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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM --------------- TO ---------------
COMMISSION FILE NUMBER 34-0-22164
RFS HOTEL INVESTORS, INC.
(Exact name of Registrant as specified in its Charter)
TENNESSEE 62-1534743
(State or other incorporation) (I.R.S. Employer
Identification Number)
850 RIDGE LAKE BOULEVARD, SUITE 220
MEMPHIS, TENNESSEE 38120
(901) 767-7005
(Address of principal executive offices, including zip code and telephone
number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $0.01 PAR VALUE
(Title of Class)
NEW YORK STOCK EXCHANGE
(Name of Market)
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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 and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $361,443,273 based on the last sale price in
the New York Stock Exchange for such stock on March 13, 2001.
The number of shares of the Registrant's Common Stock outstanding was
24,858,547 as of March 13, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders
are incorporated into Part I and Part III.
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PART I
ITEM 1. BUSINESS
RFS Hotel Investors, Inc. ("RFS" or the "Company") is a hotel real estate
investment trust which, at December 31, 2000, owned interests in 60 hotels with
8,689 rooms located in 24 states (collectively the "Hotels"). RFS owns a 90.6%
interest in RFS Partnership L.P. (the "Operating Partnership"). RFS, the
Operating Partnership, and their subsidiaries are herein referred to,
collectively, as the "Company".
In 2000, the Company received 44% of its lease revenue from full service
hotels, 29% from extended stay hotels and 27% from limited service hotels. The
Company received 66% of its lease revenue in five states (California (37%),
Florida (9%), Michigan (7%), Texas (7%) and Illinois (6%).
The following summarizes additional information for the 60 hotels owned at
December 31, 2000:
2000
FRANCHISE AFFILIATION HOTEL PROPERTIES ROOMS/SUITES LEASE REVENUE
- --------------------- ---------------- ------------ --------------
(IN THOUSANDS)
Full Service hotels:
Sheraton................................ 4 864 $ 14,027
Holiday Inn............................. 5 953 9,291
Independent............................. 2 331 8,759
Sheraton Four Points.................... 2 412 5,289
Hilton.................................. 1 234 4,106
Doubletree.............................. 1 222 3,925
-- ----- --------
15 3,016 45,397
-- ----- --------
Extended Stay hotels:
Residence Inn by Marriott............... 14 1,851 26,554
TownePlace Suites by Marriott........... 3 285 2,692
Homewood Suites by Hilton............... 1 83 794
-- ----- --------
18 2,219 30,040
-- ----- --------
Limited Service hotels:
Hampton Inn............................. 18 2,243 17,380
Holiday Inn Express..................... 5 637 6,767
Comfort Inn............................. 3 472 2,696
Courtyard by Marriott................... 1 102 1,289
-- ----- --------
27 3,454 28,132
-- ----- --------
Total........................... 60 8,689 $103,569
== ===== ========
The following summarizes the number of hotels owned for the periods
presented:
2000 1999 1998
---- ---- ----
Hotels owned at beginning of years.......................... 62 60 60
Acquisitions and developed hotels placed into service..... 2 6
Sales of hotels........................................... (2) (6)
-- -- --
Hotels owned at end of years.............................. 60 62 60
-- -- --
At December 31, 2000, the Company leased fifty hotels to wholly-owned
subsidiaries of Hilton Hotels Corporation ("Hilton"), six hotels to three other
lessees and four hotels were not leased. At December 31, 2000 fifty hotels were
managed by wholly-owned subsidiaries of Hilton and ten hotels are managed by
five other third-party management companies.
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TERMINATION OF LEASES AND RELATED AGREEMENTS WITH HILTON
Under the REIT Modernization Act (the "RMA") that became effective January
1, 2001, the Company is permitted to lease its hotels to wholly-owned taxable
REIT subsidiaries of the Company ("TRS Lessees"), provided that the TRS Lessees
engage a third-party management company to manage the hotels. Effective January
1, 2001, the Company effectively terminated its operating leases, management
contracts and related ancillary agreements with Hilton for approximately $60
million in cash. This payment to Hilton represents the cancellation of executory
contracts that extended through 2012 and substantially all of the termination
payment was recorded as an expense on January 1, 2001. The cancellation of these
agreements entitles the TRS Lessees to retain the operating profits from hotels,
which previously accrued to Hilton under these contracts and gives the Company
(i) more control over the daily operations of its hotels, (ii) the benefits from
any cost efficiencies or ancillary revenues generated at the hotels, and (iii)
flexibility, in that, the hotels are not encumbered by long term leases which
are difficult to amend and expensive to terminate. All of the hotels continue to
operate under the same franchise affiliation as prior to the contract
termination.
Simultaneous with the termination of the leases and related agreements, the
TRS Lessees entered into new management contracts with Flagstone Hospitality
Management ("Flagstone"). Flagstone is a newly-formed company jointly owned by
Angie Mock, its CEO and formerly Executive Vice President, Asset Management of
the Company, and MeriStar Hotels and Resorts, the nation's largest independent
hotel management company. Effective January 1, 2001, Flagstone manages 53 of the
Company's 60 hotels and the remaining seven hotels are managed by four other
third-party management companies. Only five of the Company's hotels were
operated under long term leases with third parties on January 1, 2001.
In connection with the termination of the leases and related agreements,
the Company purchased 973,684 shares of the Company's Series A Preferred Stock
owned by Hilton for $13.0 million. The Company included approximately $5 million
in net income available to common shareholders on January 1, 2001, representing
the difference between the Company's purchase price and approximately $18
million of proceeds from the original sale of the Series A Preferred Stock.
The aggregate $73 million of payments to Hilton were financed by the sale
of two hotels in 2000 for proceeds of approximately $25 million, proceeds from
the sale of a new issue of non-convertible mandatorily redeemable preferred
stock (the "Series B Preferred Stock") for $25 million (before fees and
expenses) and borrowings under the Company's line of credit of $23 million. At
January 1, 2001, the Company has $38.2 million of capacity under its Line of
Credit and a debt to trailing twelve month EBITDA ratio of 3.6.
GROWTH STRATEGIES
The Company's business objectives are to increase funds from operations and
enhance shareholder value primarily through (i) aggressive asset management and
the strategic investment of capital in its diversified hotel portfolio, (ii)
selectively acquiring hotels that have been under performing 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,
require inordinately large capital outlays, or are not a core holding suitable
for long-term ownership.
A part of the Company's asset management program is the licensing of all
but two of its Hotels under nationally franchised brands. The Company believes
that franchised properties generally have higher levels of occupancy and average
daily rate ("ADR") than properties that are not franchised due to access to
national reservation systems and advertising and marketing programs provided by
franchisors. For the year ended December 31, 2000, the Company derived 89% of
its lease revenue from the four largest hotel franchise companies, Marriott
International (29%), Hilton (25%), Starwood Hotels and Resorts (19%) and Bass
Hotels and Resorts (16%).
During 2000, the Company spent $32.6 million on capital improvements to its
hotels. The Company expects to spend approximately $25 million on capital
improvements to its Hotels in 2001.
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Since year end 1997, the Company has sold eight primarily limited service
hotels for proceeds of approximately $50 million. As a result, the Company has
lowered its percentage of lease revenue received from limited service hotels
from 43% at the end of 1996 to 27% at the end of 2000.
The Company did not purchase any hotels in 2000 but is looking for
strategic hotel acquisitions and additional ventures in hotel related business
in 2001 that will compliment our business objectives to increase funds from
operations and enhance shareholder value.
The Company realized an unleveraged pro forma funds from operations return
on investment for 2000 of 13.4%. Based on the Company's approximate 38% leverage
and average borrowing costs of 7.8%, the Company realized a leveraged pro forma
return on investment of 16.8%.
FINANCING
The Company believes that there is a competitive advantage in maintaining a
conservative capital structure and limiting the use of leverage. The Company's
Board of Directors has adopted a policy of limiting the amount of debt the
Company will incur to an amount not in excess of 45% of the Company's investment
in hotel properties at cost. The Board of Directors may change the debt policy
at any time without shareholder approval.
At December 31, 2000, the Company has relatively low leverage as evidenced
by the following credit statistics:
- Trailing twelve month interest coverage ratio of 3.9x
- Total debt to EBITDA of 3.1x
- Weighted average maturity of fixed rate debt of 8.4 years
- Fixed interest rate debt equal to 96% of total debt
- Debt equal to 38% of investment in hotel properties, at cost (before
depreciation and after capital expenditures)
The Company increased the availability under its Line of Credit from $100
million to $140 million during the year. The increased Line of Credit matures on
July 30, 2003. The interest rate remained substantially unchanged ranging from
150 basis points to 225 basis points above LIBOR, depending on the Company's
ratio of total debt to its investment in hotel properties (as defined). The
interest rate was approximately 8.5% at December 31, 2000. The Line of Credit is
collateralized by first priority mortgages on 24 hotels that restrict the
transfer, pledge or other hypothecation of the hotels (collectively, the
"Collateral Pool"). The Company can obtain a release of the pledge of any hotel
in the Collateral Pool if the Company provides an acceptable substitute hotel or
reduces the total availability under the Line of Credit. The Line of Credit
contains various covenants including the maintenance of a minimum net worth,
minimum debt and interest coverage ratios, and total indebtedness and liability
limitations. The Company was not aware of any failure to comply with these
covenants at December 31, 2000.
On August 9, 2000, the Company completed a $52.2 million long-term
financing; the financing is collateralized by a lien on eight of the Company's
hotel properties, carries a fixed interest rate of 8.0%, has a 25-year
amortization and matures in 10 years. The financing allowed the Company to (a)
extend its debt maturities over a longer term and (b) increase the percentage of
fixed interest rate debt. The proceeds were utilized to reduce borrowings
outstanding under the Company's Line of Credit.
On November 3, 2000, the Company entered into an interest rate swap
agreement for a notional amount of $40.0 million maturing in July 2003. The
agreement effectively converts a portion of the Company's floating rate debt to
fixed rate in order to reduce the Company's risk to increases in interest rates.
Such agreements involve the exchange of fixed and floating interest rate
payments over the life of the agreement without the exchange of the underlying
principal amounts. Accordingly, the impact of fluctuations in interest rates on
these interest rate swap agreements is fully offset by the opposite impact on
the related debt. Under the
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interest rate swap agreement, the Company receives payments based on the
one-month LIBOR rate of 6.80% at December 31, 2000 and pays a fixed rate of
6.535%.
The Company's other borrowings are nonrecourse to the Company and contain
provisions allowing, subject to certain conditions, for the substitution of
collateral after the respective loans have been outstanding for approximately
four years. Most of the mortgage borrowings are repayable and subject to various
prepayment penalties, yield maintenance, or defeasance obligations.
On January 2, 2001, the Company issued 250 thousand shares of
non-convertible mandatorily redeemable Series B Preferred Stock for $25 million
before fees and expenses. Holders of the Series B Preferred Stock are entitled
to receive quarterly cash dividends commencing March 31, 2001 at an annual rate
of 12.5%. Beginning January 1, 2006, the dividend rate increases 2.0% per annum
up to a maximum rate of 20.5%. The Company may redeem shares of the Series B
Preferred Stock in whole but not in part, on or after December 31, 2003 at the
original price of $25 million. If the shares are redeemed before December 31,
2003, the redemption price is at varying amounts in excess of the original share
price. The shares are mandatorily redeemable by the holders at varying amounts
over the original share price, depending on when the shares are redeemed, upon a
change of control, dissolution or winding up of the Company or on the Company's
failure to qualify as a REIT.
The Company believes that it maintains a conservative dividend policy.
Based on 2000 results the Company's dividend payout ratio was 65% (dividends
divided by funds from operations) and the dividend coverage ratio was 1.5x
(funds from operations divided by dividends).
COMPETITION
Substantially all of the Hotels are located in developed areas that include
other hotel properties. The number of competitive hotel properties in a
particular area could have a material adverse effect on occupancy, ADR and
RevPar of the Hotels. New, competing hotels may be opened in the Company's
markets, which could materially and adversely affect hotel operations.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Company's quarterly
operating profits.
EMPLOYEES
At December 31, 2000, the Company had a total of 28 employees. Robert M.
Solmson, (age 53), Chairman of the Board and Chief Executive Officer, Randy L.
Churchey, (age 40), President and Chief Operating Officer, Kevin M. Luebbers,
(age 34), Executive Vice President and Chief Financial Officer, and Craig Hofer
(age 41), President of Centrafuse, Inc. each have employment agreements with the
Company. Information with respect to these employment agreements is incorporated
by reference to the Company's Proxy Statement.
TAX STATUS
The Company has operated and intends to continue to operate so as to
qualify as a REIT under the federal income tax laws. Qualification as a REIT
involves the application of highly technical and complex rules for which there
are only limited judicial or administrative interpretations. There are no
controlling authorities that deal specifically with many tax issues affecting a
REIT that owns hotel properties. The determination of various factual matters
and circumstances not entirely within our control may affect our ability to
qualify as a REIT.
New regulations, administrative interpretations or court decisions could
adversely affect the Company's qualification as a REIT or the federal income tax
consequences of such qualification. If RFS were to fail to qualify as a REIT in
any taxable year, it would not be allowed a deduction for distributions to
shareholders in
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computing our taxable income. It also would be subject to federal income tax
(including any applicable alternative minimum tax) on taxable income at regular
corporate rates. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. As a result, the
cash available for distribution to shareholders would be reduced for each of the
years involved. Although the Company currently intends to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Board of Directors, with the
consent of a majority of the shareholders, to revoke the REIT election.
Under the RMA which became effective January 1, 2001, the Company is
permitted to lease its hotels to the TRS Lessees. In addition, a taxable REIT
subsidiary ("TRS") is allowed to perform "non-customary" services for hotel
guests and is allowed to enter into many new businesses. However, TRS Lessees
are not allowed to franchise or manage hotels. The TRS is allowed to enter into
management contracts for our hotels, with independent third party management
companies. The use of TRS's, however, is subject to restrictions, including the
following:
- No more than 20% of the REIT's assets may consist of securities of TRSs.
- The tax deductibility of interest paid or accrued by a TRS to its
affiliated REIT would be limited, and
- A 100% excise tax would be imposed on non-arm's length transactions
between a TRS and its affiliated REIT or the REIT's tenants.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements containing the
words "believes", "anticipates", "expects" and words of similar import. Such
forward-looking statements relate to future events, 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 or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward looking statements. Readers should specifically consider the various
factors identified in this report and in any other documents filed by the
Company with the Securities and Exchange Commission that could cause actual
results to differ. The Company disclaims 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.
HOTEL OPERATING RISKS
The Hotels are subject to all operating risks common to the hotel industry.
These risks include, among other things: competition from other hotels; recent
over-building in the hotel industry which has adversely affected occupancy and
room rates; increases in operating costs due to inflation and other factors;
significant dependence on business and commercial travelers and tourism;
increases in energy costs and other expenses of travel; and adverse effects of
general and local economic conditions. These factors could adversely affect the
lessees' ability to make lease payments and therefore the Company's ability to
make distributions to shareholders.
