SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2001 Commission File Number 01-12073
EQUITY INNS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1550848
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
7700 Wolf River Boulevard, Germantown, Tennessee 38138
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(Address of Registrant's Principal Executive Office) (Zip Code)
( 901) 754-7774
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
9 1/2% Series A Cumulative Preferred Stock, $.01 par value
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(Title of Class)
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.
Yes X 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 the definitive proxy statement or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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Aggregate market value of voting stock and non-voting common stock held by
nonaffiliates of the registrant as of March 5, 2002: $271,890,348.
Number of shares of Common Stock, $.01 par value, outstanding as of March 5,
2002: 36,897,990
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's proxy statement for its 2002 Annual Meeting of
Shareholders to be held May 9, 2002 (the "Proxy Statement") are incorporated by
reference into Part III of this Report.
Exhibit Index beginning on Page 55.
Page 1 of 59
EQUITY INNS, INC
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2001
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 48
Part III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on
Form 8-K 49
2
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Equity Inns, Inc. (the "Company") is in the business of acquiring equity
interests in hotel properties. The Company commenced operations in March 1994
and is a real estate investment trust ("REIT") for federal income tax purposes.
The Company, through its wholly-owned subsidiary, Equity Inns Trust (the
"Trust"), is the sole general partner of Equity Inns Partnership, L.P. (the
"Partnership") and, at December 31, 2001, owned an approximate 96.8% interest in
the Partnership. The Company conducts its business through the Partnership and
its subsidiaries.
(b) Narrative Description of Business
At December 31, 2001, the Partnership and its affiliates owned 96 hotel
properties with a total of 12,284 rooms in 34 states (the "Hotels"). In order to
qualify as a REIT, the Company and the Partnership cannot operate hotels.
Effective January 1, 2001 (the "2001 Effective Date") under the federal REIT
Modernization Act (the "RMA"), the Company and its affiliates (1) terminated or
assigned all existing operating leases providing for payment of percentage rent
(the "Percentage Leases") between the Company and certain affiliates of
Interstate Hotels Corporation ("IHC") leasing 75 of the Hotels (the "Interstate
Lessees") and (2) terminated related lease guaranties with Interstate Hotels,
L.L.C. and Wyndham International, Inc. and (3) entered into new Percentage
Leases with wholly-owned taxable REIT subsidiaries of the Company (the "TRS
Lessees") for the lease of 77 hotels. The terms of the Percentage Leases with
the TRS Lessees are substantially identical to the Percentage Leases terminated
with the Interstate Lessees.
Through December 31, 2001, the Partnership and its affiliates continued to lease
19 AmeriSuites Hotels to wholly-owned subsidiaries (the "Prime Lessees") of
Prime Hospitality Corporation ("Prime"), with all payments due under those
Percentage Leases guaranteed by Prime. Effective as of January 1, 2002 (the
"2002 Effective Date"), the Company and its affiliates terminated (1) the
existing Percentage Leases between the Company and the Prime Lessees and (2) the
related lease guarantees. The Company also entered into new Percentage Leases
with its TRS Lessees for such 19 Hotels, on terms substantially identical to
those of the terminated leases.
Under the RMA, the TRS Lessees are required to enter into management agreements
with eligible independent contractors to manage the hotels. On the 2001
Effective Date, the TRS Lessees entered into new management agreements for the
77 Hotels as follows: Promus Hotels, Inc. ("Promus") for 20 Hotels; Crestline
Hotels & Resorts, Inc. ("Crestline") for two Hotels; and Crossroads Hospitality
Company, L.L.C., an IHC affiliate ("CHC") for 55 Hotels. On the 2002 Effective
Date, the TRS Lessees entered into new management agreements for the 19
AmeriSuites Hotels with Prime's subsidiaries and one of the TRS Lessees also
entered into a new management agreement with Waterford Hotel Group, Inc.
("Waterford") for the Company's hotel in Burlington, Vermont. Rents generated by
the Percentage Leases with the TRS Lessees are eliminated in consolidation,
while actual operating results of all of the Company's hotels leased by the TRS
Lessees are included in the Company's financial statements. Therefore, the
Company's consolidated results of operations with respect to the 77 hotels
managed by Promus, Crestline and CHC from the 2001 Effective Date are not
comparable to 2000 results.
The diversity of the Company's portfolio is such that, at December 31, 2001, no
individual hotel exceeded 2.1% of the total rooms in the portfolio. The
Company's geographical distribution and franchise diversity is illustrated by
the following charts.
3
Franchise Diversity
# of Hotel # of
Franchise Affiliation Properties Rooms/Suites
- --------------------- ---------- --------------
Premium Limited Service Hotels:
Hampton Inn 48 6,030
Hampton Inn & Suites 1 125
Holiday Inn Express 1 101
Comfort Inn 2 245
-- ------
Sub-total 52 6,501
-- ------
All-Suite Hotels:
AmeriSuites 19 2,403
Premium Extended Stay Hotels:
Residence Inn 11 1,351
Homewood Suites 9 1,295
-- ------
Sub-total 20 2,646
-- ------
Full Service Hotels:
Holiday Inn 4 557
Comfort Inn 1 177
-- ------
Sub-total 5 734
-- ------
Total 96 12,284
== ======
4
Geographical Diversity
Number of Number of Percentage of
State Hotels Suites/Rooms Suites/Rooms
- ----- --------- ------------ -------------
Alabama 3 382 3.1%
Arizona 4 495 4.0%
Arkansas 1 123 1.0%
Colorado 3 356 2.9%
Connecticut 3 405 3.3%
Florida 8 1,079 8.8%
Georgia 3 314 2.6%
Idaho 1 104 0.8%
Illinois 3 499 4.1%
Indiana 2 255 2.1%
Kansas 2 260 2.1%
Kentucky 1 119 1.0%
Louisiana 1 128 1.0%
Maryland 2 244 2.0%
Michigan 3 399 3.2%
Minnesota 2 248 2.0%
Missouri 2 242 2.0%
Nebraska 1 80 0.7%
Nevada 1 202 1.6%
New Jersey 3 424 3.5%
New Mexico 1 128 1.0%
New York 1 154 1.3%
North Carolina 5 614 5.0%
Ohio 6 736 6.0%
Oklahoma 1 135 1.1%
Oregon 1 168 1.4%
Pennsylvania 2 249 2.0%
South Carolina 3 404 3.3%
Tennessee 10 1,172 9.5%
Texas 8 1,105 9.0%
Vermont 2 200 1.6%
Virginia 2 245 2.0%
Washington 1 161 1.3%
West Virginia 4 455 3.7%
-- ------ -----
96 12,284 100.0%
== ====== =====
GROWTH STRATEGY
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 underperforming due to the lack of
sufficient capital improvements, poor management or franchise affiliation, and
(iii) selectively disposing of hotels that have reached their earnings potential
or may, in management's judgment, suffer adverse changes in their local market,
or require large capital outlays. Currently, the Company's acquisition and
5
growth strategy has been curtailed due to various factors, including the
difficulty in obtaining equity financing on terms deemed appropriate by
management.
EMPLOYEES
At March 1, 2002, the Company employed, through a wholly-owned subsidiary, 15
employees.
COMPETITION
The hotel industry is highly competitive with various participants competing on
the basis of price, level of service and geographic location. Each of the Hotels
is located in a developed area that includes other hotel properties. The number
of competitive hotel properties in a particular area could have a material
adverse effect on occupancy, average daily rate ("ADR") and Revenue Per
Available Room ("REVPAR") of the Hotels or at hotel properties acquired in the
future. The Company believes that brand recognition, location, the quality of
the hotel, consistency of services provided, and price are the principal
competitive factors affecting the Company's hotels.
FRANCHISE AGREEMENTS
A part of the Company's asset management program is the licensing of all its
Hotels under nationally franchised brands. The Company believes that the
public's perception of quality associated with a franchisor is an important
feature in the operation of a hotel. The Company believes that franchised
properties generally have higher levels of occupancy and ADR than properties
which are unfranchised due to access to national reservation systems and
advertising and marketing programs provided by franchisors.
