitive with various participants competing on
the basis of price, level of service and geographic location. Each of our hotels
is located in a developed area that includes other hotel properties. The number
of competitive hotel properties in a particular area could have a material
adverse effect on the occupancy, average daily rate ("ADR") and RevPAR of our
hotels or at hotel properties acquired in the future. We believe that brand
recognition, location, the quality of the hotel, consistency of services
provided, and price are the principal competitive factors affecting our hotels.
To the extent that cash flows from our hotel operations are insufficient to fund
our operating or investing requirements, we may fund seasonal-related shortfalls
with borrowings under our Line of Credit.
SEASONALITY
Our operations historically have been seasonal in nature, generally reflecting
higher occupancy rates and RevPAR during the second and third quarters. This
seasonality can be expected to cause fluctuations in our quarterly operating
results.
INFLATION
Operators of hotels in general have the ability to adjust room rates quickly.
However, competitive pressures may limit our ability to raise room rates in the
face of inflation.
TAX STATUS
We intend to operate so as to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended. As long as we qualify for taxation as
a REIT, with certain exceptions, we will not be taxed at the corporate level on
our taxable income that is distributed to our shareholders. A REIT is subject to
a number of organizational and operational requirements, including a requirement
that it must distribute annually at least 90% of its taxable income in the form
of dividends to its shareholders. Failure to qualify as a REIT will render us
subject to tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates and distributions to the shareholders in any
such year will not be deductible by us. Even if we qualify for taxation as a
REIT, we may be subject to certain state and local taxes on our income and
property. In connection with our election to be taxed as a REIT, our Company
charter imposes certain restrictions on the transfer of shares of our common
stock and preferred stock. We have adopted the calendar year as our taxable
year.
25
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
BACKGROUND, Continued
AVAILABLE INFORMATION
Our Internet website address is: www.equityinns.com. We also make available free
of charge through our website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange
Act of 1934, as amended, as soon as reasonably practicable after such documents
are electronically filed with, or furnished to, the Securities and Exchange
Commission ("SEC").
We have also made available our Corporate Governance Guidelines and the charters
of the Audit Committee, Compensation Committee and Corporate Governance and
Nomination Committee on our website under "Corporate Governance." We have also
adopted a Code of Ethics that applies to our chief executive officer, our
president and chief operating officer, our chief financial officer, our
controller, and all other employees and have posted this Code of Ethics, along
with our Whistleblower policy, on our website. We intend to satisfy the
disclosure requirements under Item 10 of Form 8-K relating to amendments to or
waivers from any provision of the Code of Ethics by posting such information on
our website. Our corporate governance documents are also available in print upon
written shareholder request to our Secretary, J. Mitchell Collins, at 7700 Wolf
River Boulevard, Germantown, Tennessee 38138, or by filling out an information
request on our website under "Information Requests."
The information on our website is not, and shall not be deemed to be, a part of
this report or incorporated into any other filings that we make with the SEC.
26
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
For the Three Months Ended
-------------------------------------------------------------
March 31, March 31,
(in thousands) 2004 % 2003 %
--------- ------ --------- ------
Hotel revenues $54,477 99.8% $52,169 99.8%
Other revenue 99 .2% 107 .2%
------- ------ ------- ------
Total revenues $54,576 100.0% $52,276 100.0%
======= ====== ======= ======
Hotel expenses $33,637 61.6% $32,264 61.7%
Depreciation 9,492 17.4% 9,586 18.3%
Property taxes, rental expense
and insurance 4,429 8.1% 4,725 9.1%
General and
administrative 2,166 4.0% 2,040 3.9%
------- ------ ------- ------
Operating income $ 4,852 8.9% $ 3,661 7.0%
======= ====== ======= ======
Comparison of the Company's operating results for the three months ended March
31, 2004 and 2003.
Revenues
Our hotel revenues of approximately $54.5 million for 2004 increased
approximately $2.3 million, or 4.4%, as compared to approximately $52.2 million
in 2003. After eliminating revenues from two hotel acquisitions for the full
quarter in both periods, our same-store hotel revenues increased by
approximately $1.6 million in 2004 as compared to 2003. This increase was
primarily due to a RevPAR increase of 2.3%, driven by an increase in our ADR
from $76.35 to $77.34 and an increase of 60 points in occupancy to 62.8%, and to
approximately $500,000 in increased hotel revenues due to the effect of the 2004
leap year as compared to 2003.