ENVIRONMENTAL RISKS
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on such property. Such laws often impose
such liability without regard to whether the owner knew of, or was responsible
for, the presence of hazardous or toxic substances. Furthermore, a person that
arranges for the disposal or transports for disposal or treatment a hazardous
substance at another property may be liable for the costs of removal or
remediation of hazardous substances released into the environment at the
property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to
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promptly remediate such substances, may adversely affect the owner's ability to
sell such real estate or to borrow using such real estate as collateral. Thus,
if such liability were to arise in connection with the ownership and operation
of the Hotels, the Company, the lessees and the managers, as the case may be,
could be potentially liable for such costs.
Phase I Environmental Survey Assessments ("ESA's") were obtained on all of
the Hotels from independent environmental engineering firms at the time of
acquisition (and, for some Hotels, in connection with subsequent financing
transactions). The Phase I ESA's were intended to identify potential sources of
contamination for which the Hotels may be responsible and to assess the status
of environmental regulatory compliance. No assurance can be given that the Phase
I ESA's identified all significant environmental problems or that no additional
environmental liabilities exist. The Phase I ESA's included historical reviews
of the Hotels, reviews of certain public records, preliminary investigations of
the sites and surrounding properties, screening for the presence of asbestos,
PCBs, wetlands and underground storage tanks, and the preparation and issuance
of a written report. The Phase I ESA's did not include invasive procedures, such
as soil or ground water sampling and analysis.
The Phase I ESA for the Hampton Inn -- Airport in Indianapolis, indicated
that the Indianapolis Hotel disposes of approximately 10% of its solid waste at
a facility that is a state Superfund site. Such a site may be subject to
investigation and remediation under the federal and state Superfund laws, and
persons that sent hazardous substances to the site may be jointly and severally
liable for the costs of the work. The Phase I ESA report states that solid waste
from the Indianapolis Hotel was disposed into a domestic waste cell of the
facility. A state official informed the engineering firm conducting the Phase I
ESA that this domestic waste cell is segregated by a containment structure and
is adjacent to, but not part of, the Superfund site. The Phase I audit did not
indicate that the Indianapolis Hotel has arranged for the disposal of any
hazardous substances at this facility. If the Indianapolis Hotel in fact
arranged for such disposal, however, it could be found liable for at least a
part of any response costs.
Except as noted specifically above, the Phase I ESA reports have not
revealed an environmental liability or compliance concerns that the Company
believes would have a material adverse effect on the Company's business, assets
or results of operations, nor is the Company aware of such liability or
compliance concerns. Nevertheless, it is possible that these reports do not
reveal all environmental liabilities or compliance concerns or that there are
material environmental liabilities or compliance concerns of which the Company
is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or (ii) the current environmental condition of the Hotels will not be affected
by the condition of the properties in the vicinity of the Hotels (such as the
presence of leaking underground storage tanks) or by third parties unrelated to
the Operating Partnership or the Company.
POTENTIAL TAX RISKS
Prior to January 1, 2001, in order to qualify as a REIT, each year the
Company has been required to pay out to its stockholders at least 95% of its
taxable income (other than any net capital gain). Effective January 1, 2001, the
Company must pay out at least 90% of its taxable income to maintain its REIT
qualification. In addition, the Company would be subject to a 4% nondeductible
tax if the actual amount it pays out to its stockholders in a calendar year were
less than the minimum amount specified under federal tax laws. The Company has
paid out and intends to continue to pay out its income to its stockholders in a
manner intended to satisfy the REIT requirements for distributions of taxable
income and to avoid the 4% tax. In doing so, the Company may be required to
borrow money or sell assets to pay out enough of its taxable income to satisfy
the distributions test and to avoid the 4% tax in a particular year.
OWNERSHIP LIMITATION
In order for the Company to maintain its status as a REIT, no more than 50%
in value of its outstanding stock may be owned (actually or constructively under
the applicable tax rules) by five or fewer persons during the last half of any
taxable year. The Company's Charter prohibits, subject to certain exceptions,
any person from owning more than 9.9% (determined in accordance with the
Internal Revenue Code and the Securities
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Exchange Act of 1934, as amended) of the number of outstanding shares of any
class of its capital stock. The Company's Charter also prohibits any transfer of
its capital stock that would result in a violation of the 9.9% ownership limit,
reduce the number of stockholders below 100 or otherwise result in the Company
failing to qualify as a REIT. Any attempted transfer in violation of the Charter
prohibitions will be void and the intended transferee will not acquire any right
in the shares resulting in such violation. The Company has the right to take any
lawful action that it believes necessary or advisable to ensure compliance with
these ownership and transfer restrictions and to preserve its status as a REIT,
including refusing to recognize any transfer of capital stock in violation of
its Charter.
If a person holds or attempts to acquire shares in excess of the Company's
ownership and transfer restrictions, these shares will be immediately designated
as "shares-in-trust" and transferred automatically and by operation of law, in
trust, to a trustee designated by the Company. The trustee will have the right
to receive all distributions on, to vote and to sell these shares. The holder of
the excess shares will have no right or interest in these shares, except the
right (under certain circumstances) to receive the lesser of: (i) the proceeds
of any sale of these shares by the trustee to a permitted owner and (ii) the
amount paid for these shares (or the market value of these shares, determined in
accordance with the Charter, if the shares were received by gift, bequest or
otherwise without payment). Accordingly, the record owner of any shares
designated as shares-in-trust would suffer a financial loss if the price at
which these shares are sold to a permitted owner is less than the price paid for
these shares.
ITEM 2. PROPERTIES
The following sets forth information regarding the Hotels in which the Company
had an ownership interest at December 31, 2000:
FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------
DATE NUMBER ROOM LEASE
OPENED OF ROOMS REVENUE REVENUE REVPAR
------ -------- -------- -------- -------
(IN THOUSANDS)
FULL SERVICE
BEVERLY HERITAGE
Milpitas, CA(1)....................... 1988 237 $ 9,316 $ 6,073 $108.01
DOUBLETREE
San Diego, CA(1)...................... 1990 222 7,532 3,925 93.44
HOLIDAY INN
Columbia, SC(1)....................... 1969 175 3,110 1,090 48.55
Crystal Lake, IL(1)................... 1988 196 5,425 2,839 75.63
Flint, MI(1).......................... 1990 171 4,883 2,672 78.03
Lafayette, LA(1)...................... 1983 242 3,992 1,544 45.07
Louisville, KY(1)..................... 1970 169 2,830 1,146 45.75
HOTEL REX
San Francisco, CA(3).................. 1912 94 4,834 2,686 140.52
HILTON
San Francisco, CA(2).................. 1976 234 9,945 4,106 116.12
SHERATON FOUR POINTS
Bakersfield, CA(1).................... 1983 198 3,799 1,338 52.49
Pleasanton, CA(1)..................... 1985 214 6,835 3,951 87.26
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FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------
DATE NUMBER ROOM LEASE
OPENED OF ROOMS REVENUE REVENUE REVPAR
------ -------- -------- -------- -------
(IN THOUSANDS)
SHERATON
Birmingham, AL(3)..................... 1984 205 3,511 942 46.80
Clayton, MO(1)........................ 1965 257 6,428 2,623 68.71
Milpitas, CA(1)....................... 1988 229 10,064 5,724 120.08
Sunnyvale, CA(1)...................... 1980 173 8,412 4,738 132.86
----- -------- --------
3,016 90,917 45,397 82.49
----- -------- --------
EXTENDED STAY
HOMEWOOD SUITES BY HILTON
Chandler, AZ(3)....................... 1998 83 $ 1,948 $ 794 $ 64.13
RESIDENCE INN BY MARRIOTT
Ann Arbor, MI(1)...................... 1985 114 3,270 1,659 78.36
Atlanta, GA(1)........................ 1987 128 3,190 1,446 68.09
Charlotte, NC(1)...................... 1984 116 3,007 1,479 70.84
Fishkill, NY(1)....................... 1988 136 5,227 2,635 105.02
Ft. Worth, TX(1)...................... 1983 120 3,492 1,676 79.52
Jacksonville, FL...................... 1997 120 3,069 1,421 69.87
Kansas City, MO(1).................... 1987 96 2,442 924 69.50
Orlando, FL(1)........................ 1984 176 5,618 2,631 87.21
Sacramento, CA(1)..................... 1987 176 5,425 2,822 84.22
Torrance, CA(1)....................... 1984 247 8,354 4,196 92.41
Tyler, TX(1).......................... 1985 128 2,720 1,023 58.06
Warwick, RI(1)........................ 1989 96 3,700 1,747 105.30
West Palm Beach, FL................... 1998 78 2,259 1,116 79.17
Wilmington, DE(1)..................... 1989 120 3,662 1,779 83.38
TOWNEPLACE SUITES BY MARRIOTT
Fort Worth, TX(3)..................... 1998 95 1,324 588 38.07
Miami West, FL........................ 1999 95 2,041 1,198 58.69
Miami Lakes, FL....................... 1999 95 1,625 907 46.73
----- -------- --------
2,219 62,372 30,040 76.80
----- -------- --------
LIMITED SERVICE
COMFORT INN
Farmington Hills, MI(1)............... 1987 135 $ 2,204 $ 1,131 $ 44.61
Ft. Mill, SC(1)....................... 1987 153 1,613 573 28.54
Marietta, GA(1)....................... 1989 184 2,412 992 35.82
COURTYARD
Flint, MI(1).......................... 1996 102 2,500 1,289 66.98
HAMPTON INN
Bloomington, MN(1).................... 1994 135 2,895 1,451 58.59
Chandler, AZ(1)....................... 1997 101 1,738 829 47.02
Denver, CO(1)......................... 1985 138 1,738 569 34.41
Ft. Lauderdale, FL(1)................. 1986 122 2,413 979 54.04
Hattiesburg, MS(1).................... 1988 154 2,022 940 35.88
Houston, TX(1)........................ 1996 119 2,074 918 47.61
Indianapolis, IN(1)................... 1994 131 2,694 1,431 56.20
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FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------
DATE NUMBER ROOM LEASE
OPENED OF ROOMS REVENUE REVENUE REVPAR
------ -------- -------- -------- -------
(IN THOUSANDS)
Jacksonville, FL...................... 1998 118 2,536 1,235 58.73
Lakewood, CO(1)....................... 1987 150 2,087 804 38.01
Laredo, TX(1)......................... 1995 119 2,721 1,333 62.12
Lincoln, NE(1)........................ 1983 111 1,900 897 46.77
Memphis, TN(1)........................ 1992 120 1,713 666 39.01
Minnetonka, MN(1)..................... 1990 127 2,186 1,131 47.03
Oklahoma City, OK(1).................. 1986 134 2,019 808 41.17
Omaha, NE(1).......................... 1985 129 2,058 979 43.58
Plano, TX(1).......................... 1996 131 2,043 909 42.60
Sedona, AZ(1)......................... 1997 56 1,283 571 62.58
Tulsa, OK(1).......................... 1986 148 2,138 928 39.47
HOLIDAY INN EXPRESS
Arlington Heights, IL(1).............. 1989 125 2,659 1,461 58.11
Austin, TX(1)......................... 1992 125 2,359 1,117 51.56
Bloomington, MN(1).................... 1987 142 3,369 1,656 64.83
Downers Grove, IL(1).................. 1984 123 2,504 1,303 55.63
Wauwatosa, WI(1)...................... 1984 122 2,340 1,230 52.41
----- -------- --------
3,454 60,218 28,132 47.61
----- -------- -------- -------
Total/Average................. 8,389 $213,507 $103,569 $ 67.16
===== ======== ======== =======
- ---------------
(1) Leased to wholly-owned subsidiaries of Hilton through December 31, 2000.
Leased to TRS Lessees effective January 1, 2001.
(2) The Ramada Plaza hotel was converted to a Hilton full service hotel in the
second quarter of 2000.
(3) Lease revenue represents net operating income from this non-leased hotel.
These hotels were leased to the TRS Lessees effective January 1, 2001.
Through December 31, 2000, fifty-five of the Company's hotels were leased
to subsidiaries of Hilton. On January 1, 2001, these leases and related
ancillary agreements with Hilton were effectively terminated.
Under the RMA that became effective January 1, 2001, the Company is
permitted to lease its hotels to the TRS Lessees, provided that the TRS Lessees
engage a third-party management company to manage the hotels. Effective January
1, 2001, the Company effectively terminated its operating leases, management
contracts and related ancillary agreements with Hilton for approximately $60
million in cash. This payment to Hilton represents the cancellation of executory
contracts that extended through 2012 and substantially all of the termination
payment was recorded as an expense on January 1, 2001. The cancellation of these
agreements entitles the TRS Lessees to retain the operating profits from the
hotels, which previously accrued to Hilton under these leases and gives the
Company i) more control over the daily operations of its hotels, (ii) the
benefits from any cost efficiencies or ancillary revenues generated at the
hotels, and (iii) flexibility, in that, the hotels are not encumbered by long
term leases which are difficult to amend and expensive to terminate. All of the
hotels continue to operate under the same franchise affiliation as prior to the
contract termination.
Simultaneous with the termination of the leases and related agreements, on
January 1, 2001, the TRS Lessees entered into new management contracts with
Flagstone. Flagstone is a newly-formed company jointly owned by Angie Mock, its
CEO and formerly Executive Vice President, Asset Management, of the Company, and
MeriStar Hotels and Resorts, the nation's largest independent hotel management
company. Effective January 1, 2001, Flagstone manages 53 of the Company's 60
hotels and the remaining seven hotels are managed by four other third-party
management companies. Only five of the Company's hotels were operated under long
term leases with third parties on January 1, 2001.
9
11
ITEM 3. LEGAL PROCEEDINGS
Except as explained in the following paragraph, the Company currently is
not involved in any material litigation nor, to the Company's knowledge, is any
material litigation currently threatened against the Company.
On December 26, 2000, Frimco Associates, Inc. ("Frimco") and Inn Alpha,
Inc. ("Inn Alpha") filed a lawsuit in the Supreme Court of the State of New
York, County of Dutchess, against certain subsidiaries of the Company and RFS,
Inc., a former lessee of certain of the Company's hotels. The lawsuit was
removed to the United States District Court for the Southern District of New
York on January 5, 2001. Prior to January 1, 2001, Frimco and Inn Alpha managed
three of the Company's hotels pursuant to management agreements with RFS, Inc.,
the Company's former lessee. These management agreements were terminated in
connection with the termination of the leases for these three hotels effective
January 1, 2001. Frimco and Inn Alpha are seeking declaratory and injunctive
relief, compensatory damages of not less than $12 million, as well as punitive
damages. Pursuant to agreements related to the termination of the leases between
the Company's subsidiaries and RFS, Inc., the Company has agreed to indemnify
and defend RFS, Inc. against Frimco's and Inn Alpha's claims. The Company
believes these claims are without merit and intends to defend these claims
vigorously. The Company has filed a Motion to Dismiss the plaintiffs' claims.
The Court has scheduled the case for trial in July, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Market Information
The Company's Common Stock is traded on the New York Stock Exchange
("NYSE") under the symbol "RFS". The following table sets forth for the
indicated periods the high and low sale prices for the Common Stock, as traded
on such exchange and the dividends declared per share:
STOCK PRICE
---------------- DIVIDEND DECLARED
HIGH LOW PER SHARE
------ ------ -----------------
2000
First Quarter..................................... $11.94 $10.25 $0.385
Second Quarter.................................... 12.38 9.81 0.385
Third Quarter..................................... 13.63 12.00 0.385
Fourth Quarter.................................... 13.38 11.63 0.385
1999
First Quarter..................................... $13.13 $10.44 $0.385
Second Quarter.................................... 14.50 11.31 0.385
Third Quarter..................................... 12.63 10.88 0.385
Fourth Quarter.................................... 12.19 10.13 0.385
(b) Holders
The number of holders of record of shares of Common Stock was 24,858,547 as
of March 13, 2001.