The Partnership is also committed to franchisors to make certain capital
improvements to hotel properties, which will be funded from borrowings or
working capital. The Partnership made capital improvements of approximately
$22.2 million to its hotel properties in 2001, including approximately $10.3
million in renovations required by franchisors. In 2002, the Partnership expects
to fund approximately $10.0 million of capital improvements for the Hotels.
SEASONALITY
The Hotels' operations historically have been seasonal in nature, generally
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Company's quarterly
results of operations.
TAX STATUS
The Company intends to operate so as to be taxed as a REIT under Sections
856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). As long
as the Company qualifies for taxation as a REIT, with certain exceptions, the
Company will not be taxed at the corporate level on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it distribute
annually at least 90% of its taxable income. Failure to qualify as a REIT will
render the Company subject to tax (including any applicable minimum tax) on its
taxable income at regular corporate rates and distributions to the shareholders
in any such year will not be deductible by the Company. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain state
and local taxes on its income and property. In connection with the Company's
election to be taxed as a REIT, the Company's Charter imposes certain
restrictions on the transfer of shares of Common Stock. The Company has adopted
the calendar year as its taxable year.
6
The RMA, which generally took effect on January 1, 2001, includes several REIT
provisions (the "REIT Provisions") which revised extensively the existing tax
rules applicable to taxable REIT subsidiaries ("TRSs"). Under the REIT
Provisions, the Company is allowed to own all of the stock in TRSs. In addition,
a TRS is allowed to perform "non-customary" services for hotel guests and is
permitted to enter into many new businesses. However, a TRS is not allowed to
manage hotels. Each TRS is required to enter into management contracts for the
Company's hotels with independent third party management companies. The use of
TRSs, however, is subject to certain restrictions, including the following:
o no more than 20% of the REIT's assets may consist of securities of its
TRSs;
o the tax deductibility of interest paid or accrued by a TRS to its
affiliated REIT is limited; and
o a 100% excise tax is imposed on non-arm's length transactions between
a TRS and its affiliated REIT or the REIT's tenants.
As a result of the opportunities offered by the RMA, the Company has terminated
or assigned the Percentage Leases with the Interstate and Prime Lessees and
entered into new Percentage Leases with the TRS Lessees for all the Hotels. On
the 2001 Effective Date, the TRS Lessees entered into new management agreements
with CHC (for 55 Hotels), Promus (for 20 Hotels) and Crestline (for two Hotels).
On the 2002 Effective Date, the TRS Lessees entered into new management
agreements with Prime's subsidiaries for 19 Hotels and with Waterford for the
Company's hotel in Burlington, Vermont.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains or incorporates by reference forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements containing the words, "believes", "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, or incorporated by
reference in this report, including the Company's Current Report on Form 8-K
filed on March 25, 2002 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.
ENVIRONMENTAL MATTERS
In connection with the Partnership's acquisition of the Hotels, Phase I
environmental site assessments ("ESAs") were obtained on all of the Hotels. The
Phase I ESAs included historical review of the Hotels, reviews of certain public
records, preliminary investigations of the sites and surrounding properties,
screenings for hazardous and toxic substances and underground storage tanks, and
the preparation and issuance of a written report. The Phase I ESAs did not
include invasive procedures to detect contaminants from former operations on the
Hotels or migrating from neighbors or caused by third parties. The Phase I ESAs
have not revealed any environmental liability that the Company believes would
have a material adverse effect on the Company's business, assets, results of
operations or liquidity, nor is the Company aware of any such liability or
material environmental issues.
7
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers, listed below, serve in their respective
capacities for approximate one year terms and are subject to re-election
annually by the Board of Directors, normally in May of each year.
NAME POSITION
---- --------
Phillip H. McNeill, Sr. Chairman of the Board, Chief Executive Officer
and Director
Howard A. Silver President, Chief Operating Officer and Director
Donald H. Dempsey Executive Vice President, Chief Financial Officer,
Secretary, Treasurer and Director
Phillip H. McNeill, Jr. Executive Vice President of Development
J. Ronald Cooper Vice President, Assistant Secretary, Assistant
Treasurer and Controller
Certain biographical information required under this section for Messrs.
McNeill, Sr., Silver and Dempsey, as directors and executive officers of the
Company, is incorporated by reference from the section entitled "The Election of
Directors" in the Proxy Statement.
Phillip H. McNeill, Jr. (age 40) is Executive Vice President of Development of
the Company. From 1994 to 1996, he served as President of Trust Leasing, Inc.,
formerly McNeill Hotel Co., Inc., the Company's former lessee (the "Former
Lessee"), and from 1984 to 1996 served as Vice President of Trust Management,
Inc., formerly McNeill Hospitality Corporation, which was an affiliate of the
Former Lessee. Mr. McNeill is the son of Phillip H. McNeill, Sr. and holds a
B.B.A. from the University of Memphis and is a graduate of the Northwestern
School of Mortgage Banking.
J. Ronald Cooper (age 53) is Vice President, Assistant Secretary, Assistant
Treasurer and Controller of the Company. From 1994 to 1996, he was Controller
and Director of Financial Reporting for the Former Lessee and joined the Former
Lessee in October 1994. Mr. Cooper has been a certified public accountant
since 1972. From 1978 until joining the Former Lessee, Mr. Cooper was employed
as Secretary, Treasurer and Controller of Wall Street Deli, Inc., a publicly-
owned delicatessen company. Prior to that, Mr. Cooper was a certified public
accountant with the national accounting firm of Coopers & Lybrand L.L.P. from
1970 to 1976. Mr. Cooper holds a B.S. degree in accounting from Murray State
University.