Other revenue of $99,000 for 2004 remained relatively flat as compared to 2003.
27
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
RESULTS OF OPERATIONS, Continued
Operating Expenses
Hotel expenses of approximately $33.6 million for 2004 increased approximately
$1.3 million, or 4.0%, as compared to approximately $32.3 million in 2003. After
eliminating expenses from two hotel acquisitions for the full quarter in both
periods, our same-store hotel expenses increased by approximately $1.0 million
in 2004 as compared to 2003, primarily due to an increase in payroll and related
benefits of approximately $590,000, an increase in franchise fees of
approximately $200,000 and an increase in utility costs of approximately
$150,000. Hotel expenses as a percentage of hotel revenues were 61.8% in 2004
and 61.9% in 2003.
Depreciation expense of approximately $9.5 million for 2004 was relatively flat
as compared to 2003.
Property taxes, rental expense and insurance of approximately $4.4 million in
2004 decreased approximately $300,000, or 6.4%, as compared to approximately
$4.7 million in 2003, primarily due to a reduction in insurance premiums and
real estate taxes.
General and administrative expenses of approximately $2.2 million for 2004
increased approximately $200,000, or 10.0%, as compared to approximately $2.0
million in 2003. This increase was primarily due to severance and relocation
costs of approximately $155,000, an increase in payroll and related benefits of
approximately $135,000, an increase in public company expenses of approximately
$50,000, a write-off of telephone equipment of approximately $60,000, offset by
a decrease in professional fees of approximately $225,000.
Operating Income
For 2004, we recorded operating income of approximately $4.9 million as compared
to operating income of approximately $3.7 million in 2003. The principal
components of the change in operating income for 2004 as compared to 2003 was an
increase in same-store revenues of approximately $1.6 million, an increase of
approximately $380,000 in net operating income related to two hotel
acquisitions, a decrease in property taxes, rental expense and insurance of
approximately $300,000, partially offset by an increase in same-store hotel
expenses of approximately $1.0 million and an increase in general and
administrative expenses of approximately $200,000.
28
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES
Equity Inns' principal source of cash to meet our operating requirements,
including distributions to our shareholders and repayments of indebtedness, is
from our hotels' results of operations. For the three months ended March 31,
2004, net cash flows provided by our operating activities was approximately $5.4
million. We currently expect that our operating cash flows will be sufficient to
fund our continuing operations, including our required debt service obligations
and distributions to shareholders required to maintain our REIT status. We
expect to fund any short-term liquidity requirements above our operating cash
flows through short-term borrowings under our Line of Credit. In 2003, we
entered into our collateralized Line of Credit for $110.0 million, subject to
certain restrictions. Borrowings under the Line of Credit bear interest at LIBOR
plus 2.25% to 3.0% per annum as determined by our quarterly leverage, and this
facility matures in June 2006 but may be extended at our option for an
additional year. The Line of Credit maintains certain restrictions regarding
capital expenditures and other quarterly financial covenants, including a test
for cash available for dividend payouts, a fixed charge test and a leverage
test, among other covenants. At March 31, 2004, we had the ability to borrow
over $30.5 million under our Line of Credit. At March 31, 2004, we had
approximately $10.1 million of cash and cash equivalents.
We may make additional investments in hotel properties and may incur
indebtedness to make such investments or to meet distribution requirements
imposed on a REIT under the Internal Revenue Code of 1986 to the extent that
working capital and cash flows from our investments are insufficient to make
such distributions. Our Board has adopted a policy limiting aggregate
indebtedness to 45% of our investment in hotel properties, at cost, after giving
effect to our use of proceeds from any indebtedness. This policy may be amended
at any time by the Board without shareholder vote. Our consolidated indebtedness
was 37.2% of our investments in hotels, at original cost, at March 31, 2004.
On January 21, 2004 and March 26, 2004, we amended our Line of Credit to provide
for more flexibility regarding our financial covenants through June 2006,
including the redefining of our cash available for dividend payouts to exclude
certain non-cash operating items, including the deferred income tax benefit that
we will no longer record due to losses from our TRS Lessees. We incurred total
amendment fees of approximately $120,000.