(c) Distributions
The Company has adopted a policy of paying regular quarterly distributions
on its Common Stock, and cash distributions have been paid on the Company's
Common Stock each quarter since its inception.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from net income reported for financial reporting
purposes primarily due to the differences for federal tax purposes in the
estimated lives used to compute depreciation. Distributions made in 2000, 1999
and 1998 were considered 100% ordinary income for federal income tax purposes
except for the distribution made on November 15, 2000 which was characterized as
75.4% ordinary income, 1.4% return of capital, 1.1% capital gain, and 22.1% Sec.
1250 Recapture.
The Company currently anticipates that it will maintain at least the
current dividend rate for the immediate future, unless actual results of
operations, economic conditions or other factors differ from its current
expectations.
11
13
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data for the
Company that has been derived from the financial statements of the Company and
the notes thereto. Such data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
all of the financial statements and notes thereto.
SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Total revenue...................... $107,359 $ 99,662 $ 96,927 $ 83,069 $ 61,986
Net income......................... 30,790 34,990 34,068 34,232 34,587
Net income applicable to common
shareholders..................... 29,378 33,578 32,656 32,820 33,392
Diluted earnings per share......... 1.20 1.34 1.31 1.34 1.37
BALANCE SHEET DATA:
Total assets....................... 673,467 687,242 683,991 617,128 499,129
Total debt......................... 277,431 282,278 272,799 208,909 133,064
Shareholders' equity............... 348,454.. 361,283 366,937 362,070 357,482
CASH FLOWS DATA:
Cash provided by operating
activities....................... 64,497 66,837 55,092 58,590 46,448
Cash used by investing
activities....................... (10,843) (26,580) (65,932) (140,751) (74,518)
Cash provided (used) by financing
activities....................... (55,886) (36,358) 8,723 28,357 83,325
OTHER DATA (UNAUDITED):
Funds from operations.............. 64,170 63,010 63,030 55,263 45,723
FFO per share...................... 2.37 2.29 2.31 2.05 1.85
EBITDA............................. 90,308 86,116 82,756 70,033 51,280
Ratio of EBITDA to interest
expense.......................... 3.9 4.4 4.9 6.1 16.0
Ratio of Debt to EBITDA............ 3.1 3.3 3.4 3.0 2.6
Dividends paid per share........... 1.54 1.54 1.51 1.455 1.39
12
14
QUARTERLY RESULTS OF OPERATIONS
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000:(1)
OPERATING DATA:
Total revenue(2)...................... $11,398 $14,502 $38,771 $42,685 $107,359
Net income (loss)..................... (5,246) (6,108) 19,088 23,056 30,790
Net income (loss) applicable to common
shareholders....................... (5,594) (6,459) 18,733 22,698 29,378
Diluted earnings (loss) per share..... (0.23) (0.26) 0.75 0.94 1.20
OTHER DATA:
Funds from operations................. 14,183 17,504 18,999 13,484 64,170
FFO per share......................... 0.52 0.65 0.70 0.50 2.37
Dividends paid per share.............. 0.385 0.385 0.385 0.385 1.54
1999:
OPERATING DATA:
Total revenue(2)...................... $23,726 $26,238 $27,764 $21,934 $ 99,662
Net income............................ 8,424.. 10,774 10,216 5,576 34,990
Net income applicable to common
shareholders....................... 8,076 10,422 9,860 5,220 33,578
Diluted earnings per share............ 0.32 0.41 0.39 0.21 1.34
OTHER DATA:
Funds from operations................. 14,782 17,227 18,659 12,342 63,010
FFO per share......................... 0.54 0.62 0.68 0.45 2.29
Dividends paid per share.............. 0.385 0.385 0.385 0.385 1.54
1998:
OPERATING DATA:
Total revenue......................... $22,109 $25,753 $27,336 $21,729 $ 96,927
Net income............................ 8,825 11,492 9,452 4,299 34,068
Net income applicable to common
shareholders....................... 8,477 11,140 9,096 3,943 32,656
Diluted earnings per share............ 0.35 0.44 0.37 0.16 1.31
OTHER DATA:
Funds from operations................. 13,808 17,466 18,258 13,498 63,030
FFO per share......................... 0.51 0.64 0.67 0.49 2.31
Dividends paid per share.............. 0.375 0.375 0.375 0.385 1.51
- ---------------
(1) Under the RMA, which became effective January 1, 2001, only five of the
Company's hotels are operated under long-term leases with third parties.
Staff accounting bulletin ("SAB 101") As such, there will be little
comparability between the interim financial results for 2001 and 2000.
(2) Deferred revenue is recorded in 2000 in accordance with SAB 101 which
requires deferral of certain revenue until the third and fourth quarters.
The quarterly information for 1999 and 1998 is presented without regard to
the application of SAB 101. SAB 101 has no effect on rent payments under the
Company's leases or the Company's cash flow.
13
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
General
At December 31, 2000, the Company owned interests in 60 Hotels with 8,689
rooms located in 24 states and a 90.6% interest in the Operating Partnership.
In 2000, the Company received 44% of its lease revenue from full service
hotels, 29% from extended stay hotels and 27% from limited service hotels. The
Company received 66% of its lease revenue in five states: California (37%),
Florida (9%), Michigan (7%), Texas (7%) and Illinois (6%).
The following summarizes additional information for the 60 hotels owned at
December 31, 2000:
HOTEL 2000
FRANCHISE AFFILIATION PROPERTIES ROOMS/SUITES LEASE REVENUE
- --------------------- ---------- ------------ --------------
(IN THOUSANDS)
Full Service hotels:
Sheraton..................................... 4 864 $ 14,027
Holiday Inn.................................. 5 953 9,291
Independent.................................. 2 331 8,759
Sheraton Four Points......................... 2 412 5,289
Hilton....................................... 1 234 4,106
Doubletree................................... 1 222 3,925
-- ----- --------
15 3,016 45,397
-- ----- --------
Extended Stay hotels:
Residence Inn by Marriott.................... 14 1,851 26,554
TownePlace Suites by Marriott................ 3 285 2,692
Homewood Suites by Hilton.................... 1 83 794
-- ----- --------
18 2,219 30,040
-- ----- --------
Limited Service hotels:
Hampton Inn.................................. 18 2,243 17,380
Holiday Inn Express.......................... 5 637 6,767
Comfort Inn.................................. 3 472 2,696
Courtyard by Marriott........................ 1 102 1,289
-- ----- --------
27 3,454 28,132
-- ----- --------
Total.......................................... 60 8,689 $103,569
== ===== ========
The following summarizes the number of hotels owned for the periods
presented:
2000 1999 1998
---- ---- ----
Hotels owned at beginning of years.......................... 62 60 60
Acquisitions and developed hotels placed into service....... 2 6
Sales of hotels............................................. (2) (6)
-- -- --
Hotels owned at end of years................................ 60 62 60
-- -- --
At December 31, 2000, the Company leased fifty hotels to wholly-owned
subsidiaries of Hilton, six hotels to three other lessees and four hotels were
not leased but were managed by third parties pursuant to management agreements.
At December 31, 2000 fifty hotels were managed by wholly-owned subsidiaries of
Hilton and ten hotels are managed by five other third-party management
companies.
14
16
TERMINATION OF LEASES AND RELATED AGREEMENTS WITH HILTON
Under the RMA that became effective January 1, 2001, the Company is
permitted to lease its hotels to the TRS Lessees, provided that the TRS Lessees
engage a third-party management company to manage the hotels. Effective January
1, 2001, the Company effectively terminated its operating leases, management
contracts and related ancillary agreements with Hilton for approximately $60
million in cash. This payment to Hilton represents the cancellation of executory
contracts that extended through 2012 and substantially all of the terminations
payment was recorded as an expense on January 1, 2001. The cancellation of these
agreements entitles the TRS Lessees to retain the operating profits from the
hotels, which previously accrued to Hilton under these leases and gives the
Company (i) more control over the daily operations of its hotels, (ii) the
benefits from any cost efficiencies or ancillary revenues generated at the
hotels, and (iii) flexibility, in that, the hotels are not encumbered by long
term leases which are difficult to amend and expensive to terminate. All of the
hotels continue to operate under the same franchise affiliation as prior to the
contract termination
Simultaneous with the termination of the leases and related agreements, on
January 1, 2001, the TRS Lessees entered into new management contracts with
Flagstone. Flagstone is a newly-formed company jointly owned by Angie Mock, its
CEO and formerly Executive Vice President, Asset Management, of the Company, and
MeriStar Hotels and Resorts, the nation's largest independent hotel management
company. Effective January 1, 2001, Flagstone manages 53 of the Company's 60
hotels and the remaining seven hotels are managed by four other third-party
management companies. Only five of the Company's hotels revenue operated under
long term leases with third parties on January 1, 2001.
In connection with the termination of the leases and related agreements,
the Company purchased 973,684 shares of the Company's Series A Preferred Stock
owned by Hilton for $13.0 million. The Company included approximately $5 million
in net income available to common shareholders on January 1, 2001, representing
the difference between the Company's purchase price and approximately $18
million of proceeds from the original sale of the Series A Preferred Stock. The
Series A Preferred Stock has been retired.
The aggregate $73 million of payments to Hilton were financed by proceeds
from the sale of two hotels in 2000 of approximately ($25 million), proceeds
from the sale of $25 million non-convertible mandatorily redeemable preferred
stock (the "Series B Preferred Stock") for $25 million (prior to fees &
expenses) and borrowings under the Company's line of credit of $23 million. At
January 1, 2001, the Company has $38.2 million of capacity under its Line of
Credit, and a debt to trailing twelve month EBITDA ratio of 3.6.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2000 and 1999.
Revenues
Lease revenue increased 7.7% in 2000 over 1999 due primarily to an increase
in revenue per available room ("RevPar") at the 55 comparable hotels of 5.5% and
lease revenue associated with a 40-room addition to the Beverly Heritage hotel
in Milpitas, California completed in November 1999. At December 31, 2000, the
Company owned interests in 60 hotels with 8,689 rooms located in 24 states.
The following shows hotel operating statistics for the 55 comparable hotels
for the year ended December 31, 2000. Excluded are three hotels opened in 1999,
and two hotels that underwent renovations in
15
17
1999 and 2000 (Ramada Plaza in the Fisherman's Wharf district of San Francisco,
California converted to a Hilton full service hotel in the second quarter 2000
and the Sheraton Hotel in Birmingham, Alabama):
55 COMPARABLE HOTELS OPERATING STATISTICS
LEASE REVENUE ADR OCCUPANCY REVPAR
------------------------- ------------------ --------------- -----------------
VARIANCE VARIANCE VARIANCE VARIANCE
HOTEL TYPE 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999 2000 VS. 1999
- ---------- -------------- -------- ------- -------- ---- -------- ------ --------
(IN THOUSANDS)
Full Service................ $40,349 15.1% $110.75 7.3% 74.3% 2.0 pts $82.28 10.3%
Extended Stay............... 27,347 4.9% $ 98.49 2.7% 82.3% 1.0 pts $81.07 4.0%
Limited Service............. 28,132 0.9% $ 69.55 0.9% 68.4% 0.0 pts $47.61 1.0%
-------
Total.............. $95,828 7.6% $ 90.82 4.2% 73.7% 0.9 pts $66.93 5.5%
=======
Increases in RevPar for all market segments in 2000 exceeded those of 1999
with the full service hotels leading the way. The full service hotels produced a
RevPar increase of 10.3% in 2000 versus 3.8% in 1999. This 10.3% RevPar increase
was achieved through a 2.0 point increase in occupancy and a 7.3% increase in
ADR. The following four full service hotels, located in Silicon Valley, had
RevPar increases averaging 14.8% in 2000:
INCREASE
HOTEL LOCATION IN REVPAR
- ----- -------------- ---------
173-room Sheraton......................................... Sunnyvale, CA 18.2%
214-room Four Points...................................... Pleasanton, CA 17.5%
229-room Sheraton......................................... Milpitas, CA 14.7%
214-room Beverly Heritage................................. Milpitas, CA 8.8%
The Sunnyvale hotel was renovated and converted from a Sheraton Four Points
hotel in December 1998. Since conversion, the hotel has posted strong results
with occupancy increasing 6.7 points to 81.7% and ADR increasing 8.5% to
$162.64.
The Sheraton Four Points hotel in Pleasanton has rebounded from the loss of
a major account in 1999 with occupancy increasing 7.2 points to 76.2% and ADR
increasing 6.4% to $114.52.
The Beverly Heritage hotel's RevPar is attributable to an increase in
occupancy of 1.5 points to 76.1% in spite of a 40-room addition in November 1999
combined with an increase in ADR of 6.6% to $141.89
In addition to the Silicon Valley full service hotels, the following two
hotels benefited from recent renovations and/or re-brandings:
The Hilton San Francisco Fisherman's Wharf, which was converted from a
Ramada Plaza hotel in April 2000 after an $11 million dollar renovation,
operated at occupancy of 75.4% and ADR of $178.24 in the fourth quarter of 2000.
The 255-room Sheraton hotel in Clayton, MO, a suburb of St. Louis, produced
a RevPar gain of 16.1% in 2000. The Sheraton Clayton was converted from a
Holiday Inn hotel in August 1999. For the year, occupancy increased 6.4 points
to 68.5% and ADR increased 5.3% to $100.38.
Other full service hotels include the 94-room Hotel Rex in San Francisco
Union Square that produced a RevPar increase of 17.4% in 2000 driven by an
occupancy increase of 3.7 points to 80.0% and an ADR increase of 11.9% to
$175.58. The five Holiday Inn hotels, which have an average of 190 rooms per
hotel, produced an increase in RevPar of 1.1% in 2000. The Holiday Inn at
Crystal Lake, IL (a suburb of Chicago) had been hit by enormous supply increases
over the last 18 months as over 400 primarily limited service rooms have opened
in the hotels primary and secondary market area. Group business at this hotel
remains strong but transient business has been reduced in that market. In the
first quarter 2001, the Company plans to spend approximately $1.6 million
renovating the hotel to better compete with this new supply. The rest of the
Holiday Inn hotels are primarily located in competitive secondary markets that
do not allow us the opportunity to aggressively increase rate or occupancy.
16
18
The extended stay hotels experienced an increase in RevPar of 4.0% in 2000.
Fourteen of the eighteen extended stay properties are Residence Inns by Marriott
which produced an increase in RevPar of 3.8%, occupancy of 0.7 points to 82.7%
and ADR of 2.9% to $98.89.
The limited service hotels experienced an increase in RevPar of 1.0% in
2000 versus a decrease of 1.9% in 1999. Nineteen of the twenty-seven limited
service hotels are Hampton Inns which produced increased RevPar of 1.7% through
an increase in occupancy of 1.3 points.