8
ITEM 2. PROPERTIES
The following table sets forth certain information for the year ended December
31, 2001 with respect to the Hotels owned by the Company for such period:
Year Ended December 31, 2001
Revenue
Number Hotel Net Average Per
Date Of Room Operating Daily Available
Opened Rooms Revenue(1) Income (1) Occupancy Rate Room (3)
------ ------- ---------- ---------- --------- ------- ---------
Hotels operated under
management contracts:
- -------------------------
Hampton Inn:
Albany, New York 1986 154 $ 3,784 $1,823 69.3% $97.14 $67.32
Ann Arbor, Michigan 1986 150 2,903 1,307 66.9% $79.74 $53.38
Atlanta (Northlake),
Georgia 1988 130 1,685 461 56.8% $63.01 $35.79
Austin, Texas 1987 122 2,144 913 63.5% $76.38 $48.54
Baltimore (Glen Burnie),
Maryland 1989 116 2,674 1,188 74.3% $85.80 $63.71
Beckley, West Virginia 1992 108 2,107 1,019 78.7% $67.90 $53.44
Birmingham (Mountain
Brook), Alabama 1987 131 2,130 869 65.7% $68.37 $44.89
Birmingham (Vestavia),
Alabama 1986 123 1,703 501 62.4% $60.75 $37.94
Chapel Hill, North
Carolina 1986 122 1,953 749 59.8% $73.29 $43.86
Charleston, South
Carolina 1985 125 1,655 518 61.4% $59.10 $36.27
Chattanooga, Tennessee 1988 168 2,625 834 69.6% $61.84 $43.06
Chicago (Gurnee),
Illinois 1988 134 2,016 763 57.0% $72.33 $41.22
Chicago (Naperville),
Illinois 1987 130 2,603 1,324 72.4% $76.96 $55.71
Cleveland, Ohio 1987 123 1,860 798 61.2% $67.70 $41.44
College Station, Texas 1986 135 2,282 1,014 68.9% $67.67 $46.65
Colorado Springs,
Colorado 1985 128 1,567 510 45.5% $73.65 $33.54
Columbia, South
Carolina 1985 121 1,555 469 55.9% $63.23 $35.34
Columbus, Georgia 1986 119 1,878 796 67.2% $64.91 $43.61
Columbus (Dublin), Ohio 1988 123 2,082 920 60.7% $76.36 $46.37
Dallas (Addison), Texas 1985 160 1,977 645 49.6% $68.72 $34.07
Dallas (Richardson),
Texas 1987 130 2,018 799 58.0% $73.27 $42.52
Denver (Aurora),
Colorado 1985 132 1,634 498 53.8% $63.48 $34.18
Detroit (Madison
Heights), Michigan 1987 124 2,511 1,278 69.1% $80.29 $55.47
Detroit (Northfield),
Michigan 1989 125 2,679 1,283 65.7% $89.41 $58.72
Fayetteville, North
Carolina 1986 122 1,283 351 49.8% $57.86 $28.82
Ft. Worth, Texas 1987 125 1,425 402 53.3% $58.61 $31.24
Gastonia, North
Carolina 1989 109 1,553 583 60.5% $64.51 $39.05
Indianapolis, Indiana 1987 129 2,223 1,002 66.6% $70.89 $47.20
Jacksonville, Florida 1986 122 1,792 549 64.4% $62.62 $40.34
Kansas City (Overland
Park), Kansas 1991 134 2,356 970 65.3% $73.79 $48.16
Kansas City, Missouri 1987 120 2,133 802 63.8% $76.37 $48.69
Knoxville, Tennessee 1991 118 1,745 588 65.4% $61.93 $40.50
Little Rock (North),
Arkansas 1985 123 1,286 233 51.5% $55.63 $28.64
Louisville, Kentucky 1986 119 1,759 708 61.8% $66.10 $40.84
Memphis (Poplar),
Tennessee 1985 126 2,451 1,072 70.2% $76.74 $53.87
Memphis (Sycamore
View), Tennessee 1984 117 1,346 321 55.9% $56.93 $31.80
Meriden, Connecticut 1988 125 2,340 1,105 61.2% $84.48 $51.71
Milford, Connecticut 1986 148 2,995 1,378 66.8% $82.99 $55.43
Morgantown, West
Virginia 1991 108 2,128 1,061 69.2% $78.06 $53.99
Nashville (Briley
Parkway), Tennessee 1987 120 2,152 849 68.1% $72.52 $49.36
Norfolk, Virginia 1990 119 1,911 819 66.4% $66.28 $43.99
Pickwick, Tennessee 1994 50 653 93 52.3% $68.39 $35.79
San Antonio (Bowie),
Texas 1995 169 3,676 1,925 66.8% $89.17 $59.59
Sarasota, Florida 1987 97 1,013 49 43.4% $66.00 $28.61
Scottsdale, Arizona 1996 126 1,868 816 48.5% $83.67 $40.61
9
Year Ended December 31, 2001
Revenue
Number Hotel Net Average Per
Date Of Room Operating Daily Available
Opened Rooms Revenue(1) Income (1) Occupancy Rate Room (3)
------ ------- ---------- ---------- --------- ------- ---------
Hampton Inn (Continued):
Scranton, Pennsylvania 1994 129 2,570 1,116 72.1% $75.71 $54.58
State College,
Pennsylvania 1987 120 2,173 1,028 61.2% $81.04 $49.61
St. Louis (Westport),
Missouri 1987 122 2,012 753 63.9% $70.72 $45.18
Hampton Inn & Suites:
Memphis (Bartlett),
Tennessee 1998 125 2,362 900 73.0% $70.95 $51.76
Comfort Inn:
Dallas (Arlington),
Texas 1985 141 1,283 300 45.8% $54.42 $24.93
Jacksonville Beach,
Florida 1973 177 4,114 1,711 71.9% $88.51 $63.68
Rutland, Vermont 1985 104 1,797 785 64.3% $73.60 $47.35
Residence Inn:
Boise, Idaho 1986 104 2,780 1,229 84.1% $87.07 $73.24
Burlington, Vermont 1988 96 1,861 582 60.2% $88.16 $53.11
Colorado Springs,
Colorado 1984 96 2,327 973 78.6% $84.52 $66.40
Minneapolis (Eagan),
Minnesota 1988 120 2,988 1,477 78.9% $86.44 $68.22
Oklahoma City,
Oklahoma 1982 135 2,873 1,177 75.7% $77.01 $58.30
Omaha, Nebraska 1981 80 2,039 790 80.0% $87.28 $69.82
Portland, Oregon 1990 168 4,147 2,158 66.8% $101.26 $67.64
Princeton, New Jersey 1988 208 6,457 3,610 72.2% $117.78 $85.05
Somers Point,
New Jersey 1988 120 3,795 1,716 78.6% $110.27 $86.64
Tinton Falls, New
Jersey 1988 96 3,636 1,946 83.7% $124.03 $103.76
Tucson, Arizona 1985 128 3,142 1,432 81.7% $82.27 $67.25
Holiday Inn:
Bluefield, West
Virginia 1980 120 1,897 741 64.1% $67.61 $43.32
Charleston (Mt.
Pleasant), South
Carolina 1988 158 1,953 82 42.9% $78.91 $33.86
Oak Hill, West Virginia 1983 119 1,247 303 45.8% $62.71 $28.70
Wilkesboro, North
Carolina 1985 101 1,453 612 62.0% $64.20 $39.80
Winston-Salem, North
Carolina 1969 160 1,630 198 46.4% $60.53 $28.09
Homewood Suites:
Augusta, Georgia 1997 65 1,648 735 75.2% $92.29 $69.45
Chicago, Illinois 1999 235 8,489 3,422 75.8% $131.62 $99.81
Cincinnati
(Sharonville), Ohio 1990 111 2,019 781 60.9% $81.83 $49.83
Hartford, Connecticut 1990 132 4,086 1,985 71.1% $119.35 $84.80
Memphis (Germantown),
Tennessee 1996 92 1,940 650 69.0% $83.76 $57.76
Orlando, Florida 1999 252 6,162 2,443 78.7% $85.10 $66.99
Phoenix, Arizona 1996 124 3,453 1,630 74.9% $101.93 $76.30
San Antonio, Texas 1996 123 2,920 1,199 77.2% $84.30 $65.05
Seattle, Washington 1998 161 4,963 2,588 72.7% $116.19 $84.46
Revenue
Number Average Per
Date Of Room Lease Daily Available
Opened Rooms Revenue(1) Payment (1)(2) Occupancy Rate Room (3)
------ ------- ---------- -------------- --------- ------- ---------
Hotels operated under
Percentage Leases:
AmeriSuites:
Albuquerque, New Mexico 1997 128 2,606 1,341 83.5% $66.76 $55.78
Baltimore, Maryland 1996 128 3,386 1,798 79.6% $90.99 $72.47
Baton Rouge, Louisiana 1997 128 2,211 1,144 63.1% $75.07 $47.33
Birmingham, Alabama 1997 128 2,167 1,002 62.5% $74.25 $46.38
10
Year Ended December 31, 2001
Revenue
Number Average Per
Date Of Room Lease Daily Available
Opened Rooms Revenue(1) Payment (1)(2) Occupancy Rate Room (3)
------ ------- ---------- -------------- --------- ------- ---------
AmeriSuites (Continued):
Cincinnati (Blue Ash),
Ohio 1990 127 1,277 837 42.9% $64.17 $27.55
Cincinnati (Forest
Park), Ohio 1992 126 1,765 744 51.3% $74.76 $38.39
Columbus, Ohio 1994 126 2,367 1,061 69.1% $74.52 $51.48
Flagstaff, Arizona 1993 117 1,793 735 66.1% $63.50 $41.99
Indianapolis, Indiana 1992 126 2,283 1,085 60.2% $82.49 $49.63
Jacksonville, Florida 1996 112 1,652 714 62.9% $64.19 $40.40
Las Vegas, Nevada 1998 202 4,659 2,398 78.1% $80.94 $63.19
Kansas City (Overland
Park), Kansas 1994 126 2,222 1,299 61.3% $78.82 $48.30
Memphis (Wolfchase),
Tennessee 1996 128 2,000 991 58.5% $73.15 $42.81
Miami, Florida 1996 126 2,965 1,628 84.5% $76.32 $64.47
Miami (Kendall),
Florida 1996 67 2,147 1,297 83.5% $105.16 $87.78
Minneapolis, Minnesota 1997 128 2,769 1,345 74.3% $79.76 $59.27
Nashville, Tennessee 1997 128 2,134 1,123 63.4% $72.02 $45.68
Richmond, Virginia 1992 126 1,816 1,208 59.3% $66.55 $39.50
Tampa, Florida 1994 126 3,220 1,796 75.2% $93.16 $70.06
------ ------- ------ ------- ------
Consolidated Totals/Weighted
Average for all Hotels 12,284 $233,768 65.50% $79.79 $52.23
====== ======== ===== ====== ======
- ------------------------
(1) Amounts in thousands.