29
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
The following details our debt outstanding at March 31, 2004 and December 31,
2003 (in thousands):
Principal Balance
---------------------- Interest
3/31/04 12/31/03 Rate Maturity
------- -------- ------------------- --------
Commercial Mortgage Bonds
Class A $ - $ 4,061 6.83% Fixed Nov 2006
Class B 47,839 50,600 7.37% Fixed Dec 2015
Class C 10,000 10,000 7.58% Fixed Feb 2017
-------- --------
57,839 64,661
Line of Credit 69,500 50,000 LIBOR plus Variable June 2006
Percentage
Mortgage 90,590 91,009 8.37% Fixed July 2009
Mortgage 66,625 66,891 8.25% Fixed Nov 2010
Mortgage 34,481 34,612 8.25% Fixed Nov 2010
Mortgage 10,750 10,750 LIBOR plus
285 pts. Variable August 2008
Mortgage 2,887 2,912 6.00% Fixed May 2008
Mortgage 5,369 5,431 10.00% Fixed Sept 2005
Mortgage 3,461 3,508 6.37% Fixed Nov 2016
Mortgage 6,336 - 8.70% Fixed Nov 2010
-------- --------
$347,838 $329,774
======== ========
In 2003, we entered into an interest rate swap agreement with a financial
institution on a notional amount of $25.0 million. The agreement expires in
November 2008. The agreement effectively fixes the interest rate on the first
$25.0 million of floating rate debt outstanding under our Line of Credit at a
rate of 3.875% per annum plus the interest rate spread on our Line of Credit,
or 6.63% at March 31, 2004, thus reducing our exposure to interest rate
fluctuations. The notional amount does not represent amounts exchanged by the
parties, and thus is not a measure of exposure to us. The differences to be paid
or received by us under the interest rate swap agreement are recognized as an
adjustment to interest expense. The agreement is with a major financial
institution, which is expected to fully perform under the terms of the
agreement.
In 2003, we entered into an additional interest rate swap agreement with a
financial institution on a notional amount of $25.0 million. The agreement
expires in November 2006. The agreement effectively fixes the interest rate on
the second $25.0 million of floating rate debt outstanding under our Line of
Credit at a rate of 3.22% per annum plus the interest rate spread on our Line of
Credit, or 5.97% at March 31, 2004, thus reducing our exposure to interest rate
fluctuations. The notional amount does not represent amounts exchanged by the
parties, and thus is not a measure of exposure to us. The differences to be paid
or received by us under the interest rate swap agreement are recognized as an
adjustment to interest expense. The agreement is with a major financial
institution, which is expected to fully perform under the terms of the
agreement.
30
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
During the three months ended March 31, 2004, we invested approximately $19.6
million in hotel properties related to previously announced acquisitions that
were completed during the quarter. We funded these acquisitions primarily
through our Line of Credit and the assumption of $6.3 million in long-term debt.
During the three months ended March 31, 2004, we invested $3.3 million to fund
capital improvements in our hotels, including replacement of carpets, drapes,
renovation of common areas and improvements of hotel exteriors. We expect to
fund an aggregate of approximately $17.0 million throughout 2004 for capital
improvements with $3.5 million representing one-time upgrades, related to brand
initiatives, to certain of our hotel properties. We intend to fund such
improvements out of future cash flows from operations, current cash balances and
borrowings under our Line of Credit. Under our franchise agreements, we are
periodically required to make capital improvements in order to maintain our
brand standards. Additionally, under certain of our loan covenants, we are
generally obligated to fund 4% of total hotel revenues per quarter on a
cumulative basis, to a separate room renovation account for the ongoing
replacement or refurbishment of furniture, fixtures and equipment at our hotels.
For 2004, we expect that amounts expended will exceed, in the aggregate, the
amount required under the loan covenants. If, for any reason, we do not meet the
renovation requirements at the individual hotel level, we could be required to
fund such shortfalls into cash escrow accounts.
During the three months ended March 31, 2004, we sold three hotels for
approximately $10.9 million, including approximately $9.1 million in cash (after
selling costs of approximately $980,000) and an increase to an existing note
receivable of $800,000. We utilized the net proceeds to pay down existing
long-term debt.
REITs are subject to a number of organizational and operational requirements.
For example, for federal income tax purposes, a REIT, and therefore the Company,
is required to pay distributions of at least 90% of its taxable income to our
shareholders. We intend to pay these distributions from operating cash flows.
During the three months ended March 31, 2004, our Partnership distributed an
aggregate of $5.7 million to its limited partners, or $.13 per unit (including
$5.6 million of distributions to the Company to fund distributions to our
shareholders of $.13 per share). We expect to make future quarterly
distributions to our shareholders. The amount of our future distributions will
be based upon quarterly operating results, economic conditions, capital
requirements, the Internal Revenue Code's annual distribution requirements,
leverage restrictions imposed by our Line of Credit and other factors which our
Board deems relevant.