Expenses
As a percentage of total revenue, expenses, before the loss on sale of
hotel properties and franchise termination fees increased to 67% in 2000 from
63% in 1999.
Taxes and insurance expense represented 10% of lease revenues for 2000 and
1999. The decrease in real estate taxes from the sale of two hotels in the
fourth quarter was offset by increases in the taxing authorities' reassessments
on renovations at some of our properties.
Depreciation increased 12.3% due to increases in depreciable assets related
to two hotels opened in 1999 and substantial renovations at the Hilton San
Francisco Fisherman's Wharf and the Sheraton Birmingham hotel.
General and administrative expenses increased $2.6 million in 2000 to 5.9%
of lease revenues in 2000 from 3.7% in 1999. Increases in general and
administrative expenses are due to increases in compensation from incentive
bonuses and additional personnel, other expenses in response to initiatives
associated with the REIT Modernization Act, and to Centrafuse (the Company's
application service provider of hotel accounting solutions).
Interest expense increased $3.4 million in 2000. This increase is due to a
weighted average increase in borrowings during the year of approximately $19
million and an increase in borrowing costs due to a general increase in interest
rates that impacted our variable rate debt. Borrowings increased primarily due
to funding of renovation costs. At December 31, 2000, variable rate debt was 4%
of total debt, a reduction from 37% a year ago. From 1998 through 2000, the
Company has spent $75 million or approximately 12% of gross hotel revenues
renovating, expanding, and re-branding our hotels.
The loss on the sale of hotel properties and franchise termination fees of
$4.3 million represents a reserve of $4.0 million established against notes
receivable from prior years hotel sales and a loss of approximately $1.0 million
on the sale of the Hampton Inn in Plano, Texas offset by gains on the sale of
two hotels, the Hawthorne Suites in Atlanta, Georgia and the Hampton Inn in
Warren, Michigan, aggregating approximately $0.7 million.
Comparison of the Years Ended December 31, 1999 and 1998.
Revenues
Lease revenue increased 2.7% in 1999 over 1998 due primarily to (i) an
average increase in RevPar at the 57 comparable hotels of 1.5% which resulted in
a 2.6% increase in lease revenues; (ii) one hotel opened in 1998, and two hotels
opened in 1999; and, (iii) a 40-room addition to the Beverly Heritage hotel in
Milpitas, California. These increases were partially offset by the sale of five
hotels during the latter half of 1998 and a decrease in RevPar at two hotels
undergoing major renovation in 1999.
The following shows hotel operating statistics for the 57 comparable hotels
for the year ended December 31, 1999 (62 total owned hotels at December 31,
1999). Excluded are one hotel opened in 1998, two hotels opened in 1999, and two
hotels undergoing renovations in 1999 (Ramada Plaza in the Fisherman's
17
19
Wharf district of San Francisco, California converted to a Hilton full service
hotel in the second quarter 2000 and the Sheraton hotel in Birmingham, Alabama):
57 COMPARABLE HOTELS OPERATING STATISTICS
LEASE REVENUE ADR OCCUPANCY REVPAR
------------------------- ------------------ ---------------- -----------------
VARIANCE VARIANCE VARIANCE VARIANCE
HOTEL TYPE 1999 VS. 1998 1999 VS. 1998 1999 VS. 1998 1999 VS. 1998
- ---------- -------------- -------- ------- -------- ---- --------- ------ --------
(IN THOUSANDS)
Full Service............... $35,070 4.5% $103.24 4.8% 72.3% (0.7) pts $74.62 3.8%
Extended Stay.............. 29,213 5.8% $ 95.24 3.2% 79.6% (0.8) pts $75.81 2.2%
Limited Service............ 28,967 (2.6)% $ 68.86 2.9% 68.4% (3.3) pts $47.10 (1.9)%
-------
Total............. $93,250 2.6% $ 86.99 4.0% 72.6% (1.8) pts $63.11 1.5%
=======
Expenses
As a percentage of total revenue, expenses, before the loss on sale of
hotel properties and franchise termination fees, increased from 61% in 1998 to
63% in 1999.
Taxes and insurance decreased 1.0% from 1998 to 1999 primarily due to the
sale of five hotels during the latter half of 1998 partially offset by an
average increase in real estate taxes of approximately 2.5% for the 57
comparable hotels and full year real estate taxes in 1999 for the one hotel
opened in 1998, and two hotels opened in 1999.
Depreciation increased 15.8% in 1999 over 1998 due to increases in
depreciable assets in 1999 relating to the one hotel opened in 1998, and two
hotels opened in 1999 and renovation expenditures at certain of the Hotels. As a
percentage of total revenue, depreciation increased from 21.6% to 24.3%. This
increase is the result of an increase in short-lived assets relative to total
fixed assets from the Company's renovation expenditures.
General and administrative expenses decreased 12.7% from 1998 to 1999 due
to the 1998 write-off of expenses in terminating a proposed new REIT, Lodging
Trust USA, and to a decrease in compensation expense of 18.2% attributable to an
overall decrease in bonuses under the Company's bonus programs for officers of
the Company.
Interest expense increased 18.2% in 1999 over 1998 due to an increase in
the weighted average debt balance outstanding in 1999 of approximately $30
million and an increase in the weighted average interest rate in 1999 from 7.35%
to 7.68%. Borrowings increased due to capital improvements and distributions to
shareholders being in excess of cash flow from operations. Interest rates
increased due to fixed rate 10-year financing of approximately $95 million
obtained in November 1998 which was used to repay lower variable interest rate
borrowings under the Line of Credit.
FUNDS FROM OPERATIONS AND EBITDA
The Company considers Funds From Operations ("FFO") and Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") to be appropriate
measures of a REIT's performance which should be considered along with, but not
as an alternative to, net income and cash flow as a measure of the Company's
operating performance and liquidity.
The National Association of Real Estate Investment Trusts (NAREIT), defines
FFO as net income (computed in accordance with generally accepted accounting
principles or GAAP which includes all operating results of the Company, both
recurring and non-recurring), excluding gains (losses) from debt restructuring
and sales of depreciable operating property, plus real estate related
depreciation and amortization and after comparable adjustments for the Company's
portion of these items related to unconsolidated partnerships and joint
ventures. The Company computes FFO in accordance with standards established by
NAREIT which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the
18
20
current NAREIT definition or that interpret the current NAREIT definition
differently than the Company. FFO and EBITDA do not represent cash flows from
operations as determined by GAAP and should not be considered as an alternative
to net income as an indication of the Company's financial performance or to cash
flow from operating activities determined in accordance with GAAP as a measure
of the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
The following details the computation of FFO (in thousands except per share
amounts):
2000 1999 1998
------- ------- -------
Net income............................................ $30,790 $34,990 $34,068
Minority interest in Operating Partnership............ 3,218 3,620 3,655
Depreciation.......................................... 27,198 24,210 20,906
Attempted merger expenses............................. 1,664
Loss on sale of hotel properties and franchise
termination fees.................................... 4,376 1,602 4,149
Preferred stock dividends............................. (1,412) (1,412) (1,412)
------- ------- -------
FFO................................................... $64,170 $63,010 $63,030
======= ======= =======
Weighted average common shares, partnerships units and
potential dilutive shares outstanding............... 27,127 27,569 27,343
FFO per share......................................... $ 2.37 $ 2.29 $ 2.31
The following details the computation of EBITDA (in thousands):
2000 1999 1998
------- ------- -------
FFO................................................... $64,170 $63,010 $63,030
Interest expense...................................... 23,016 19,623 16,604
Amortization.......................................... 1,710 2,071 1,710
Preferred stock dividends............................. 1,412 1,412 1,412
------- ------- -------
EBITDA................................................ $90,308 $86,116 $82,756
======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders and repayments of indebtedness, is its
share of the Operating Partnership's cash flow. For the year ended December 31,
2000, cash flow provided by operating activities was $64.5 million 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 strategic
objectives and any other liquidity needs by borrowing on its Line of Credit,
exchanging equity for hotel properties or possibly accessing the capital markets
if market conditions permit. At December 31, 2000, the Company had $3.7 million
of cash and cash equivalents and had borrowed $50.3 million under its $140.0
million Line of Credit.
19
21
The following details the Company's debt outstanding at December 31, 2000
(dollar amounts in thousands):
COLLATERAL
--------------------------
# OF NET BOOK VALUE AT
BALANCE INTEREST RATE MATURITY HOTELS DEC. 31, 2000
-------- ------------- ------------- ------ -----------------
Line of
Credit........ $ 50,273 LIBOR + 200bp Fix/Variable July 2003 24 $200,793
Mortgage........ 36,971 6.83% Fixed August 2008 15 144,385
Mortgage........ 25,000 7.30% Fixed November 2011 (a ) (a)
Mortgage........ 93,460 7.83% Fixed December 2008 10 130,001
Mortgage........ 18,556 8.22% Fixed November 2007 1 43,907
Mortgage........ 1,125 4.50% Variable January 2001 1 20,991
Mortgage........ 52,046 8.00% Fixed August 2010 8 87,732
-------- --------
$277.431 $627,809
======== ========
- ---------------
(a) This mortgage is also collateralized by the fifteen properties pledged
against the previous mortgage in the table.
The Company increased the availability under its Line of Credit from $100
million to $140 million during the year. The increased Line of Credit matures on
July 30, 2003. The interest rate remained substantially unchanged ranging from
150 basis points to 225 basis points above LIBOR, depending on the Company's
ratio of total debt to its investment in hotel properties (as defined). The
interest rate was approximately 8.5% at December 31, 2000. The Line of Credit is
collateralized by the Collateral Pool. The Company can obtain a release of the
pledge of any hotel in the Collateral Pool if the Company provides a substitute
hotel or reduces the total availability under the Line of Credit. The Line of
Credit contains various covenants including the maintenance of a minimum net
worth, minimum debt and interest coverage ratios, and total indebtedness and
liability limitations. The Company was in compliance with all covenants at
December 31, 2000.
On August 9, 2000, the Company completed a $52.2 million long-term
financing; the financing is collateralized by a lien on eight of the Company's
hotel properties, carries a fixed interest rate of 8.0%, has a 25-year
amortization and matures in 10 years. The financing allowed the Company to (a)
extend its debt maturities over a longer term and (b) increase the percentage of
fixed interest rate debt. The proceeds were utilized to reduce borrowings
outstanding under the Company's Line of Credit.
On November 3, 2000, the Company entered into an interest rate swap
agreement for a notional amount of $40.0 million maturing in July 2003. The
agreement effectively converts a portion of the Company's floating rate debt to
fixed rate in order to reduce the Company's risk to increases in interest rates.
Such agreements involve the exchange of fixed and floating interest rate
payments over the life of the agreement without the exchange of the underlying
principal amounts. Accordingly, the impact of fluctuations in interest rates on
these interest rate swap agreements is fully offset by the opposite impact on
the related debt. Under the interest rate swap agreement, the Company receives
payments based on the one-month LIBOR rate of 6.80% at December 31, 2000 and
pays a fixed rate of 6.535%.
The Company's other borrowings are nonrecourse to the Company and contain
provisions allowing for the substitution of collateral, upon satisfaction of
certain conditions, after the respective loans have been outstanding for
approximately four years. Most of the mortgage borrowings are repayable and
subject to various prepayment penalties, yield maintenance, or defeasance
obligations.
On January 2, 2001, the Company issued 250 thousand shares of
non-convertible mandatorily redeemable Series B Preferred Stock for $25 million
prior to fees and expenses of approximately $1 million. Holders of the Series B
Preferred Stock are entitled to receive quarterly cash dividends commencing
March 31, 2001 at an annual rate of 12.5%. Beginning January 1, 2006, the
dividend rate increases 2.0% per annum up to a maximum rate of 20.5%. The
Company may redeem shares of the Series B Preferred Stock in whole but not in
part, on or after December 31, 2003 at the original price of $25 million. If the
shares are redeemed before December 31, 2003, the redemption price is at varying
premiums over the original share price. The shares are mandatorily redeemable by
the holders at varying amounts over the original share price, depending on when
20
22
the shares are redeemed, upon a change of control, dissolution or winding up of
the Company or on the Company's failure to qualify as a REIT.
Future scheduled principal payments of debt obligations at December 31,
2000 are as follows (in thousands):
AMOUNT
--------
2001........................................................ $ 7,240
2002........................................................ 6,547
2003........................................................ 57,344
2004........................................................ 7,547
2005........................................................ 8,152
Thereafter.................................................. 190,601
--------
$277,431
========
Certain significant credit statistics at December 31, 2000 are as follows:
- Trailing twelve month interest coverage ratio of 3.9x
- Total debt to EBITDA of 3.1x
- Weighted average maturity of fixed rate debt of 8.4 years
- Fixed interest rate debt equal to 96% of total debt
- Debt equal to 38% of investment in hotel properties, at cost (before
depreciation and after capital expenditures)
During 2000, the Company spent $32.6 on capital improvements to its hotels.
The Company expects to spend approximately $25 million on capital improvements
to its hotels in 2001 which the Operating Partnership is expected to fund from
cash generated from operations and borrowings under the Line of Credit.
The Company in the future may seek to increase further the amount of its
credit facilities, negotiate additional credit facilities, or issue corporate
debt instruments. Although the Company has no charter restrictions on the amount
of indebtedness the Company may incur, the Board of Directors of the Company has
adopted a current policy limiting the amount of indebtedness that the Company
will incur to an amount not in excess of approximately 45% of the Company's
investment in hotel properties, at cost, (as defined). The Board of Directors
may change the debt policy at any time without shareholder approval.
The Company intends to fund cash distributions to shareholders principally
out of cash generated from operations. The Company may incur, or cause the
Operating Partnership to incur, indebtedness to meet distribution requirements
imposed on a REIT under the Internal Revenue Code including the requirement that
a REIT distribute to its shareholders annually at least 95% of its taxable
income (90% effective January 1, 2001) to the extent that working capital and
cash flow from the Company's investments are insufficient to make such
distributions.
The Company believes that it maintains a conservative dividend policy.
Based on 2000 results the Company's dividend payout ratio was 65% (dividends
divided by funds from operations) and the dividend coverage ratio was 1.5x
(funds from operations divided by dividends).
INFLATION
Operators of hotels, in general, possess the ability to adjust room rates
daily to reflect the effects of inflation. However, competitive pressures may
limit the ability of the lessees and management companies to raise room rates.
21
23
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Company's quarterly
operating profits.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which provides guidance on revenue
recognition. SAB 101 is effective for fiscal years beginning after December 15,
1999. SAB 101 requires that a lessor not recognize contingent rental income
until annual specified hurdles have been achieved by the lessee. During 1999 and
prior years, the Company recognized contingent rentals throughout the year since
it was considered probable that the lessee would exceed the annual specified
hurdles. The Company has reviewed the terms of its Percentage Leases and has
determined that the provisions of SAB 101 materially impact the Company's
revenue recognition on an interim basis in 2000 effectively deferring the
recognition of revenue from its Percentage Leases from the first and second
quarters of the calendar year to the third and fourth quarters. SAB 101 will not
impact the Company's revenue recognition on an annual basis given that Company
has only calendar year leases. SAB 101 will have no impact on the Company's
interim or annual cash flow from its lessees, and therefore on its ability to
pay dividends. The Company has accounted for SAB 101 as a change in accounting
principle effective January 1, 2000.