(2) Represents lease payments calculated by applying the rent provisions in
the Percentage Leases to the room revenues of the hotels.
(3) Determined by multiplying occupancy times the ADR.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Partnership currently is involved in any material
litigation nor, to the Company's knowledge, is any material litigation currently
threatened against the Company or the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 2001, through the solicitation of proxies or otherwise.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock, $.01 par value (the "Common Stock") is traded on the
New York Stock Exchange (the "NYSE") under the symbol "ENN." The following table
sets forth for the indicated periods the high and low closing prices for the
Common Stock as traded through the facilities of the NYSE and the cash
distributions declared per share:
11
Price Range Distributions
----------- Declared
High Low Per Share Date
-------- ------- ------------- --------------------
Year Ended December 31, 2000:
First Quarter $7-1/16 $6-5/16 $0.31 March 31, 2000
Second Quarter $7 $6-1/8 $0.25 June 30, 2000
Third Quarter $6-15/16 $6-1/8 $0.25 September 30, 2000
Fourth Quarter $6-13/16 $5-1/2 $0.25 December 29, 2000
Year Ended December 31, 2001:
First Quarter $8.22 $6.31 $0.25 March 31, 2001
Second Quarter $9.87 $6.55 $0.25 June 29, 3001
Third Quarter $9.85 $6.01 $0.25 September 28, 2001
Fourth Quarter $8.72 $6.61 $0.00 N/A
(b) Stockholder Information
On March 5, 2002, there were 868 record holders of the Company's Common Stock,
including shares held in "street name" by nominees who are record holders, and
approximately 21,500 beneficial owners.
(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, through the third quarter of 2001. Due
to the economic impact of the events of September 11, 2001 on the lodging
industry, the Company did not declare or pay a dividend for the fourth quarter
of 2001. Earnings and profits, which will determine the taxability of
distributions to shareholders, will differ from net income reported for
financial purposes primarily due to the difference for federal tax purposes in
the estimated lives used to compute depreciation.
The Company expects to pay future quarterly dividends, beginning in the first
quarter of 2002. The amount of future dividends will be based upon operating
results, economic conditions, capital expenditure requirements and leverage
restrictions imposed by the Company's line of credit. Future distributions paid
by the Company will be at its Board of Directors' sole discretion and will
depend on the Company's actual cash flow, its financial condition, capital
requirements, the Code's REIT annual distribution requirements and other
relevant factors.
A portion of the distribution to shareholders is expected to represent a return
of capital for federal income tax purposes which generally will not be subject
to federal income tax under current law. The Company's distributions made in
2001 and 2000 are considered to be approximately 21% and 54% return of capital,
respectively, for federal income tax purposes.
(d) Recent Sales of Unregistered Securities
The Company has no such transactions to report for the year ended December 31,
2001.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets 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.
EQUITY INNS, INC
SELECTED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Operating Data:
Revenue (2) $226,060 $116,810 $117,294 $107,436 $71,095
Net income 10,164 16,340 29,316 31,595 23,543
Preferred stock dividends 6,531 6,531 6,531 3,374
Net income applicable to common
shareholders 3,633 9,809 22,785 28,221 23,543
Income before extraordinary
item per common share .10 .27 .61 .78 .88
Net income per common share,
basic and diluted .10 .27 .61 .78 .82
Distributions declared per
common share and Unit .75 1.06 1.24 1.24 1.14
Weighted average number of
common shares and Units
outstanding-diluted 38,036 37,960 38,570 38,001 29,963
Balance Sheet Data:
Investments in hotel properties,
net $751,891 $772,411 $814,537 $790,132 $617,072
Total assets 778,079 801,743 832,119 807,023 635,525
Debt 384,166 383,403 381,175 331,394 233,206
Minority interest in Partnership 9,512 10,370 12,008 19,070 19,035
Shareholders' Equity 358,164 383,786 412,252 431,264 360,172
Cash Flow Data:
Cash flows provided by
operating activities 68,568 58,010 71,515 69,386 50,402
Cash flows used in investing
activities (20,925) (2,201) (61,899) (193,539) (314,089)
Cash flows provided by (used in)
financing activities (44,077) (55,377) (9,655) 124,363 263,748
Other Data:
Funds from operations (1) $44,646 $53,729 $61,180 $64,985 $45,748
(1) Represents Funds from Operations ("FFO") of the Company on a consolidated
basis. The Company generally considers FFO to be an appropriate measure
of the performance of an equity REIT. In accordance with the resolution
adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT"), FFO represents net income (loss)
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from sales of property, plus depreciation,
and after adjustment for unconsolidated partnerships and joint ventures.
The Company's computation of FFO may not be comparable to FFO reported by
other REITs that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition
differently than the Company. FFO should not be considered an alternative
to net income or other measurements under
13
generally accepted accounting principles as an indicator of operating
performance or to cash flows from operating, investing or financing
activities as a measure of liquidity. FFO does not reflect working
capital changes, cash expenditures for capital improvements or principal
payments with respect to indebtedness on the hotels.
(2) During 2000, the Company's revenue was primarily rental income from the
Interstate Lessees and the Prime Lessees. As a result of the termination
of the Interstate leases, beginning in 2001, the Company's consolidated
results of operations reflect hotel-level revenues and operating costs
and expenses for 75 hotels previously leased to the Interstate Lessees
and two additional hotels previously operated under management contracts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company
Equity Inns, Inc. (the "Company") is a self-advised hotel real estate investment
trust ("REIT") for federal income tax purposes. The Company, through its
wholly-owned subsidiary, Equity Inns Trust (the "Trust"), is the sole general
partner of Equity Inns Partnership, L.P. (the "Partnership") and at December 31,
2001 owned an approximate 96.8% interest in the Partnership.
At December 31, 2001, the Partnership and its affiliates owned 96 hotel
properties with a total of 12,284 rooms in 34 states (the "Hotels"). In order to
qualify as a REIT, the Company and the Partnership cannot operate hotels.
Effective January 1, 2001 (the "2001 Effective Date") under the federal REIT
Modernization Act (the "RMA"), the Company and its affiliates (1) terminated or
assigned all existing operating leases providing for payment of percentage rent
(the "Percentage Leases") between the Company and certain affiliates of
Interstate Hotels Corporation ("IHC") leasing 75 of the Hotels (the "Interstate
Lessees") and (2) terminated related lease guaranties with Interstate Hotels,
L.L.C. and Wyndham International, Inc. and (3) entered into new Percentage
Leases with wholly-owned taxable REIT subsidiaries of the Company (the "TRS
Lessees") for the lease of 77 hotels. The terms of the Percentage Leases with
the TRS Lessees are substantially identical to the Percentage Leases terminated
with the Interstate Lessees.