We expect to meet our long-term liquidity requirements, such as scheduled debt
maturities and property acquisitions, through long-term secured and unsecured
borrowings, the issuance of
31
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
additional equity securities of the Company or, in connection with acquisitions
of hotel properties, the issuance of Partnership units. Under our Partnership's
limited partnership agreement, subject to certain holding period requirements,
holders of units in our Partnership have the right to require the Partnership to
redeem their units. Under the Partnership agreement, we have the option to
redeem units tendered for redemption on a one-for-one basis for shares of common
stock or for an equivalent amount of cash. We anticipate that we will acquire
any units tendered for redemption in the foreseeable future in exchange for
shares of common stock and, to date, have registered such shares so as to be
freely tradeable by the recipient.
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts, or NAREIT, defines
Funds From Operations, or FFO, as net income (loss) applicable to common
shareholders excluding gains (or losses) from sales of real estate, the
cumulative effect of changes in accounting principles, real estate-related
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not include the cost of capital
improvements and any related capitalized interest. FFO is presented on a per
share basis, including the assumed conversion of all Partnership units, and
after making adjustments for the effects of dilutive securities. We use FFO per
share as a measure of performance to adjust for certain non-cash expenses such
as depreciation and amortization because historical cost accounting for real
estate assets implicitly assumes that the value of real estate assets diminishes
predictably over time.
Because real estate values have historically risen or fallen with market
conditions, many industry investors have considered presentation of operating
results for real estate companies that use historical cost accounting to be less
informative. NAREIT adopted the definition of FFO in order to promote an
industry-wide standard measure of REIT operating performance. Accordingly, as a
member of NAREIT, Equity Inns adopted FFO as a measure to evaluate performance
and facilitate comparisons between the Company and other REITs, although FFO and
FFO per share may not be comparable to those measures reported by other
companies.
32
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
FUNDS FROM OPERATIONS, Continued
The following reconciliation of net income to FFO, applicable to common
shareholders, illustrates the difference in these measures of operating
performance:
For the Three Months Ended March 31,
2004 2003
------- -------
(in thousands, except per share and unit data)
Net loss applicable to common shareholders $(4,085) $(1,674)
Less:
Loss (gain) on sale of hotel properties 320 (1,274)
Add:
Minority interests (107) (49)
Depreciation 9,492 9,586
Depreciation from discontinued operations - 368
------- -------
Funds From Operations (FFO) (1) $ 5,620 $ 6,957
======= =======
Weighted average number of diluted common
shares and Partnership units outstanding 44,003 41,686
======= =======
(1) For 2003, FFO includes a non-cash deferred income tax benefit of $2.3
million.
33
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
our management to make estimates and judgments that affect the reported amount
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
On an on-going basis, all estimates are evaluated by our management, including
those related to bad debts, carrying value of investments in hotel properties,
income taxes, contingencies and litigation. All estimates are based upon
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers and other borrowers to make required
payments. The allowance for doubtful accounts is maintained at a level
believed adequate by us to absorb estimated probable receivable losses. Our
periodic evaluation of the adequacy of the allowance is primarily based on
past receivable loss experience, known and inherent credit risks, current
economic conditions, and other relevant factors. This evaluation is
inherently subjective as it requires estimates including the amounts and
timing of future collections. If the financial condition of our customers or
other borrowers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
We record an impairment charge when we believe an investment in hotels has
been impaired such that future undiscounted cash flows would not recover the
book basis of the investment in the hotel property. Future adverse changes
in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's carrying value,
thereby possibly requiring an impairment charge in the future.
We record a valuation allowance to reduce our deferred income tax asset to
the amount that is more likely than not to be realized. We have considered
future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. Currently, we
believe that it is more likely than not that we will not be able to realize
our deferred income tax asset, and thus have recorded a valuation allowance
for the entire balance. If we
34
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
CRITICAL ACCOUNTING POLICIES AND ESTIMATES, Continued
determine that the Company will be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the valuation allowance would
be charged to income in the periods such determination was made.
OTHER DEVELOPMENTS
Acquisitions
In late 2003 and early 2004, we announced our intent to purchase nine hotels
from the McKibbon Hotel Group. All of these transactions are expected to close
by the end of May 2004. The total purchase price for the nine hotels is
approximately $70.0 million, including the assumption of approximately $37.0
million in secured debt, and we expect to fund these acquisitions primarily
through borrowings under our Line of Credit and the additional issuance of
equity securities. The average age of these nine hotels is seven years.