In September 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In September 1999, the FASB issued SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 133 was originally effective
for all fiscal quarters of fiscal years beginning after September 15, 1999. SFAS
No. 138 deferred the effective date of SFAS No. 133 to all fiscal quarters of
all fiscal years beginning after June 15, 2000. Upon adoption on January 1,
2001, the Company will record a liability of approximately $0.8 million
representing the estimated value of the swap with a corresponding charge to
other comprehensive income. The Company will record subsequent changes in the
fair value of the swap through other comprehensive income. These instruments are
designated as hedges.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, including, without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import. Such forward-looking statements relate to future
events and the future financial performance of the Company, and involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from the results or achievements expressed or implied by such forward-looking
statements. The Company is not obligated to update any such factors or to
reflect the impact of actual future events or developments on such
forward-looking statements.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to certain financial market risks, one being
fluctuations in interest rates. The Company monitors interest rate fluctuations
as an integral part of our overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on our results. The effect of interest rate fluctuations
historically has been small relative to other factors affecting operating
results, such as occupancy.
22
24
Our operating results are affected by changes in interest rates primarily
as a result of borrowing under our line of credit. If interest rates increased
by 25 basis points, our annual interest expense would have increased by
approximately $237 thousand, based on balances outstanding during the year
ending December 31, 2000.
The Company's primary market risk exposure is to changes in interest rate
as a result of its Line of Credit and long-term debt. At December 31, 2000, the
Company had outstanding total indebtedness of approximately $277.4 million. The
Company's interest rate risk objective is to limit the impact of interest rate
fluctuations on earnings and cash flows and to lower its overall borrowing
costs. To achieve this objective, the Company manages its exposure to
fluctuations in market interest rates for its borrowings through the use of
fixed rate debt instruments to the extent that reasonably favorable rates are
obtainable with such arrangements and derivative financial instruments such as
interest rate swaps, to effectively lock the interest rate on a portion of its
variable debt. The Company does not enter into derivative or interest rate
transactions for speculative purposes. Approximately 96% of the Company's
outstanding debt was subject to fixed rates with a weighted average interest
rate of 7.8% at December 31, 2000. On November 3, 2000, the Company entered into
an interest rate swap agreement for a notional amount of $40.0 million which
effectively locked an interest rate (before the spread over LIBOR) of 6.535%
through an interest rate swap agreement. 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 instruments
that are sensitive to changes in interest rates. For debt obligations
outstanding at December 31, 2000, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve as
of December 31, 2000. For the interest rate swap, the table presents notional
amounts and weighted average interest rates by expected contractual maturity
dates. The fair value of the Company's fixed rate debt indicates the estimated
principal amount of debt having similar debt service requirements, which could
have been borrowed by the Company at December 31, 2000. The rate assumed in the
fair value calculation of fixed rate debt is equal to 7.05% which consists of
the 7-year treasury of 5.05% as December 31, 2000 plus 200 basis points.
EXPECTED PRINCIPAL CASH FLOWS
-------------------------------------------------------------------------------------
FAIR
VALUE
LIABILITIES 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL
- ----------- ------ ------ ------- ------ ------ ---------- -------- --------
(IN THOUSANDS)
Long-Term Debt:
Fixed Rate............ $7,240 $6,547 $47,044 $7,547 $8,152 $190,628 $267,158 $275,326
Average Interest
Rate................ 7.79% 7.79% 7.79% 7.66% 7.66% 7.66%
Variable Rate........... $1,125 -- $10,273 -- -- -- $ 11,398 $ 11,398
Average Interest
Rate................ 8.64% -- 8.81%
Interest Rate
Derivatives:
Variable to Fixed:.... $40,000 $ 40,000 $ (810)
Average Receive
Rate................ 5.75% 5.56% 5.79%
Average Pay Rate...... 6.54% 6.54% 6.54%
The table incorporates only those exposures that exist as of December 31,
2000 and does not consider exposures or positions which could arise after that
date. In addition, because firm commitments are not represented in the table
above, the information presented therein has limited predictive value. As a
result, the Company's ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during future periods,
prevailing interest rates, and the Company's 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.
23
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INCLUDED HEREIN BEGINNING
AT PAGE F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information about the Directors and Executive Officers of the Company is
incorporated herein by reference to the discussion under "Executive Officers of
RFS" in the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information about executive compensation is incorporated herein by
reference to the discussion under "Executive Compensation Tables" in the
Company's Proxy Statement for the 2001 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information about the security ownership of certain beneficial owners and
management of the Company is incorporated herein by reference to the discussion
under "Director and Officer Stock Ownership" and "Principal Stockholders" in the
Company's Proxy Statement for the 2001 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information about certain relationships and related transactions is
incorporated by reference to the discussion under "Certain Relationships and
Related Transactions" in the Company's Proxy Statement for the 2001 Annual
Meeting of Shareholders.
24
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 10-K
(a) Financial Statements
The following financial statements are included in this report on Form
10-K:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Shareholders' Equity for years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
The following financial statement schedule and report of independent
accountants on the financial statement schedule is included in this report on
Form 10-K:
Report of Independent Accountants on the Financial Statement Schedules
Schedule III -- Real Estate and Accumulated Depreciation
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the information is included in the consolidated financial statements and notes
thereto.
(b) Reports on Form 8-K
No filings of Form 8-K were made during the last quarter of 2000.
25
27
(c) Exhibits
EXHIBIT
NUMBER EXHIBIT
- ------- -------
3.1 Second Restated Charter of the Registrant (previously filed
as Exhibit 3.1 to the Company's Current report on Form 8-K
dated March 6, 1996 and incorporated herein by reference).
3.1(a) Articles of Amendment to the Second Amended and Restated
Charter of RFS Hotel Investors (previously filed as Exhibit
3.1 to the Company's current report on Form 8-K dated
January 16, 2001 and incorporated herein by reference).
3.2 By-Laws of the Registrant (previously filed as Exhibit 3.2
to the Company's Form S-11 Registration Statement,
Registration No. 33-63696 and incorporated herein by
reference).
*3.3 Fifth Amended and Restated Agreement of Limited Partnership
of RFS Partnership, L.P.
10.1 Consolidated Lease Amendment (previously filed as Exhibit
10.3 to the Company's current report on Form 8-K, dated
February 27, 1996 and incorporated herein by reference).
10.2 Form of Future Percentage Lease (previously filed as Exhibit
10.4 to the Company's Current Report on Form 8-K, dated
February 27, 1996 and incorporated herein by reference).
10.2(a) Schedule of terms of Percentage Leases (previously filed as
Exhibit 10.2(a) to the Company's Form 10-K for the year
ended December 31, 1998 and incorporated herein by
reference).
10.2(b) Form of Percentage Lease with TRS Lessees (previously filed
as Exhibit 10.1 to the Company's Current report on Form 8-K
dated January 16, 2001 and incorporated herein by
reference).
10.2(c) Form of Management Agreement with Flagstone (previously
filed as Exhibit 10.2 to the Company's current report Form
8-K dated January 16, 2001 and incorporated herein by
reference).
10.4 Second Amended and Restated Employment Agreement between RFS
Managers, Inc. and Robert M. Solmson (previously filed as
Exhibit 10.4 to the Company's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference).
*10.4(a) Employment Agreement between RFS Managers, Inc. and Randall
L. Churchey dated September 27, 1999.
*10.4(b) Employment Agreement between RFS Managers, Inc. and Kevin M.
Luebbers dated July 1, 2000.
10.9 Master Agreement, dated February 1, 1996 (previously filed
as Exhibit 10.2 to the Company's current Report on Form 8-K
dated February 27, 1996 and incorporated herein by
reference).
10.9(a) First Amendment to Master agreement dated as of November 21,
1996 (previously filed as Exhibit 10.9(a) to the Company's
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
10.10 Indenture dated as of November 21, 1996 (previously filed as
Exhibit 10.10 to the Company's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference).
10.15 Termination Agreement dated as of January 26, 2000
(previously filed as Exhibit 10.15 to the Company's Form
10-K for the year ended December 31, 1999 and incorporated
herein by reference).
*10.16 First Amendment to the Fourth Amended and Restated Revolving
Credit Agreement dated March 1, 2000.
*10.17 Second Amendment to the Fourth Amended and Restated
Revolving Credit Agreement dated August 1, 2000.
*10.18 Third Amendment to the Fourth Amended and Restated Revolving
Credit Agreement dated August 1, 2000.
*10.19 Loan Agreement dated August 9, 2000 by and between Bank of
America, N.A. (as lender) and RFS SPE 2000, LLC (as
borrower), a wholly-owned subsidiary of RFS Hotel Investors,
Inc.
*10.20 Loan Agreement dated August 9, 2000 by and between Bank of
America, N.A. (as lender) and RFS SPE 2 2000, LLC (as
borrower), a wholly-owned subsidiary of RFS Hotel Investors,
Inc.
*21.1 List of Subsidiaries of the Registrant
*23.1 Consent of PricewaterhouseCoopers LLP
- ---------------
* Filed herewith
26
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant as duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RFS HOTEL INVESTORS, INC.
By: /s/ KEVIN M. LUEBBERS
------------------------------------
Kevin M. Luebbers
Executive Vice President and Chief
Financial Officer
Date: March 14, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
---------- ----- ----
/s/ ROBERT M. SOLMSON Chairman of the Board, Chief March 14, 2001
- ----------------------------------------------------- Executive Officer and
Robert M. Solmson President
/s/ RANDALL L. CHURCHEY President and Chief Operating March 14, 2001
- ----------------------------------------------------- Officer and Director
Randall L. Churchey
/s/ KEVIN M. LUEBBERS Executive Vice President And March 14, 2001
- ----------------------------------------------------- Chief Financial Officer
Kevin M. Luebbers (principal financial and
accounting officer)
/s/ H. LANCE FORSDICK, SR. Director March 14, 2001
- -----------------------------------------------------
H. Lance Forsdick, Sr.
/s/ BRUCE E. CAMPBELL, JR. Director March 14, 2001
- -----------------------------------------------------
Bruce E. Campbell, Jr.
/s/ MICHAEL E. STARNES Director March 14, 2001
- -----------------------------------------------------
Michael E. Starnes
/s/ JOHN W. STOKES, JR. Director March 14, 2001
- -----------------------------------------------------
John W. Stokes, Jr.
/s/ R. LEE JENKINS Director March 14, 2001
- -----------------------------------------------------
R. Lee Jenkins
/s/ RICHARD REISS, JR. Director March 14, 2001
- -----------------------------------------------------
Richard Reiss, Jr.
27
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of RFS Hotel Investors, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of RFS
Hotel Investors, Inc. (the "Company") at December 31, 2000 and 1999, and the
results of its operations and cash flows for each of the three years then ended,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
January 24, 2001, except for note 9 as to
which the date is February 20, 2001
F-1
30
RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
2000 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
ASSETS
Investment in hotel properties, net......................... $635,997 $651,988
Cash and cash equivalents................................... 3,681 5,913
Restricted cash............................................. 4,929 4,550
Due from Lessees............................................ 13,041 10,801
Notes receivable, net....................................... 626 5,352
Deferred expenses, net...................................... 6,814 4,458
Other assets................................................ 8,379 4,180
-------- --------
Total assets...................................... $673,467 $687,242
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses....................... $ 12,734 $ 8,063
Borrowings on Line of Credit................................ 50,273 98,807
Mortgage notes payable...................................... 227,158 183,471
Minority interest in Operating Partnership, 2,562 and 2,565
units issued and outstanding at December 31, 2000 and
December 31, 1999, respectively and other consolidated
subsidiaries.............................................. 34,848 35,618
-------- --------
Total liabilities................................. 325,013 325,959
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000 shares authorized,
974 shares issued and outstanding...................... 10 10
Common Stock, $.01 par value, 100,000 shares authorized,
25,088 and
25,062 shares issued at December 31, 2000 and December
31, 1999, respectively................................. 251 251
Additional paid-in capital............................. 374,910 374,087
Treasury stock, at cost, 576 and 167 shares at December
31, 2000 and December 31, 1999, respectively........... (8,100) (3,656)
Distributions in excess of income......................... (18,617) (9,409)
-------- --------
Total shareholders' equity........................ 348,454 361,283
-------- --------
Total liabilities and shareholders' equity........ $673,467 $687,242
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
31
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Lease revenue............................................. $106,574 $98,962 $96,371
Other revenue............................................. 785 700 556
-------- ------- -------
Total revenues.................................... 107,359 99,662 96,927
-------- ------- -------
Expenses:
Taxes and insurance....................................... 10,747 9,859 9,949
Depreciation.............................................. 27,198 24,210 20,906
General and administrative................................ 6,304 3,687 4,222
Attempted merger expenses................................. 1,664
Loss on sale of hotel properties and franchise termination
fees................................................... 4,376 1,602 4,149
Amortization of deferred expenses and unearned
compensation........................................... 1,710 2,071 1,710
Interest expense.......................................... 23,016 19,623 16,604
Minority interest in Operating Partnership and
subsidiaries........................................... 3,218 3,620 3,655
-------- ------- -------
Total expenses.................................... 76,569 64,672 62,859
-------- ------- -------
Net income.................................................. 30,790 34,990 34,068
Preferred stock dividends................................... (1,412) (1,412) (1,412)
-------- ------- -------
Net income applicable to common shareholders................ $ 29,378 $33,578 $32,656
======== ======= =======
Basic earnings per share.................................... $ 1.20 $ 1.34 $ 1.32
Weighted average common shares outstanding.................. 24,559 25,002 24,775
Diluted earnings per share.................................. $ 1.20 $ 1.34 $ 1.31
Weighted average common shares and equivalents
outstanding............................................... 24,580 25,002 24,864
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
32
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
COMMON STOCK
------------------ ADDITIONAL DISTRIBUTIONS
PREFERRED NUMBER OF PAID-IN IN EXCESS OF TREASURY
STOCK SHARES AMOUNT CAPITAL INCOME STOCK TOTAL
--------- --------- ------ ---------- ------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Balances at December 31, 1997......... $10 24,389 $244 $361,479 $ 337 $362,070
Issuance of common shares, net of
offering costs of $75............ 643 6 11,034 11,040
Retirement of common shares......... (140)
Purchase of treasury shares......... $(2,012) (2,012)
Issuance of restricted common shares
to officers and directors........ 129 1 (1)
Distributions on common shares,
($1.51 per share)................ (37,431) (37,431)
Distributions on preferred shares,
($1.45 per share)................ (1,412) (1,412)
Distribution on partnership
interest......................... (30) (30)
Amortization of unearned
compensation..................... 644 644
Net income.......................... 34,068 34,068
--- ------ ---- -------- -------- ------- --------
Balances at December 31, 1998......... 10 25,021 251 373,156 (4,468) (2,012) 366,937
Purchase of treasury shares......... 205 (1,644) (1,439)
Issuance of restricted common shares
to officers and directors........ 41
Distributions on common shares,
($1.54 per share)................ (38,519) (38,519)
Distributions on preferred shares,
($1.45 per share)................ (1,412) (1,412)
Amortization of unearned
compensation..................... 726 726
Net income.......................... 34,990 34,990
--- ------ ---- -------- -------- ------- --------
Balances at December 31, 1999......... 10 25,062 251 374,087 (9,409) (3,656) 361,283
Purchase of treasury shares......... (4,444) (4,444)
Issuance of common shares........... 13 162 162
Issuance of restricted common shares
to officers and directors........ 13
Distributions on common shares,
($1.54 per share)................ (38,586) (38,586)
Distributions on preferred shares,
($1.45 per share)................ (1,412) (1,412)
Amortization of unearned
compensation..................... 661 661
Net income.......................... 30,790 30, 790
--- ------ ---- -------- -------- ------- --------
Balances at December 31, 2000......... $10 25,088 $251 $374,910 $(18,617) $(8,100) $348,454
=== ====== ==== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
33
RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income............................................... $ 30,790 $ 34,990 $ 34,068
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 28,908 26,281 22,616
Minority interest in Operating Partnership and
subsidiaries........................................ 3,218 3,620 3,655
Loss on sale of hotel properties and franchise
termination fees.................................... 4,376 79 1,441
Attempted merger expenses............................. 1,664
Changes in assets and liabilities:
Due from Lessees.................................... (2,240) (145) (769)
Other assets........................................ (4,199) 2,230 (6,053)
Accounts payable and accrued expenses............... 3,644 (218) (1,530)
-------- -------- --------
Net cash provided by operating activities........ 64,497 66,837 55,092
-------- -------- --------
Cash flows from investing activities:
Investment in hotel properties and hotels under
development........................................... (32,551) (34,066) (78,839)
Proceeds from sale of hotel properties................... 22,087 808 19,627
Prepayments under purchase agreements.................... (1,425)
Restricted cash.......................................... (379) 6,727 (5,295)
Cash paid for franchise agreements....................... (49)
-------- -------- --------
Net cash used by investing activities............ (10,843) (26,580) (65,932)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 162 11,040
Purchase of treasury stock............................... (4,444) (1,439) (2,012)
Proceeds from borrowings................................. 81,200 16,500 54,264
Payments on debt......................................... (86,047) (7,021) (9,543)
Distributions to common and preferred shareholders....... (39,972) (39,931) (38,873)
Distributions to limited partners........................ (3,988) (3,954) (3,879)
Redemption of shares/units............................... (22) (37)
Collections on notes receivable.......................... 726 47 65
Loan fees paid........................................... (3,523) (538) (2,302)
-------- -------- --------
Net cash provided (used) by financing
activities..................................... (55,886) (36,358) 8,723
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (2,232) 3,899 (2,117)
Cash and cash equivalents at beginning of years............ 5,913 2,014 4,131
-------- -------- --------
Cash and cash equivalents at end of years.................. $ 3,681 $ 5,913 $ 2,014
======== ======== ========
Supplemental cash flow information:
Cash paid for interest................................... $ 22,970 $ 20,172 $ 16,474
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC.