Through December 31, 2001, the Partnership and its affiliates continued to lease
19 AmeriSuites Hotels to wholly-owned subsidiaries (the "Prime Lessees") of
Prime Hospitality Corporation ("Prime"), with all payments due under those
Percentage Leases guaranteed by Prime. Effective as of January 1, 2002 (the
"2002 Effective Date"), the Company and its affiliates terminated (1) the
existing Percentage Leases between the Company and the Prime Lessees and (2) the
related lease guarantees. The Company also entered into new Percentage Leases
with its TRS Lessees for such 19 Hotels, on terms substantially identical to
those of the terminated leases.
Under the RMA, the TRS Lessees are required to enter into management agreements
with eligible independent contractors to manage the hotels. On the 2001
Effective Date, the TRS Lessees entered into new management agreements for the
77 Hotels as follows: Promus Hotels, Inc. ("Promus") for 20 Hotels; Crestline
Hotels & Resorts, Inc. ("Crestline") for two Hotels; and Crossroads Hospitality
Company, L.L.C., an IHC affiliate ("CHC") for 55 Hotels. On the 2002 Effective
Date, the TRS Lessees entered into new management agreements for the 19
AmeriSuites Hotels with Prime's subsidiaries and one of the TRS Lessees also
entered into a new management agreement with Waterford Hotel Group, Inc.
("Waterford") for the Company's hotel in Burlington, Vermont. Rents generated by
the Percentage Leases with the TRS Lessees are eliminated in consolidation,
while actual operating results of all of the Company's hotels leased by the TRS
Lessees are included in the Company's financial statements. Therefore, the
Company's consolidated results of operations with respect to the 77 hotels
managed by Promus, Crestline and CHC from the 2001 Effective Date are not
comparable to 2000 results.
14
Recent Developments
Since its inception, the Company has taken steps to position itself for growth
and stability. Several changes have occurred since December 31, 2000 which add
significantly to these efforts. These events are as follows:
Interest Rate Swaps
On January 16, 2001, the Company entered into an interest rate swap
agreement with a financial institution on a notional principal amount of
$50 million. The agreement effectively fixes the interest rate on floating
rate debt at a rate of 6.4275%, plus 1.5%, 1.75%, 2.0%, 2.25%, 2.5% or
2.75% as determined by the Company's percentage of total debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"), as
defined in the loan agreement for the Line of Credit (the "Percentage").
The swap agreement will expire in October 2003.
Debt Covenant Modifications
In December 2001, the Company negotiated an amendment to its $125 million
secured line of credit (the "Line of Credit"). The amendment modifies
certain of the financial covenants contained in the Line of Credit and is
effective beginning in the fourth quarter of 2001 through the fourth
quarter of 2002. The Line of Credit expires in October 2003.
Action Taken as a Result of RMA Legislation
The Company terminated or assigned all 75 of its Percentage Leases with the
Interstate Lessees effective January 1, 2001. Effective January 1, 2002,
the Company terminated the remaining 19 leases with the Prime Lessees. No
remuneration was exchanged for the termination of the leases. This action
was precipitated by the recent enactment of the RMA, which enables REITs
such as the Company to gain greater control of their properties by
establishing taxable subsidiaries to function as lessees, with hotel
management provided by independent companies.
Results of Operations
During 2000, the Company's revenue was primarily rental income from the
Interstate Lessees and the Prime Lessees. As a result of the termination of the
Interstate leases, beginning in 2001, the Company's consolidated results of
operations reflect hotel-level revenues and operating costs and expenses for 75
hotels previously leased to the Interstate Lessees and two additional hotels
previously operated under management contracts. In order to provide a clearer
understanding and comparability of the Company's results of operations, in
addition to the discussion of the historical results, the Company has presented
an unaudited recap of Percentage Lease revenue which compares the historical
results related to Percentage Lease revenue for the years ended December 31,
2000 and 2001. The Company has also presented the pro forma condensed
consolidated operating results of 77 hotels not subject to third party leases
for the years ended December 31, 2000 and 2001. The pro forma recap of operating
results of the 77 hotels not subject to third party leases for the year ended
December 31, 2000 reflects the termination of the Interstate leases as if it
occurred on January 1, 2000, and a discussion of the results thereof compared to
the Company's historical results for the year ended December 31, 2001.
Because of the significant changes to the Company's structure as a result of the
termination of the Interstate leases effective January 1, 2001, management
believes that a discussion of the Company's 2001 historical results compared to
its 2000 actual results for the properties subject to the Prime Leases (see
"Recap of Percentage Lease Revenue") and pro forma results for the 77 hotels not
subject to third party leases (see "Recap of Operating Results of 77 Hotels Not
Subject to Third Party Leases") is meaningful and relevant to an investor's
understanding of the Company's present and future operations. The 2000 pro forma
adjustments to reflect the termination of the
15
Interstate leases are as follows:
o record hotel-level revenues and expenses and eliminate historical percentage
lease revenue with respect to the 77 properties;
o record the minority interest effect related to the outside ownership in the
Partnership;
o reverse the recording in operations of the deferred lease revenue as a result
of the termination of the Interstate leases; and
o record the tax provision attributable to the income of the TRS Lessees at an
effective tax rate of 38%.
The pro forma financial information does not purport to represent what the
Company's results of operations or financial condition would actually have been
if the transactions had in fact occurred at the beginning of 2000 or to project
the Company's results of operations or financial condition for any future
period. The pro forma financial information is based upon available information
and upon assumptions and estimates that management believes are reasonable under
the circumstances.
The following tables separately set forth a comparison of both the Company's
hotels leased to the Prime Lessees and the hotels leased to the TRS Lessees.
Recap of Percentage Lease Revenue
---------------------------------
(in thousands)
For the Years Ended
December 31,
----------------------
2001 2000
------- -------
Percentage rents collected or due from
Prime Lessee $23,545 $24,992
Recognition of deferred lease revenue from
termination of Interstate leases 1,386
-------- -------
Percentage Lease Revenue $24,931 $24,992
======= =======
Recap of Hotel Revenue and Operating Expenses of 77 Hotels
Not Subject to Third Party Leases
----------------------------------------------------------
(in thousands)
For the Years Ended
December 31,
------------------------
Pro Forma
2001 2000
-------- ---------
Hotel revenue $199,009 $204,146
Hotel operating expenses, including
management fees (121,467) (120,031)
Comparison of the Company's operating results for the year ended December 31,
2001 with the year ended December 31, 2000
The decrease in lease revenue from the 19 hotels leased to the Prime Lessees is
due primarily to a decrease in revenue per available room ("REVPAR") of 7.4%
over the comparable period in 2000. The decrease in hotel revenues from the 77
hotels not subject to third party leases is due to a 2.0% decrease in REVPAR. On
a same store and comparable basis, REVPAR for all hotels owned by the Company
throughout both periods decreased by 3.1% from $54.00 to $52.23. The effect of
the weakened national economy and the dramatic national events that occurred on
September 11, 2001 had a material effect on the Company's REVPAR, particularly
in the fourth quarter, where REVPAR decreased by 8.2%.
16
Other income increased by $1.1 million over the comparable period in 2000. The
Company entered into an agreement with one of its furniture and equipment
contractors to form a joint venture for the purpose of engaging in the sale of
furniture and equipment to third parties. The Company provided certain
management services to its joint venture partner in 2001 and was compensated
$1.1 million for such services.
Hotel operating expenses, on a pro forma basis, increased by $1.4 million. This
increase in expenses for the period is due primarily to increases in sales and
marketing expenses.
On a historical basis, total revenue and total expenses increased $109.2 million
and $122.5 million, respectively in 2001 over 2000 as a result of reporting
hotel operating revenues and expenses in 2001 compared to reporting percentage
lease revenue in 2000 as a result of the aforementioned termination of the
Interstate leases on January 1, 2001.
Real estate and personal property taxes decreased approximately $1.4 million
over the comparable period in 2000 due to successful settlement of several
appeals on 2000 taxes, resulting in significant refunds of taxes paid in 2000.
Depreciation and amortization increased to $41.3 million in 2001 from $40.5
million in 2000, due primarily to capitalized renovation costs at certain
hotels.