On January 26, 2004, the Company completed the acquisition of one of the
McKibbon hotels, a 93- room Marriott Courtyard hotel located in Tallahassee,
Florida, for approximately $9.8 million in cash.
On March 25, 2004, we completed the acquisition of one of the McKibbon hotels, a
102-room Marriott Residence Inn hotel located in Tampa, Florida, for
approximately $3.5 million in cash and the assumption of $6.3 million in
long-term debt.
On April 29, 2004, we completed the acquisition of two of the McKibbon hotels, a
81-room Marriott Courtyard hotel located in Gainesville, Florida and a 78-room,
Marriott Residence Inn hotel located in Tallahassee, Florida for approximately
$5.4 million in cash and the assumption of $9.7 million in long-term debt.
Common Stock Offering
On April 7, 2004, we completed an offering of 2.4 million shares of common stock
that resulted in net proceeds of approximately $21.4 million. The proceeds will
be used to fund approximately $16.0 million in previously announced
acquisitions, with the remaining funds being utilized to pay down our Line of
Credit.
Hotel Sales
During the first quarter, we sold three hotels for approximately $10.9 million,
including $9.1 million of cash (after selling costs of approximately $980,000)
and an increase to an existing note receivable of approximately $800,000. The
hotels sold were a 97-room Hampton Inn located in Sarasota, Florida,
35
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
OTHER DEVELOPMENTS, Continued
a 122-room Hampton Inn located in Jacksonville, Florida, and a 141-room Comfort
Inn located in Arlington, Texas. The average age of these hotels was
approximately 17 years. We utilized the net proceeds to pay down existing
long-term debt. These sales represent the last of our hotels that were
previously classified as discontinued operations.
Hotel Development
We intend to develop a 200-room, full service Marriott hotel in Sandy, Utah, a
suburb of Salt Lake City, Utah. We estimate that the development cost of this
hotel will be approximately $24.0 million, including approximately $2.2 million
in land previously purchased by us, and should be completed by mid-2006. For
2004, we expect to fund approximately $5.3 million related to the development of
this hotel, principally through borrowings under our Line of Credit. We plan to
obtain additional financing sources to complete the development of this hotel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial market risks, the most predominant of which
is the fluctuation in interest rates. At March 31, 2004, our exposure to market
risk for a change in interest rates is related to our debt outstanding under the
Line of Credit and certain hotel secured debt. Total debt outstanding under
these two debentures totaled approximately $80.3 million at March 31, 2004.
Our Line of Credit bears interest at a variable rate of LIBOR plus 2.25% to 3.0%
per annum as determined by our quarterly leverage. At March 31, 2004, our
interest rate on our Line of Credit was LIBOR (1.09% at March 31, 2004) plus
2.75%. Our interest rate risk objective is to limit the impact of interest rate
fluctuations on earnings and cash flows and to lower our overall borrowing
costs. To achieve this objective, we manage our exposure to fluctuations in
market interest rates for our borrowings through the use of fixed-rate debt
instruments to the extent that reasonably favorable rates are obtainable through
such arrangements and derivative financial instruments such as interest rate
swaps, to effectively lock the interest rate on a portion of our variable rate
debt. We do not enter into derivative or interest rate transactions for
speculative purposes. We also regularly review interest rate exposure on our
outstanding borrowings in an effort to minimize the risk of interest rate
fluctuation.
In 2003, we entered into an interest rate swap agreement with a financial
institution on a notional amount of $25.0 million. The agreement expires in
November 2008. The agreement effectively fixes the interest rate on the first
$25.0 million of floating rate debt outstanding under our Line of Credit at a
rate of 3.875% per annum plus the interest rate spread on our Line of Credit,
thus reducing our exposure to interest rate fluctuations. The notional amount
does not represent amounts exchanged by the parties, and thus is not a measure
of exposure to us. The differences to be paid or received by us under the
interest rate swap agreement are recognized as an adjustment to interest
36
Management's Discussion and Analysis of
Financial Condition and Results of Operations, Continued
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, Continued
expense. The agreement is with a major financial institution, which is expected
to fully perform under the terms of the agreement.