NOTE 1. ORGANIZATION
RFS Hotel Investors, Inc. ("RFS" or the "Company") is a hotel real estate
investment trust which, at December 31, 2000, owned interests in 60 hotels with
8,689 rooms located in 24 states (collectively the "Hotels") and RFS owned a
90.6% interest in RFS Partnership L.P. (the "Operating Partnership"). RFS, the
Operating Partnership, and their subsidiaries are herein referred to,
collectively, as the "Company".
The following summarizes additional information for the 60 hotels owned at
December 31, 2000:
HOTEL
FRANCHISE AFFILIATION PROPERTIES ROOMS/SUITES LEASE REVENUE
- --------------------- ---------- ------------ --------------
(IN THOUSANDS)
Full Service hotels:
Sheraton..................................... 4 864 $ 14,027
Holiday Inn.................................. 5 953 9,291
Independent.................................. 2 331 8,759
Sheraton Four Points......................... 2 412 5,289
Hilton....................................... 1 234 4,106
Doubletree................................... 1 222 3,925
-- ----- --------
15 3,016 45,397
-- ----- --------
Extended Stay hotels:
Residence Inn by Marriott.................... 14 1,851 26,554
TownePlace Suites by Marriott................ 3 285 2,692
Homewood Suites by Hilton.................... 1 83 794
-- ----- --------
18 2,219 30,040
-- ----- --------
Limited Service hotels:
Hampton Inn.................................. 18 2,243 17,380
Holiday Inn Express.......................... 5 637 6,767
Comfort Inn.................................. 3 472 2,696
Courtyard by Marriott........................ 1 102 1,289
-- ----- --------
27 3,454 28,132
-- ----- --------
Total.......................................... 60 8,689 $103,569
== ===== ========
The following summarizes the number of hotels owned for the periods
presented:
2000 1999 1998
---- ---- ----
Hotels owned at beginning of years.......................... 62 60 60
Acquisitions and developed hotels placed into service....... 2 6
Sales of hotels............................................. (2) (6)
-- -- --
Hotels owned at end of years................................ 60 62 60
-- -- --
At December 31, 2000, the Company leased fifty hotels to wholly-owned
subsidiaries of Hilton Hotels Corporation ("Hilton"), six hotels to three other
lessees and four hotels were not leased. At December 31, 2000 fifty hotels were
managed by wholly-owned subsidiaries of Hilton and ten hotels are managed by
five other third-party management companies.
Under the RMA that became effective January 1, 2001, the Company is
permitted to lease its hotels to TRS Lessees, provided that the TRS Lessees
engage a third-party management company to manage the hotels. Effective January
1, 2001, the Company effectively terminated its operating leases, management
F-6
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
contracts and related ancillary agreements with Hilton for approximately $60
million in cash. This payment to Hilton represents the cancellation of executory
contracts that extended through 2012 and substantially all of the terminations
payment was recorded as an expense on January 1, 2001. The cancellation of these
agreements entitles the TRS Lessees to retain the operating profits from the
hotels, which previously accrued to Hilton under these leases and gives the
Company (i) more control over the daily operations of its hotels, (ii) the
benefits from any cost efficiencies or ancillary revenues generated at the
hotels, and (iii) flexibility, in that, the hotels are not encumbered by long
term leases which are difficult to amend and expensive to terminate. All of the
hotels continue to operate under the same franchise affiliation as prior to the
contract termination.
Simultaneous with the termination of the leases and related agreements, the
TRS Lessees entered into new management contracts with Flagstone Hospitality
Management ("Flagstone"). Flagstone is a newly-formed company jointly owned by
Angie Mock, its CEO and formerly Executive Vice President, Asset Management of
the Company, and MeriStar Hotels and Resorts, the nation's largest independent
hotel management company. Effective January 1, 2001, Flagstone manages 53 of the
Company's 60 hotels and the remaining seven hotels are managed by four other
third-party management companies. Only five of the Company's hotels revenue
operated under long term leases with third parties on January 1, 2001.
In connection with the termination of the leases and related agreements,
the Company purchased 973,684 shares of the Company's Series A Preferred Stock
owned by Hilton for $13.0 million. The Company included approximately $5 million
in net income available to common shareholders on January 1, 2001, representing
the difference between the Company's purchase price and approximately $18
million of proceeds from the original sale of the Series A Preferred Stock. The
Series A Preferred Stock was retired.
The aggregate $73 million of payments to Hilton were financed by the sale
of two hotels in 2000 for proceeds of approximately $25 million, proceeds from
the sale on January 2, 2001 of a new issue of non-convertible mandatorily
redeemable preferred stock (the "Series B Preferred Stock") for $25 million
before fees and expenses and borrowings under the Company's line of credit of
$23 million.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of RFS, the Operating Partnership and their consolidated
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Fair Value of Financial Instruments. The Company's financial instruments
include rents receivable, accounts payable, other accrued expenses, mortgage
loans payable and an interest rate swap agreement. The fair values of these
financial instruments other than the interest rate swap agreement are not
materially different from their carrying or contract values. The fair value of
the interest rate swap is estimated based on quotes from the market makers of
these instruments and represents the estimated amounts the Company would expect
to receive or pay to terminate the agreements. Credit and market risk exposures
are limited to the net interest differentials. The estimated unrealized net loss
on these instruments was approximately $0.8 million at December 31, 2000. The
carrying values of the Company's borrowings are estimated to be below fair value
by approximately $8.2 million due to changes in comparable interest rates.
Investment in Hotel Properties. Hotel properties are recorded at cost and
are depreciated using the straight-line method over estimated useful lives of 40
years for buildings and improvements and five to seven years for furniture and
equipment. The Company periodically reviews the carrying value of each Hotel to
F-7
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel or that depreciation periods should be modified.
If circumstances support the possibility of impairment, the Company will prepare
a projection of the undiscounted future cash flows, without interest charges, of
the specific hotel and determine if the investment in such hotel is recoverable
based on the undiscounted cash flows. If impairment is indicated, an adjustment
will be made to the carrying value of the hotel based on discounted future cash
flows. The Company does not believe that there are any facts or circumstances
indicating impairment of any of its investment in hotel properties.
Cash and Cash Equivalents. All highly liquid investments with a maturity
of three months or less when purchased are considered to be cash equivalents.
Restricted Cash. Restricted cash includes amounts the Company must make
available for the replacement and refurbishment of furniture and equipment and
amounts held in escrow by certain lenders for the payment of taxes and
insurance.
Notes Receivable. At January 1, 2000, the Company had three notes
receivable from prior years' hotel sales that aggregated approximately $5.3
million. During 2000, the Company collected $0.7 million in cash and established
a reserve for collection of $4.0 million. At December 31, 2000 the notes
receivable balance was $2.5 million offset by a reserve for collection of the
notes of approximately $1.9 million. The notes receivable bear interest at 9%,
mature in November 2002 and 2005 and one of the notes is collateralized by a
first mortgage on the hotel and the other note by guarantees from certain
principals of the buyer.
Deferred Expenses. Deferred expenses, consisting of initial fees paid to
franchisors, loan fees and other costs incurred in issuing debt, are recorded at
cost. Amortization of franchise fees is computed using the straight-line method
over the lives of the franchise agreements, which range from 10 to 15 years.
Amortization of loan fees and other costs incurred in issuing debt are computed
using the interest method over the maturity period of the related debt.
Accumulated amortization of deferred expenses is $5.0 million and $3.8 million
at December 31, 2000 and 1999, respectively.
Minority Interest in Operating Partnership. Minority interest in the
Operating Partnership represents the limited partners' proportionate share of
the equity in the Operating Partnership. Income is allocated to minority
interest based on the weighted average percentage ownership throughout the year.
Treasury Stock. The Board of Directors approved a stock repurchase program
to buy back up to 3 million shares of common stock on the open market subject to
certain market conditions and other factors. During 2000, the Company
repurchased 409 thousand shares of common stock at an average price per share of
$10.88 or $4.4 million, bringing the total number of shares repurchased under
the program to 576 thousand.
Revenue Recognition. In accordance with SAB 101, which was effective for
fiscal years beginning after December 15, 1999, lease revenue is recognized as
income after certain specific annual hurdles have been achieved by the lessee in
accordance with the provisions of the Percentage Lease agreements. SAB 101
effectively defers the recognition of revenue from its percentage leases for the
first and second quarters to the third and fourth quarters. The Company
accounted for SAB 101 as a change in accounting principle effective January 1,
2000. The lessees are in compliance with their rental obligations under the
Percentage Leases.
Income Taxes. The Company has elected to be treated as a REIT under
Sections 856 to 860 of the Internal Revenue Code. Accordingly, no provision for
federal income taxes has been reflected in the consolidated financial
statements. Earnings and profits, which will determine the taxability of
distributions to shareholders, will differ from net income reported for
financial reporting purposes primarily due to the differences for federal tax
purposes in the estimated useful lives used to compute depreciation.
Basic and Diluted Earnings Per Share. Basic earnings per share is computed
by dividing net income less preferred stock dividends by the weighted average
number of common shares outstanding. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares and
F-8
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
equivalents outstanding. Common share equivalents represent shares issuable upon
exercise of options and unvested directors and officers restricted stock grants.
For the years ended December 31, 2000, 1999 and 1998, the Company's Series A
Preferred Stock, if converted to common shares, would be antidilutive;
accordingly, the Series A Preferred Stock is not assumed to be converted in the
computation of diluted earnings per share.
Derivatives. Upon adoption of SFAS 133 on January 1, 2001, the Company
recorded the fair value of the swap as a liability of approximately $0.8 million
with a corresponding charge to other comprehensive income. The Company will
record subsequent changes in the fair value of the swap through other
comprehensive income. These instruments are designated as hedges.
Distributions. The Company pays regular quarterly distributions on its
common shares and Units and the current quarterly distribution is $0.385 per
share or unit. Distributions made in 2000, 1999 and 1998 were considered 100%
ordinary income for federal income tax purposes except for the distribution made
on November 15, 2000 which was characterized as 75.4% ordinary income, 1.4%
return of capital, 1.1% capital gain, and 22.1% Sec. 1250 Recapture.
Additionally, the Company pays regular quarterly dividends on its Series A
Preferred Stock in accordance with its dividend requirements and will pay
regular quarterly dividends on its Series B Preferred Stock beginning in 2001.
The Company's ability to make distributions is dependent upon receipt of its
quarterly distributions from the Operating Partnership.
NOTE 3. INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties consists of the following at December 31,
2000, and 1999, respectively (in thousands):
2000 1999
--------- --------
Land.................................................. $ 71,886 $ 75,135
Building and improvements............................. 541,847 542,931
Furniture and equipment............................... 106,554 91,445
Capital improvements program expenditures............. 19,245 24,685
--------- --------
739,532 734,196
Accumulated depreciation.............................. (103,535) (82,208)
--------- --------
$635,997.. $651,988
========= ========
Capitalized interest during 2000, 1999, and 1998 was $0.6 million, $1.1 million
and $1.4 million, respectively.
F-9
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
NOTE 4. DEBT
The following details the Company's debt outstanding at December 31, 2000
and 1999 (dollar amounts in thousands):
COLLATERAL
-------------------------
INTEREST # OF NET BOOK VALUE
RATE MATURITY HOTELS AT DEC. 31, 2000 2000 1999
-------- ------------- ------ ---------------- -------- --------
VARIABLE RATE DEBT:
Line of Credit....... LIBOR July 2003 24 200,$793..... $ 10,273 $ 98,807
+200bp
FIXED RATE DEBT:
Line of Credit....... 6.54% July 2003 (a) (a) 40,000 --
Mortgage............. 6.83% August 2008 15 144,385 36,971 40,508
Mortgage............. 7.30% November 2011 (b) (b) 25,000 25,000
Mortgage............. 7.83% December 2008 10 130,001 93,460 94,709
Mortgage............. 8.22% November 2007 1 43,907 18,556 18,815
Mortgage............. 4.50% January 2001 1 20,991 1,125 4,440
Mortgage............. 8.00% August 2010 8 87,732 52,046 --
-------- -------- --------
$627,809 $277,431 $282,279
======== ======== ========
- ---------------
(a) An interest rate swap has fixed the rate of interest on this portion of the
Line of Credit and this portion is also collateralized by the twenty-four
properties pledged against the variable portion of the Line.
(b) This mortgage is also collateralized by the fifteen properties pledged
against the previous mortgage in the table.