Interest expense decreased to $31.0 million from $32.3 million in 2000 due
primarily to a decrease in weighted average interest rates from 8.44% to 8.14%
in 2001.
Amortization of loan costs increased to $2.0 million from $1.7 million in 2000,
reflecting a full year's amortization of costs associated with the refinancing
of a significant amount of the Company's variable rate debt with fixed rate debt
in late 2000.
General and administration expenses decreased by approximately $300,000 over the
comparable period in 2000. This decrease is primarily attributable to a decrease
in legal and professional fees as compared to 2000 which were incurred in the
conversion of the Company's leases to management contracts and to the
establishment of taxable REIT subsidiaries to serve as Lessees.
An impairment of long-lived assets of $550,000 was recorded in 2001 as the
Company made the decision to abandon a project to construct a hotel on an
undeveloped parcel of land in Salt Lake City, Utah and consequently, recorded an
impairment charge to write the land down to its estimated net realizable value
at December 31, 2001.
An allowance for doubtful accounts was established against the Company's notes
receivable from Hudson Hotels Properties Corporation and Rosemont Hospitality
Group, L.L.C. in the amount of $3.3 million based on the Company's current
evaluation of the creditworthiness of these parties. The allowance established
has fully reserved for the notes as of December 31, 2001.
Effective January 1, 2001 the Company leases its hotels to wholly-owned taxable
REIT subsidiaries that are subject to federal and state income taxes. In years
ending before January 1, 2001, the Company was not subject to federal and state
income tax because of its REIT status. Consequently, the Company recorded a
deferred federal income tax benefit in 2001 in the amount of $3.5 million which
is comprised of net operating loss carryforwards generated by the Company's
taxable REIT subsidiaries.
Net income applicable to common shareholders for 2001 was $3.6 million or $0.10
per share, compared to $9.8 million or $0.27 per share for 2000.
17
Comparison of the Company's operating results for the year ended December 31,
2000 with the year ended December 31, 1999
For the year ended December 31, 2000, the Company had total revenue of $116.8
million, consisting substantially of Percentage Lease revenue. This compares
with total revenue of $117.3 million for the year ended December 31, 1999.
Decreases in revenue from hotel operations for the year ended December 31, 2000
as compared to 1999 are due to the recognition in 1999 of $2 million in
percentage revenue applicable to the amendment of the Company's leases with the
Interstate Lessees, partially offset by (i) a .9% increase in REVPAR for
comparable hotels and (ii) a full year of operations in 2000 of two hotels
acquired in 1999.
Real estate and personal property taxes increased over the comparable period in
1999 due primarily to taxes on two large extended stay hotels purchased in
mid-1999 that were not assessed at full value until 2000.
Depreciation and amortization increased to $40.5 million from $38.9 million over
the comparable period in 1999 due primarily to capitalized renovation costs at
certain hotels.
Interest expense increased to $32.3 million from $27.9 million in 1999 due to
(i) an increase in the Company's weighted average outstanding debt to $379.9
million from $362.4 million in 1999 and (ii) an increase in weighted average
interest rates to 8.44% from 7.74% in 1999. The increase in borrowings is due
primarily to costs incurred as a result of refinancing a major portion of the
Company's debt during the year.
Amortization of loan costs increased to $1.7 million from $1.2 million in 1999
as a result of refinancing a significant amount of the Company's variable rate
debt with fixed rate debt.
General and administration expenses increased to $5.6 million, an increase of
$571,000 over 1999. This increase is primarily attributable to legal and
professional fees incurred in the conversion of the Company's leases to
management contracts and the establishment of the TRS Lessees.
Net income applicable to common shareholders for 2000 was $9.8 million or $0.27
per share, compared to $22.8 million or $0.61 per share for 1999.
Liquidity and Capital Resources
The Company's principal source of cash to meet its cash requirements, including
distributions to its shareholders, is its cash distributions from the
Partnership. At December 31, 2001, the Partnership's principal source of revenue
was a combination of lease payments from the hotels leased by the Prime Lessees
and net operating income from the 77 hotels leased by the TRS Lessees, and the
Company's liquidity, including its ability to make distributions to
shareholders, was dependent upon the Prime Lessees' ability to make payments
under the Percentage Leases and upon the cash flow from the 77 hotels leased by
the TRS Lessees. Effective January 1, 2002, the Company's liquidity and ability
to make distributions to its shareholders will be dependent upon the cash flows
from the TRS Lessees.
Cash and cash equivalents were $4,359,000 at December 31, 2001, compared to
$793,000 at December 31, 2000. Excess cash balances are used to reduce the
Company's outstanding debt. For the year ended December 31, 2001, cash flow
provided by operating activities was $68.6 million.
The Company may make additional investments in hotel properties and may incur,
or cause the Partnership to incur, indebtedness to make such investments or to
meet distribution requirements imposed on a REIT under the Internal Revenue Code
of 1986 (the "Code") to the extent that working capital and cash flow from the
Company's investments are insufficient to make such distributions. The Company's
Board of Directors has adopted a policy limiting aggregate indebtedness to 45%
18
of the Company's investment in hotel properties, at cost, after giving effect to
the Company's use of proceeds from any indebtedness. This policy may be amended
at any time by the Board of Directors without shareholder vote. The Company's
consolidated indebtedness was 41.8% of its investments in hotels, at cost, at
December 31, 2001.
At December 31, 2001, the Company's consolidated debt was $384.2 million,
comprised of $70.9 million of Commercial Mortgage Bonds and $211.3 million of
non-recourse mortgage debt. In addition, the Company had $102 million
outstanding under the Line of Credit. The Line of Credit has a borrowing
capacity of $125 million and is due in November 2003. The weighted average
interest rate incurred by the Company in 2001 was 8.14%. Maturities under the
Company's debt in 2002 are approximately $5.1 million.
On January 16, 2001, the Company entered into an interest rate swap agreement
with a financial institution on a notional principal amount of $50 million. The
agreement effectively fixes the interest rate on floating rate debt at a rate of
6.4275% plus 1.50%, 1.75%, 2.00%, 2.25%, 2.50% or 2.75% as determined by the
Percentage. The swap agreement will expire in November 2003.
During 2001, the Company invested $22.2 million, including $10.3 million for
renovations required by franchisors, to fund capital improvements to its hotels,
including replacement of carpets, drapes, renovation of common areas and
improvements of hotel exteriors. In addition, the Company expects to fund
approximately $10.0 million in 2002 for capital improvements.
The Company intends to fund such improvements out of future cash from
operations, present cash balances and borrowings under the Line of Credit. Under
certain of its loan covenants, the Partnership is obligated to fund 4% of room
revenues per quarter on a cumulative basis, to a separate room renovation
account for the ongoing replacement or refurbishment of furniture, fixtures and
equipment at the Hotels. For the years ended December 31, 2001 and 2000, the
amounts expended exceeded the amounts required under the loan covenants.
The Company has elected to be treated as a REIT under the Internal Revenue Code.
Prior to January 1, 2001, the Company, as a REIT, was not subject to federal
income taxes. Under the Tax Relief Extension Act of 1999 that became effective
January 1, 2001, the Company leases its hotels to wholly-owned taxable REIT
subsidiaries that are subject to federal and state income taxes. The Company
accounts for income taxes in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No., 109, "Accounting for Income Taxes."
Under SFAS 109, the Company uses the asset and liability method under which
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
REITs are subject to a number of organizational and operational requirements.
For example, for federal income tax purposes, a REIT, and therefore the Company,
is required to pay distributions of at least 90% of its taxable income to its
shareholders. The Company intends to pay these distributions from operating cash
flows. During 2001, the Partnership distributed an aggregate of $28.5 million to
its partners, or $.75 per Unit (including $27.6 million of distributions to the
Company to fund distributions to shareholders of $.75 per share in 2001). During
2000, the Partnership distributed an aggregate of $40.2 million to its partners,
or $1.06 per share in 2000. For federal income tax purposes, approximately 21%
of 2001 distributions represented a return of capital, compared with
approximately 54% for 2000.