In 2003, we entered into an interest rate swap agreement with a financial
institution on a notional amount of $25.0 million. The agreement expires in
November 2006. The agreement effectively fixes the interest rate on the second
$25.0 million of floating rate debt outstanding under our Line of Credit at a
rate of 3.22% per annum plus the interest rate spread on our Line of Credit,
thus reducing our exposure to interest rate fluctuations. The notional amount
does not represent amounts exchanged by the parties, and thus is not a measure
of exposure to us. The differences to be paid or received by us under the
interest rate swap agreement are recognized as an adjustment to interest
expense. The agreement is with a major financial institution, which is expected
to fully perform under the terms of the agreement.
Our Line of Credit matures in June 2006. As discussed above, our Line of Credit
bears interest at variable rates, and therefore, cost approximates market value.
At March 31, 2004, the fair value liability of our interest rate swaps was
approximately $1.7 million.
Our operating results are affected by changes in interest rates, primarily as a
result of our borrowings under the Line of Credit. If interest rates increased
by 25 basis points, our interest expense would have increased by approximately
$16,000, based on balances outstanding during the three months ended March 31,
2004.
ITEM 4. CONTROLS AND PROCEDURES
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, we carried
out an evaluation, with the participation of the Company's management, including
Phillip H. McNeill, Sr., the Company's Chief Executive Officer ("CEO") and J.
Mitchell Collins, the Company's Chief Financial Officer ("CFO"). Based upon that
evaluation, the Company's CEO and CFO concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company required to be included in the Company's
periodic SEC filings. There has been no change in the Company's internal control
over financial reporting during the quarter ended March 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
37
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal actions arising in the ordinary course of
business. Management does not believe that any of the pending actions will have
a material adverse effect on our business, financial condition or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- The following exhibits were filed with this Quarterly Report on
Form 10-Q:
10.1 -- First Amendment to Amended and Restated Secured Revolving
Credit Agreement dated as of January 21, 2004 by and among
Equity Inns Partnership, L.P., Equity Inns/West Virginia
Partnership, L.P. and Equity Inns Partnership II, L.P. as
Borrower, Bank One, NA as Administrative Agent and Lender, and
the remaining lenders that are signatories thereto
(incorporated by reference to Exhibit 10.10(b) to the
Company's Annual Report on Form 10-K (Registration No.
01-12073) filed with the SEC on March 12, 2004)
10.2 -- Second Amendment to Amended and Restated Secured Revolving
Credit Agreement dated as of March 26, 2004 by and among
Equity Inns Partnership, L.P., Equity Inns/West Virginia
Partnership, L.P. and Equity Inns Partnership II, L.P. as
Borrower, Bank One, NA as Administrative Agent and Lender, and
the remaining lenders that are signatories thereto
31.1 -- Rule 13a-14(a) Certification of Phillip H. McNeill, Sr.
31.2 -- Rule 13a-14(a) Certification of J. Mitchell Collins
32.1 -- Section 1350 Certification of Phillip H. McNeill, Sr.
32.2 -- Section 1350 Certification of J. Mitchell Collins
(b) Reports on Form 8-K -- During the period covered by this Quarterly Report on
Form 10-Q, the Company filed the following four (4) Current Reports on Form 8-K:
(1) Current Report on From 8-K dated January 20, 2004 and filed on
January 20, 2004 (Items 5 and &) announcing the resignation of Donald H. Dempsey
as Executive Vice President, Chief Financial Officer, Secretary and Treasurer
and director of the Company, as well as the hiring of J. Mitchell Collins as
Executive Vice President, Chief Financial Officer, Secretary and Treasurer of
the Company.
(2) Current Report on Form 8-K dated February 17, 2004 and filed on
February 17, 2004, (Items 12 and 7) announcing the Company's issuance of its
earnings press release for the three and twelve months ended December 31, 2003.
(3) Current Report on Form 8-K dated March 11, 2004 and filed on March
11, 2004, (Item 5) disclosing the Company's annual updated material risk factors
(no financial information required).
38
(4) Current Report on Form 8-K dated March 18, 2004 and filed on March
18, 2004 (Items 5 and 7) announcing the nomination of Robert P. Bowen as a new
board member to be voted on by shareholders at the Company's May 13, 2004 annual
meeting, and the resignation of William W. Deupree, Jr. as a director of the
Company.
39
SIGNATURES
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 thereunto duly authorized.
Equity Inns, Inc.
May 10, 2004 By: /s/J. Mitchell Collins
- --------------------- -------------------------------------------------
Date J. Mitchell Collins
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer),
Secretary and Treasurer
40