The Company increased the availability under its Line of Credit from $100
million to $140 million during the year. The increased Line of Credit matures on
July 30, 2003. The interest rate remained substantially unchanged ranging from
150 basis points to 225 basis points above LIBOR, depending on the Company's
ratio of total debt to its investment in hotel properties (as defined). The
interest rate was approximately 8.5% at December 31, 2000. The Line of Credit is
collateralized by the Collateral Pool. The Company can obtain a release of the
pledge of any hotel in the Collateral Pool if the Company provides a substitute
hotel or reduces the total availability under the Line of Credit. The Line of
Credit contains various covenants including the maintenance of a minimum net
worth, minimum debt and interest coverage ratios, and total indebtedness and
liability limitations. The Company was not aware of any failure to comply with
these covenants at December 31, 2000.
On November 3, 2000, the Company entered into an interest rate swap
agreement for a notional amount of $40.0 million maturing in July 2003. The
agreement effectively converts a portion of the Company's floating rate debt to
fixed rate in order to reduce the Company's risk to increases in interest rates.
Such agreements involve the exchange of fixed and floating interest rate
payments over the life of the agreement without the exchange of the underlying
principal amounts. Accordingly, the impact of fluctuations in interest rates on
these interest rate swap agreements is fully offset by the opposite impact on
the related debt. Under the interest rate swap agreement, the Company receives
payments based on the one-month LIBOR rate of 6.80% at December 31, 2000 and
pays a fixed rate of 6.535%.
The differences to be paid or received by the Company under the terms of
the Interest Rate Swap are accrued as interest rates change and recognized as an
adjustment to interest expense by the Company pursuant to the terms of the
agreements and will have a corresponding effect on its future cash flows.
Agreements such as these contain a credit risk that the counterparties may be
unable to meet the terms of the
F-10
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
agreement. The Company minimizes that risk by evaluating the creditworthiness of
its counterparties, which is limited to major banks and financial institutions,
and does not anticipate non-performance by the counterparties.
The fair value of the Interest Rate Swap is estimated based on quotes from
the market makers of these instruments and represents the estimated amounts the
Company would expect to receive or pay to terminate the agreements. Credit and
market risk exposures are limited to the net interest differentials. The
estimated unrealized net loss on these instruments was approximately $0.8
million at December 31, 2000.
The Company's other borrowings are nonrecourse to the Company and contain
provisions allowing for the substitution of collateral, upon satisfaction of
certain conditions, after the respective loans have been outstanding for
approximately four years. Most of the mortgage borrowings are repayable and
subject to various prepayment penalties, yield maintenance, or defeasance
obligations.
Future scheduled principal payments of debt obligations at December 31,
2000 are as follows (in thousands):
AMOUNT
--------
2001........................................................ $ 7,240
2002........................................................ 6,547
2003........................................................ 57,344
2004........................................................ 7,547
2005........................................................ 8,152
Thereafter.................................................. 190,601
--------
$277,431
========
NOTE 5. CAPITAL STOCK
Preferred Stock. The Board of Directors is authorized to provide for the
issuance of up to 5 million shares of Preferred Stock in one or more series, to
establish the number of shares in each series and to fix the designation,
powers, preferences and rights of each such series and the qualifications,
limitations or restrictions thereof.
The Company issued to one of the lessees 973,684 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). The Company
redeemed the Series A Preferred Stock on January 1, 2001 (See Subsequent Event
footnote). The Series A Preferred Stock had an initial preference value of
$19.00 per share (the "Stated Value"), a par value of $0.01, and is senior to
the Company's common shares as to distributions and upon liquidation of the
Company. The shares of Series A Preferred Stock were entitled to a $1.45
cumulative annual dividend per share. Each share of Series A Preferred Stock had
one vote and was convertible into one share of common stock after February 2002.
On January 2, 2001, the Company issued 250 thousand shares of
non-convertible mandatorily redeemable Series B Preferred Stock for $25 million
prior to fees and expenses of approximately $1 million. Holders of the Series B
Preferred Stock are entitled to receive quarterly cash dividends commencing
March 31, 2001 at an annual rate of 12.5%. Beginning January 1, 2006, the
dividend rate increases 2.0% per annum up to a maximum rate of 20.5%. The
Company may redeem shares of the Series B Preferred Stock in whole but not in
part, on or after December 31, 2003 at the original price of $25 million. If the
shares are redeemed before December 31, 2003, the redemption price is at varying
amounts over the original share price. The shares are mandatorily redeemable by
the holders at varying amounts over the original share price, depending on when
the shares are redeemed, upon a change of control, dissolution or winding up of
the Company or on the Company's failure to qualify as a REIT.
F-11
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
Operating Partnership Units. RFS is the sole general partner of the
Operating Partnership and is obligated to contribute the net proceeds from any
issuance of its equity securities to the Operating Partnership in exchange for
units of partnership interest ("Units") corresponding in number and terms to the
equity securities issued. Units may also be issued by the Operating Partnership
to third parties in exchange for cash or property, and units so issued to third
parties are redeemable at the option of RFS for either one common share or the
cash equivalent thereof at the then current fair market value of a common share.
NOTE 6. COMMITMENTS AND CONTINGENCIES
On December 26, 2000, Frimco Associates, Inc. ("Frimco") and Inn Alpha,
Inc. ("Inn Alpha") filed a lawsuit in the Supreme Court of the State of New
York, County of Dutchess, against certain subsidiaries of the Company and RFS,
Inc., a former lessee of certain of the Company's hotels. The lawsuit was
removed to the United States District Court for the Southern District of New
York on January 5, 2001. Prior to January 1, 2001, Frimco and Inn Alpha managed
three of the Company's hotels pursuant to management agreements with RFS, Inc.,
the Company's former lessee. These management agreements were terminated in
connection with the termination of the leases for these three hotels effective
January 1, 2001. Frimco and Inn Alpha are seeking declaratory and injunctive
relief, compensatory damages of not less than $12 million, as well as punitive
damages. Pursuant to agreements related to the termination of the leases between
the Company's subsidiaries and RFS, Inc., the Company has agreed to indemnify
and defend RFS, Inc. against Frimco's and Inn Alpha's claims. The Company
believes these claims are without merit and intends to defend these claims
vigorously. The Company has filed a Motion to Dismiss the plaintiffs' claims.
The Court has scheduled the case for trial in July, 2001.
Effective January 1, 2001, the Company is to receive rental income from
five hotels leased to third parties under the Percentage Leases which expire in
2007 (1 hotel), 2008 (2 hotels) and 2009 (2 hotels).
Minimum future rental income (base rents) due the Company under these
noncancelable operating leases at December 31, 2000, is as follows (in
thousands):
YEAR AMOUNT
- ---- -------
2001........................................................ $ 2,442
2002........................................................ 2,442
2003........................................................ 2,442
2004........................................................ 2,442
2005........................................................ 2,442
2006 and thereafter......................................... 6,267
-------
$18,477
=======
Lease revenue is based on a percentage of room revenues, food and beverage
revenues and other revenues of the Hotels. Both the base rent and the threshold
room revenue in each lease computation are adjusted annually for changes in the
Consumer Price Index ("CPI"). The adjustment is calculated at the beginning of
each calendar year. The CPI adjustments made in January 2000 and 1999 were 2.7%
and 1.6%, respectively.
The Company may terminate any lease agreement with respect to a hotel
property upon the sale of a hotel property in exchange for a termination payment
to the lessee. During 2000, the Company terminated two such leases and incurred
fees of $2.1 million that is included in the loss on sale of hotel properties.
Under the Percentage Leases, the Operating Partnership is obligated to pay
the costs of real estate taxes, property insurance, maintenance of underground
utilities and structural elements of the Hotels, and to set aside a portion of
the Hotels' revenues to fund capital expenditures for the periodic replacement
or refurbishment of furniture, fixtures and equipment required for the retention
of the franchise licenses with respect to the Hotels.
F-12
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
NOTE 7. SUPPLEMENTAL CASH FLOW DISCLOSURE
In 2000, the Company sold two hotels for cash consideration of $25.2
million and accrued a loss of $1.0 million on the sale of a third hotel that did
not close until February 20, 2001 and is a non-cash transaction as at December
31, 2000. In 1998, the Company assumed $19.2 million of debt in connection with
the purchase of a hotel and the Company sold two hotels for cash consideration
of $5.4 million and a note receivable of $2.7 million.
NOTE 8. STOCK-BASED COMPENSATION PLANS
The Company's Restricted Stock and Stock Option Plan (the "Plan") provides
for the grant of stock options to purchase a specified number of shares of
common stock ("Options") and grants of restricted shares of common stock
("Restricted Stock"). Approximately 2.6 million shares of common stock, of which
600 thousand shares may be restricted stock, are available for awards to the
officers and key employees of the Company and 400 thousand shares of common
stock, of which 50 thousand shares may be restricted stock, are available for
awards to Directors of the Company who are not officers or employees. Options
issued under the plan have a maximum term of ten years from the date of grant.
The exercise price of the options shall be determined on the date of each grant.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plan. In 1995, the Financial Accounting Standards Board
issued SFAS Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") which, if fully adopted by the Company, would change the methods the
Company applies in recognizing the cost of the Plan. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company has decided not
to adopt the provisions of SFAS 123. However, pro forma disclosures, as if the
Company adopted the cost recognition requirements of SFAS 123, are required by
SFAS 123 and are presented below.
A summary of the Company's stock options under the Plan as of December 31,
2000, 1999 and 1998, and the changes during the years are presented below (in
thousands, except per share data):
2000 1999 1998
--------------------- --------------------- ---------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of years.... 1,484 $13.83 1,091 $14.99 1,188 $15.92
Granted.............................. 50 11.06 600 11.99 210 11.88
Exercised............................ (30) 11.88 (95) 17.00
Forfeited............................ (297) 14.64 (207) 14.64 (212) 16.18
--------- ------ --------- ------ --------- ------
Outstanding at end of years.......... 1,207 $13.43 1,484 $13.83 1,091 $14.99
========= ====== ========= ====== ========= ======
Exercisable at end of years.......... 700 $14.25 604 $15.34 520 $15.50
========= ====== ========= ====== ========= ======
Weighted-average fair value.......... $ 0.60 $ 1.75 $ 1.54
====== ====== ======
Price range of shares under option... $10.50 to $10.50 to $11.87 to
$16.87 $16.87 $16.87
The weighted average remaining contractual life of options outstanding as
of December 31, 2000 is 6.2 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: dividend of $1.54; volatility of 26.25% for 2000 grants, 29% for
1999 grants, and 27% for 1998 grants, risk-free interest rate of 6.2% for 2000,
of 5.9% for 1999, and 4.6% for 1998 and expected life of 6 years for 2000, 1999,
and 1998.
F-13
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, the Company's pro forma net income per
common share of 2000, 1999 and 1998 would have decreased by approximately 1%.
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts.
Restricted Stock. The Company granted 14 thousand, 41 thousand and 129
thousand shares of Restricted Stock in 2000, 1999, and 1998 respectively,
subject to vesting. At December 31, 2000, 239 thousand shares were vested and 82
thousand shares remain unvested. The weighted average fair value per share of
the Restricted Stock granted in 2000 and 1999 was $11.36 and $11.25,
respectively.
NOTE 9. SUBSEQUENT EVENTS
Under the RMA that became effective January 1, 2001, the Company is
permitted to lease its hotels to TRS Lessees, provided that the TRS Lessees
engage a third-party management company to manage the hotels. Effective January
1, 2001, the Company effectively terminated its operating leases, management
contracts and related ancillary agreements with Hilton for approximately $60
million in cash. This payment to Hilton represents the cancellation of executory
contracts that extended through 2012 and substantially all of the terminations
payment was recorded as an expense on January 1, 2001. The cancellation of these
agreements entitles the TRS Lessees to retain the operating profits from the
hotels, which previously accrued to Hilton under these leases and gives the
Company i) more control over the daily operations of its hotels, (ii) the
benefits from any cost efficiencies or ancillary revenues generated at the
hotels, and (iii) flexibility, in that, the hotels are not encumbered by long
term leases which are difficult to amend and expensive to terminate. All of the
hotels continue to operate under the same franchise affiliation as prior to the
contract termination.
Simultaneous with the termination of the leases and related agreements, the
TRS Lessees entered into new management contracts with Flagstone. Flagstone is a
newly-formed company jointly owned by Angie Mock, its CEO and formerly Executive
Vice President, Asset Management, of the Company, and MeriStar Hotels and
Resorts, the nation's largest independent hotel management company. Effective
January 1, 2001, Flagstone manages 53 of the Company's 60 hotels and the
remaining seven hotels are managed by four other third-party management
companies. Only five of the Company's hotels revenue operated under long term
leases with third parties on January 1, 2001.
In connection with the termination of the leases and related agreements,
the Company purchased 973,684 shares of the Company's Series A Preferred Stock
owned by Hilton for $13.0 million. The Company included $5.1 million in net
income available to common shareholders on January 1, 2001, representing the
difference between the Company's purchase price and $18.1 million of proceeds
from the original sale of the Series A Preferred Stock. The Series A Preferred
Stock was retired.
The aggregate $73 million of payments to Hilton were financed by proceeds
from the sale of two hotels in 2000 of approximately (prior to fees and
expenses) $25 million, proceeds from the sale Series B Preferred Stock for
(prior to fees and expenses) and borrowings under the Company's line of credit
of $23 million. At January 1, 2001, the Company has $38.2 million of capacity
under its Line of Credit and a debt to trailing twelve month EBITDA ratio of
3.6.
On January 2, 2001, the Company issued 250 thousand shares of
non-convertible mandatorily redeemable Series B Preferred Stock for $25 million
prior to fees and expenses of approximately $1 million. Holders of the Series B
Preferred Stock are entitled to receive quarterly cash dividends commencing
March 31, 2001 at an annual rate of 12.5%. Beginning January 1, 2006, the
dividend rate increases 2.0% per annum up to a maximum rate of 20.5%. The
Company may redeem shares of the Series B Preferred Stock in whole but not in
part, on or after December 31, 2003 at the original price of $25 million. If the
shares are redeemed before December 31, 2003, the redemption price is at varying
premiums over the original share price. The shares are mandatorily redeemable by
the holders at varying amounts over the original share price, depending on when
F-14
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OF RFS HOTEL INVESTORS, INC. -- (CONTINUED)
the shares are redeemed, upon a change of control, dissolution or winding up of
the Company or on the Company's failure to qualify as a REIT.
On January 25, 2001, the Company declared a distribution of $0.385 on each
share of Common Stock and Unit outstanding payable on February 15, 2001 to
shareholders of record on February 5, 2001.
On February 20, 2001, the Company completed the sale of the 131-room
Hampton Inn in Plano, Texas for $5.525 million and recorded a loss on the sale
of approximately $1.0 million in its 2000 income statement as the sale was
contracted prior to year-end. The proceeds were used to reduce borrowings
outstanding under the line of credit.
F-15
44
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholders of RFS Hotel Investors, Inc.