The Company expects to meet its short-term liquidity requirements generally
through net cash provided by operations, existing cash balances and, if
necessary, short-term borrowings under the Line of Credit. The Company believes
that its net cash provided by operations will be adequate to fund both operating
requirements and payment of distributions by the Company in accordance with REIT
requirements.
19
The Company expects to meet its long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowings, the issuance of additional equity securities of the
Company or, in connection with acquisitions of hotel properties, the issuance of
Partnership Units. Under the Partnership's limited partnership agreement (the
"Partnership Agreement"), subject to certain holding period requirements,
holders of Units in the Partnership have the right to require the Partnership to
redeem their Units. During the year ended December 31, 2001, 11,421 Units were
tendered for redemption. Under the Partnership Agreement, the Company has the
option to redeem Units tendered for redemption on a one-for-one basis for shares
of Common Stock or for an equivalent amount of cash. The Company anticipates
that it will acquire any Units tendered for redemption in the foreseeable future
in exchange for shares of Common Stock and, to date, has registered such shares
so as to be freely tradeable by the recipient.
Funds from Operations
The Company generally considers Funds from Operations ("FFO") to be an
appropriate measure of the performance of an equity REIT. In accordance with the
resolution adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT"), FFO represents net income (loss) (computed
in accordance with generally accepted accounting principles), excluding gains
(or losses) from sales of property, plus depreciation, and after adjustments for
unconsolidated partnerships and joint ventures. For the periods presented,
depreciation and minority interest were the Company's only adjustments to net
income for the definition of FFO. The Company's computation of FFO may not be
comparable to FFO reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. FFO should not be considered an
alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance or to cash flows
from operating, investing or financing activities as a measure of liquidity. FFO
does not reflect working capital changes, cash expenditures for capital
improvements or principal payments with respect to indebtedness on the hotels.
The following reconciliation of net income to FFO illustrates the difference in
the two measures of operating performance:
For the Years Ended December 31,
2001 2000
------- -------
(in thousands, except per
share and Unit data)
Net income $10,164 $16,340
Less:
Gain on sale of hotel properties (83)
Preferred stock dividends (6,531) (6,531)
Add:
Minority interest 119 337
Depreciation of buildings,
furniture and fixtures 40,977 40,267
Loss on sale of hotel properties 3,316
------- ------
Funds from Operations 44,646 53,729
Add non-recurring items:
Provision for doubtful accounts 2,592
Impairment of long-lived assets 550
------- ------
Recurring Funds From Operations $47,788 $53,729
======= =======
Weighted average number of
common shares and Units
outstanding 38,036 37,960
======= =======
20
Inflation
Operators of hotels in general have the ability to adjust room rates quickly.
However, competitive pressures may limit the Company's ability to raise room
rates in the face of inflation.
Seasonality
Hotel operations historically are seasonal in nature, generally reflecting
higher occupancy rates during the second and third quarters. This seasonality
can be expected to cause fluctuations in the Company's quarterly results of
operations.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") approved SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Asset." The
Statement requires that long- lived assets to be disposed of by sale be
considered held and used until they are disposed of. The Statement requires that
long-lived assets to be disposed of by sale be accounted for under the
requirements of SFAS No. 121 which requires that such assets be measured at the
lower of carrying amount or fair value less cost to sell and to cease
depreciation. SFAS No. 144 requires a probability-weighted cash flow estimation
approach with situations in which alternative courses of action to recover the
carrying amount of a long-lived asset are under consideration or a range of
possible future cash flow amounts are estimated. As a result, discontinued
operations will no longer be measured on a net realizable basis, and future
operating losses will no longer be recognized before they occur. Additionally,
goodwill will be removed from the scope of SFAS No. 144 and as a result will no
longer be required to be allocated to long-lived assets to be tested for
impairment. The Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The Company is currently not affected by the Statement's
requirements.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company's management to make estimates and judgments that affect the
reported amount of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities.
On an on-going basis, all estimates are evaluated by the Company's management,
including those related to bad debts, carrying value of investments in hotel
properties, income taxes, contingencies and litigation. All estimates are based
upon historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers and other borrowers to make
required payments. If the financial condition of its customers or other
borrowers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
21
The Company records an impairment charge when it believes an investment in
hotels has been impaired such that future undiscounted cash flows would not
recover the book basis of the investment in the hotel property. Future
adverse changes in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an investment's
carrying value, thereby possibly requiring an impairment charge in the
future.
The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. The Company's
management has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance. If management determines that the Company will not be able to
realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the
periods such determination was made.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains, or incorporates by reference, forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended, including, without
limitation, statements containing the words "believes," "estimates," "projects,"
"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 achievement expressed or implied
by such forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to certain financial market risks, the most predominant
of which is the fluctuation in interest rates. At December 31, 2001, the
Company's exposure to market risk for a change in interest rates is related
solely to its debt outstanding under the Line of Credit. Total debt outstanding
under the Line of Credit totaled $102 million at December 31, 2001.
The Company's line of credit bears interest at a variable rate of LIBOR plus
1.5%, 1.75%, 2.0%, 2.5% or 2.75% as determined by the Company's percentage of
total debt to earnings before interest, taxes, depreciation and amortization, as
defined in the loan agreement (the "Percentage"). At December 31, 2001, the
interest rate on the line of credit was LIBOR (1.93% at December 31, 2001) plus
2.5%. 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 through such arrangements and derivative financial instruments such
as interest rate swaps, to effectively lock the interest rate on a portion of
its variable rate debt. The Company does not enter into derivative or interest
rate transactions for speculative purposes. The Company regularly reviews
interest rate exposure on its outstanding borrowings in an effort to minimize
the risk of interest rate fluctuation.
On January 16, 2001, the Company entered into an interest rate swap agreement
with a financial institution on a notional principal amount of $50 million. The
agreement effectively fixes the interest rate on the first $50 million of
floating rate debt at 6.4275% plus the Percentage. The swap agreement will
expire in November 2003. Thus, at December 31, 2001, the Company had $52 million
of variable rate debt outstanding under the Line of Credit that was exposed to
fluctuations in the market rate of interest.
22
The Company's line of credit matures in November of 2003. As discussed above,
the Company's line of credit bears interest at variable rates, and therefore,
cost approximates market value. As of December 31, 2001, the fair value
liability of the Company's interest rate swap was approximately $2.9 million.
The Company's operating results are affected by changes in interest rates,
primarily as a result of its borrowings under the Line of Credit. If interest
rates increased by 25 basis points, the Company's interest expense would have
increased by approximately $130,000, based on balances outstanding during the
year ended December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements:
The following financial statements are located in this report on the pages
indicated.
Equity Inns, Inc. Page
Report of Independent Accountants 25
Consolidated Balance Sheets as of December 31, 2001 and
2000 26
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 27
Consolidated Statements of Comprehensive Income for the
years ended December 31, 2001, 2000 and 1999 28
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2001, 2000, and 1999 29
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999 31
Notes to Consolidated Financial Statements 32
Schedule II -- Valuation and Qualifying Accounts for the years
ended December 31, 2001, 2000 and 1999 45
Schedule III -- Real Estate and Accumulated Depreciation
as of December 31, 2001 46
23
(b) Supplementary Data:
Quarterly Financial Information
Unaudited quarterly results for 2001 and 2000 are summarized as follows:
First Second Third Fourth
Quarter (1) Quarter (1) Quarter (1) Quarter (1)
----------- ----------- ------------- -----------
2001 (in thousands, except per share data)
Revenue $54,566 $60,569 $58,946 $51,979
Net income (loss) applicable
to common shareholders (390) 5,011 2,576 (3,564)
Net income (loss) per common
share, basic and diluted (.01) .14 .07 (.10)
2000
Revenue $20,332 $20,759 $29,430 $46,289
Net income (loss) applicable
to common shareholders (6,180) (6,499) 3,520 18,968
Net income (loss) per common
share, basic and diluted (.17) (.18) .10 .52
- ------------------
(1) During 2000, the Company's revenue was primarily rental income from the
Interstate Lessees and the Prime Lessees. As a result of the termination of the
Interstate leases, beginning in 2001, the Company's consolidated results of
operations reflect hotel-level revenues and operating costs and expenses for 75
hotels previously leased to the Interstate Lessees and two additional hotels
previously operated under management contracts.