Our audits of the consolidated financial statements referred to in our
report dated January 24, 2001, except for Note 9 as to which the date is
February 20, 2001, appearing on page F-1 of the 2000 Form 10-K of RFS Hotel
Investors, Inc. also included an audit of the financial statement schedule
listed in Item 14(a) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Dallas, Texas
January 24, 2001, except for Note 9 as to
which the date is February 20, 2001
F-16
45
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
COST CAPITALIZED GROSS AMOUNT AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT END OF PERIOD
----------------------- -------------------- -----------------------
BUILDINGS BUILDINGS BUILDINGS
AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------- ------------- ---- ------------- ------- ------------- --------
(IN THOUSANDS)
Sheraton Hotel
Clayton, MO............. (1) $ 1,599 $ 4,968 $ 7,245 $ 1,599 $ 12,213 $ 13,812
Holiday Inn
Columbia, SC............ (1) 790 3,573 1,111 790 4,684 5,474
Holiday Inn
Louisville, KY.......... (1) 1,328 3,808 1,322 1,328 5,130 6,458
Comfort Inn
Marietta, GA............ (2) 989 5,509 262 989 5,771 6,760
Holiday Inn
Lafayette, LA........... (1) 700 8,858 1,416 700 10,274 10,974
Residence Inn
Kansas City, MO......... (2) 392 5,344 452 392 5,796 6,188
Comfort Inn
Ft. Mill, SC............ (2) 763 6,612 311 763 6,923 7,686
Hampton Inn
Ft. Lauderdale, FL...... (1) 590 4,664 372 590 5,036 5,626
Holiday Inn Express
Arlington Heights, IL... (1) 350 4,121 477 350 4,598 4,948
Hampton Inn
Denver, CO.............. none 500 8,098 399 500 8,497 8,997
Holiday Inn Express
Downers Grove, IL....... (1) 400 5,784 482 400 6,266 6,666
Comfort Inn
Farmington Hills, MI.... (2) 525 4,118 338 525 4,456 4,981
Hampton Inn
Indianapolis, IN........ (2) 475 8,008 339 475 8,347 8,822
Hampton Inn
Lincoln, NE............. (1) 350 4,829 426 350 5,255 5,605
Hampton Inn
Bloomington, MN......... (2) 375 8,657 210 375 8,867 9,242
Holiday Inn Express
Bloomington, MN......... (1) 780 6,910 $152 918 932 7,828 8,760
Hampton Inn
Minnetonka, MN.......... (1) 475 5,066 173 475 5,239 5,714
Hampton Inn
Oklahoma City, OK....... (2) 530 6,826 479 530 7,305 7,835
Hampton Inn
Omaha, NE............... (2) 450 6,362 494 450 6,856 7,306
LIFE UPON
WHICH
ACCUMULATED NET BOOK DEPRECIATION IN
DEPRECIATION VALUE LATEST INCOME
BUILDINGS AND BUILDINGS AND DATE OF STATEMENT IS
DESCRIPTION IMPROVEMENTS IMPROVEMENTS ACQUISITION CALCULATED
----------- ------------- ------------- ----------- ---------------
(IN THOUSANDS)
Sheraton Hotel
Clayton, MO............. $ 1,319 $ 10,894 1993 40
Holiday Inn
Columbia, SC............ 753 3,931 1993 40
Holiday Inn
Louisville, KY.......... 814 4,316 1993 40
Comfort Inn
Marietta, GA............ 993 4,778 1993 40
Holiday Inn
Lafayette, LA........... 1,707 8,567 1993 40
Residence Inn
Kansas City, MO......... 938 4,858 1994 40
Comfort Inn
Ft. Mill, SC............ 1,133 5,790 1994 40
Hampton Inn
Ft. Lauderdale, FL...... 813 4,223 1994 40
Holiday Inn Express
Arlington Heights, IL... 728 3,870 1994 40
Hampton Inn
Denver, CO.............. 1,371 7,126 1994 40
Holiday Inn Express
Downers Grove, IL....... 988 5,278 1994 40
Comfort Inn
Farmington Hills, MI.... 701 3,755 1994 40
Hampton Inn
Indianapolis, IN........ 1,351 6,996 1994 40
Hampton Inn
Lincoln, NE............. 834 4,421 1994 40
Hampton Inn
Bloomington, MN......... 1,441 7,426 1994 40
Holiday Inn Express
Bloomington, MN......... 1,182 6,646 1994 40
Hampton Inn
Minnetonka, MN.......... 846 4,393 1994 40
Hampton Inn
Oklahoma City, OK....... 1,167 6,138 1994 40
Hampton Inn
Omaha, NE............... 1,094 5,762 1994 40
F-17
46
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AS OF DECEMBER 31, 2000
COST CAPITALIZED GROSS AMOUNT AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT END OF PERIOD
----------------------- -------------------- -----------------------
BUILDINGS BUILDINGS BUILDINGS
AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------- ------------- ---- ------------- ------- ------------- --------
(IN THOUSANDS)
Hampton Inn
Tulsa, OK............... (1) 350 5,715 501 350 6,216 6,566
Holiday Inn Express
Wauwatosa, WI........... (2) 700 4,926 522 700 5,448 6,148
Residence Inn
Fishkill, NY............ (1) 2,280 10,484 246 2,280 10,730 13,010
Residence Inn
Providence, RI.......... (2) 1,385 7,742 307 1,385 8,049 9,434
Residence Inn
Tyler, TX............... (1) 855 6,212 455 855 6,667 7,522
Hampton Inn
Memphis, TN............. (2) 980 6,157 98 980 6,255 7,235
Residence Inn
Ft. Worth, TX........... (2) 985 10,726 714 985 11,440 12,425
Residence Inn
Wilmington, DE.......... (1) 1,100 8,488 191 1,100 8,679 9,779
Residence Inn
Torrance, CA............ (1) 2,600 17,789 816 2,600 18,605 21,205
Residence Inn
Ann Arbor, MI........... (2) 525 4,461 227 3,084 752 7,545 8,297
Holiday Inn
Flint, MI............... (1) 1,220 11,994 369 1,220 12,363 13,583
Residence Inn
Charlotte, NC........... (2) 850 3,844 159 3,126 1,009 6,970 7,979
Holiday Inn Express
Austin, TX.............. (2) 500 4,737 160 500 4,897 5,397
Hampton Inn
Lakewood, CO............ (2) 957 6,790 245 957 7,035 7,992
Hampton Inn
Hattiesburg, MS......... (2) 785 4,653 1,690 785 6,343 7,128
Hampton Inn
Laredo, TX.............. (1) 1,037 4,116 23 1,037 4,139 5,176
Residence Inn
Atlanta, GA............. (1) 1,306 10,200 362 1,306 10,562 11,868
Holiday Inn
Crystal Lake, IL........ (2) 1,665 10,932 445 1,665 11,377 13,042
Residence Inn
Orlando, FL............. (2) 1,045 8,880 230 1,045 9,110 10,155
LIFE UPON
WHICH
ACCUMULATED NET BOOK DEPRECIATION IN
DEPRECIATION VALUE LATEST INCOME
BUILDINGS AND BUILDINGS AND DATE OF STATEMENT IS
DESCRIPTION IMPROVEMENTS IMPROVEMENTS ACQUISITION CALCULATED
----------- ------------- ------------- ----------- ---------------
(IN THOUSANDS)
Hampton Inn
Tulsa, OK............... 988 5,228 1994 40
Holiday Inn Express
Wauwatosa, WI........... 857 4,591 1994 40
Residence Inn
Fishkill, NY............ 1,698 9,032 1994 40
Residence Inn
Providence, RI.......... 1,266 6,783 1994 40
Residence Inn
Tyler, TX............... 1,020 5,647 1994 40
Hampton Inn
Memphis, TN............. 969 5,286 1994 40
Residence Inn
Ft. Worth, TX........... 1,687 9,753 1994 40
Residence Inn
Wilmington, DE.......... 1,367 7,312 1994 40
Residence Inn
Torrance, CA............ 2,870 15,735 1994 40
Residence Inn
Ann Arbor, MI........... 960 6,585 1994 40
Holiday Inn
Flint, MI............... 1,880 10,483 1994 40
Residence Inn
Charlotte, NC........... 730 6,240 1994 40
Holiday Inn Express
Austin, TX.............. 722 4,175 1995 40
Hampton Inn
Lakewood, CO............ 999 6,036 1995 40
Hampton Inn
Hattiesburg, MS......... 844 5,499 1995 40
Hampton Inn
Laredo, TX.............. 557 3,582 1995 40
Residence Inn
Atlanta, GA............. 1,360 9,202 1995 40
Holiday Inn
Crystal Lake, IL........ 1,448 9,929 1995 40
Residence Inn
Orlando, FL............. 1,178 7,932 1995 40
F-18
47
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AS OF DECEMBER 31, 2000
COST CAPITALIZED GROSS AMOUNT AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT END OF PERIOD
----------------------- -------------------- -----------------------
BUILDINGS BUILDINGS BUILDINGS
AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------- ------------- ---- ------------- ------- ------------- --------
(IN THOUSANDS)
Residence Inn
Sacramento, CA.......... (2) $ 1,000 $ 13,122 $ 163 $ 1,000 $ 13,285 $ 14,285
Doubletree Hotel
Del Mar, CA............. (2) 1,500 13,535 295 201 1,795 13,736 15,531
Hampton Inn
Plano, TX............... (1) 959 5,178 31 959 5,209 6,168
Courtyard by Marriott
Flint, MI............... (1) 600 4,852 183 600 5,035 5,635
Hampton Inn
Sedona, AZ.............. (1) 1,464 3,858 88 1,464 3,946 5,410
Hampton Inn
Chandler, AZ............ (1) 485 3,950 4 485 3,954 4,439
Hampton Inn
Houston, TX............. (1) 606 4,919 3 606 4,922 5,528
Sheraton Hotel
Milpitas, CA............ (2) 5,253 23,169 209 5,253 23,378 28,631
Sheraton Hotel
Sunnyvale, CA........... (2) 785 22,401 597 785 22,998 23,783
Sheraton Four Points
Pleasanton, CA.......... (2) 1,935 19,251 382 1,935 19,633 21,568
Sheraton Four Points
Bakersfield, CA......... (2) 1,390 7,554 431 1,390 7,985 9,375
Beverly Heritage
Milpitas, CA............ (1) 5,250 25,118 4,532 5,250 29,650 34,900
Sheraton Hotel
Birmingham, AL.......... $ 1,125 3,103 13,491 859 3,103 14,350 17,453
Residence Inn
Jacksonville, FL........ (1) 1,339 4,990 43 1,339 5,033 6,372
Residence Inn
West Palm Beach, FL..... (1) 1,293 4,025 1,293 4,025 5,318
Hampton Inn
Jacksonville, FL........ (1) 1,047 4,375 1,047 4,375 5,422
Homewood Suites
Chandler, AZ............ (1) 485 4,601 3 485 4,604 5,089
Hotel Rex
San Francisco, CA....... (1) 3,000 11,039 60 3,000 11,099 14,099
Hilton
San Francisco, CA....... $18,556 3,007 28,308 9,180 3,007 37,488 40,495
LIFE UPON
WHICH
ACCUMULATED NET BOOK DEPRECIATION IN
DEPRECIATION VALUE LATEST INCOME
BUILDINGS AND BUILDINGS AND DATE OF STATEMENT IS
DESCRIPTION IMPROVEMENTS IMPROVEMENTS ACQUISITION CALCULATED
----------- ------------- ------------- ----------- ---------------
(IN THOUSANDS)
Residence Inn
Sacramento, CA.......... $ 1,651 $ 11,634 1996 40
Doubletree Hotel
Del Mar, CA............. 1,584 12,152 1996 40
Hampton Inn
Plano, TX............... 584 4,625 1996 40
Courtyard by Marriott
Flint, MI............... 511 4,524 1996 40
Hampton Inn
Sedona, AZ.............. 332 3,614 1997 40
Hampton Inn
Chandler, AZ............ 353 3,601 1997 40
Hampton Inn
Houston, TX............. 483 4,439 1997 40
Sheraton Hotel
Milpitas, CA............ 2,323 21,055 1997 40
Sheraton Hotel
Sunnyvale, CA........... 2,257 20,741 1997 40
Sheraton Four Points
Pleasanton, CA.......... 1,936 17,697 1997 40
Sheraton Four Points
Bakersfield, CA......... 764 7,221 1997 40
Beverly Heritage
Milpitas, CA............ 2,330 27,320 1997 40
Sheraton Hotel
Birmingham, AL.......... 1,111 13,239 1997 40
Residence Inn
Jacksonville, FL........ 395 4,638 1997 40
Residence Inn
West Palm Beach, FL..... 284 3,741 1998 40
Hampton Inn
Jacksonville, FL........ 309 4,066 1998 40
Homewood Suites
Chandler, AZ............ 314 4,290 1998 40
Hotel Rex
San Francisco, CA....... 737 10,362 1998 40
Hilton
San Francisco, CA....... 1,819 35,669 1998 40
F-19
48
RFS HOTEL INVESTORS, INC.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
AS OF DECEMBER 31, 2000
COST CAPITALIZED GROSS AMOUNT AT
SUBSEQUENT TO WHICH CARRIED
INITIAL COST ACQUISITION AT END OF PERIOD
----------------------- -------------------- -----------------------
BUILDINGS BUILDINGS BUILDINGS
AND AND AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ ------- ------------- ---- ------------- ------- ------------- --------
(IN THOUSANDS)
TownPlace Suites
Ft. Worth, TX........... (1) 753 4,721 80 753 4,801 5,554
TownPlace Suites
Miami, FL............... (1) 895 5,187 895 5,190 6,085
TownPlace Suites
Miami (West), FL........ (1) 914 5,210 914 5,380 6,294
Unimproved land
Crystal Lake, IL........ none 504 504 504
------- -------- ---- ------- ------- -------- --------
Totals............ $71,053 $493,815 $833 $47,859 $71,886 $541,847 $613,733
======= ======== ==== ======= ======= ======== ========
LIFE UPON
WHICH
ACCUMULATED NET BOOK DEPRECIATION IN
DEPRECIATION VALUE LATEST INCOME
BUILDINGS AND BUILDINGS AND DATE OF STATEMENT IS
DESCRIPTION IMPROVEMENTS IMPROVEMENTS ACQUISITION CALCULATED
----------- ------------- ------------- ----------- ---------------
(IN THOUSANDS)
TownPlace Suites
Ft. Worth, TX........... 238 4,563 1998 40
TownPlace Suites
Miami, FL............... 204 4,986 1997 40
TownPlace Suites
Miami (West), FL........ 155 5,225 1997 40
Unimproved land
Crystal Lake, IL........ 0 1995 n/a
------- --------
Totals............ $64,247 $477,600
======= ========
- ---------------
(1) Property is collateral for the Line of Credit.
(2) Property is collateral for long-term, fixed rate debt.
2000 1999 1998
-------- -------- --------
Cost of land and improvements, buildings and improvements:
Balance at beginning of year.............................. $618,066 $573,912 $547,229
Additions................................................. 17,179 44,154 49,852
Disposals................................................. (21,512) (23,169)
-------- -------- --------
Balance at end of year.................................... $613,733 $618,066 $573,912
-------- -------- --------
Accumulated depreciation on land improvements, buildings and
improvements:
Balance at beginning of year.............................. $ 53,124 $ 40,979 $ 29,662
Additions................................................. 16,994 12,145 13,267
Disposals................................................. (5,871) (1,950)
-------- -------- --------
Balance at end of year.................................... $ 64,247 $ 53,124 $ 40,979
-------- -------- --------
F-20