24
Report of Independent Accountants
To the Board of Directors and
Shareholders of Equity Inns, Inc.
In our opinion, the financial statements listed in the accompany index appearing
under item 8(a) on page 23 present fairly, in all material respects, the
financial position of Equity Inns, Inc. at December 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules listed in the accompany index appearing under
item 8(a) on page 23 present fairly, in all material respects, the information
set forth therein, when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedules 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
Memphis, Tennessee
February 7, 2002
25
EQUITY INNS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
2001 2000
------------ ------------
Assets:
Investment in hotel properties, net $751,891 $772,411
Cash and cash equivalents 4,359 793
Accounts receivable, net of doubtful
accounts of $125 2,534
Due from Lessees 162 5,595
Notes receivable, net 739 3,408
Deferred expenses, net 10,820 12,843
Deferred tax asset 3,452
Deposits and other assets 4,122 6,693
-------- --------
Total Assets $778,079 $801,743
======== ========
Liabilities and Shareholders' Equity:
Debt $384,166 $383,403
Accounts payable and accrued expenses 22,225 13,605
Distributions payable 1,089 10,579
Interest rate swap 2,923
Minority interest in Partnership 9,512 10,370
-------- --------
Total Liabilities 419,915 417,957
-------- --------
Commitments and contingencies (Note 9)
Shareholders' Equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized,
2,750,000 issued and outstanding
at December 31, 2001 and 2000 68,750 68,750
Common stock, $.01 par value,
100,000,000 shares authorized,
37,591,622 and 37,498,659 shares
issued and outstanding at December 31,
2001 and 2000, respectively 376 375
Additional paid-in capital 418,351 417,755
Treasury stock, at cost, 747,600 shares
issued and outstanding at December 31,
2001 and 2000 (5,173) (5,173)
Unearned directors' and officers'
compensation (1,153) (1,854)
Distributions in excess of net earnings (120,064) (96,067)
Unrealized loss on interest rate swap (2,923)
-------- --------
Total Shareholders' Equity 358,164 383,786
-------- --------
Total Liabilities and Shareholders' Equity $778,079 $801,743
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
26
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Years Ended December 31,
2001 2000 1999
-------- -------- --------
Revenue:
Hotel revenues $199,090
Percentage lease revenues 24,931 $115,875 $116,459
Other income 2,039 935 835
-------- -------- --------
Total Revenue 226,060 116,810 117,294
-------- -------- --------
Expenses:
Hotel operating expenses 121,467
Real estate and personal property taxes 12,677 14,085 12,756
Depreciation and amortization 41,327 40,494 38,856
Interest 31,044 32,323 27,947
Amortization of loan costs 1,964 1,749 1,210
General and administrative expenses:
Stock based or non-cash compensation 975 1,007 971
Other general and administrative expenses 5,335 5,641 5,070
Impairment of long-lived assets 550
Provision for doubtful accounts 2,717
Rental expense 1,256 1,518 1,346
-------- -------- --------
Total Expenses 219,312 96,817 88,156
-------- -------- --------
Income before minority interest
and other items 6,748 19,993 29,138
Minority interest (119) (337) (819)
Gain (loss) on sale of hotel properties 83 (3,316) 1,130
Change in accounting for corporate
organizational costs (133)
-------- -------- --------
Income before taxes 6,712 16,340 29,316
Income tax benefit 3,452
-------- -------- --------
Net income 10,164 16,340 29,316
Preferred stock dividends 6,531 6,531 6,531
-------- -------- --------
Net income applicable to common
shareholders $ 3,633 $ 9,809 $ 22,785
======== ======== ========
Net income per common share, basic
and diluted $ .10 $ .27 $ .61
======== ======== ========
Weighted average number of common
shares and units outstanding - diluted 38,036 37,960 38,570
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
27
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years Ended December 31,
2001 2000 1999
------- ------- -------
Net income $10,163 $16,340 $29,316
Unrealized loss on interest rate swap (2,923)
------- ------- -------
Comprehensive income $ 7,240 $16,340 $29,316
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
28
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share data)
Unearned
Preferred Stock Common Stock Additional Treasury Stock Directors'
------------------ ------------------- Paid-In ----------------- and Officers'
Shares Dollars Shares Dollars Capital Shares Dollars Compensation
--------- ------- ---------- ------- ---------- ------- -------- -------------
Balance at December 31, 1998 2,750,000 $68,750 36,438,535 $ 364 $407,833 $(2,006)
Issuance of common shares to
officers in lieu of cash bonus 98,824 1 987
Issuance of common shares to
directors in lieu of cash
compensation 9,235 80
Issuance of restricted common
stock to officers and directors 129,800 1 1,259 (1,260)
Repurchase of Treasury Stock 557,300 $(3,883)
Offering expenses (30)
Amortization of unearned officers'
and directors' compensation 891
Issuance of common shares upon
redemption of Units 632,129 7 6,266
Net income applicable to common
shareholders
Distributions ($1.24 per share)
Adjustments to minority interest from
purchase of treasury stock,
issuance of common shares and
partnership units (41)
--------- ------- ---------- ---- -------- ------- ------- -------
Balance at December 31, 1999 2,750,000 68,750 37,308,523 373 416,354 557,300 (3,883) (2,375)
Issuance of common shares to
officers in lieu of cash bonus 38,669 265
Issuance of common shares to
directors in lieu of cash
compensation 12,324 80
Issuance of restricted common
stock to officers and directors 71,450 1 481 (482)
Forfeiting of unvested shares by
an officer, upon resignation (7,010) (76) 76
Repurchase of Treasury Stock 190,300 (1,290)
Unrealized
Distributions Loss on
In Excess of Interest
Net Earnings Rate Swap Total
------------- ----------- --------
Balance at December 31, 1998 $ (43,677) $431,264
Issuance of common shares to
officers in lieu of cash bonus 988
Issuance of common shares to
directors in lieu of cash
compensation 80
Issuance of restricted common
stock to officers and directors 0
Repurchase of Treasury Stock (3,883)
Offering expenses (30)
Amortization of unearned officers'
and directors' compensation 891
Issuance of common shares upon
redemption of Units 6,273
Net income applicable to common
shareholders 22,785 22,785
Distributions ($1.24 per share) (46,075) (46,075)
Adjustments to minority interest from
purchase of treasury stock,
issuance of common shares and
partnership units (41)
--------- ------- --------
Balance at December 31, 1999 (66,967) 412,252
Issuance of common shares to
officers in lieu of cash bonus 265
Issuance of common shares to
directors in lieu of cash
compensation 80
Issuance of restricted common
stock to officers and directors 0
Forfeiting of unvested shares by
an officer, upon resignation 0
Repurchase of Treasury Stock (1,290)
29
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(in thousands, except share and per share data)
Unearned
Preferred Stock Common Stock Additional Treasury Stock Directors'
------------------ ------------------- Paid-In ----------------- and Officers'
Shares Dollars Shares Dollars Capital Shares Dollars Compensation
--------- ------- ---------- ------- ---------- ------- -------- -------------
Amortization of unearned officers'
and directors' compensation 927
Issuance of common shares upon
redemption of Units 74,703 1 675
Net income applicable to common
shareholders
Distributions ($1.06 per share)
Adjustments to minority interest from
purchase of treasury stock,
issuance of common shares and
partnership units (24)
--------- ------- ---------- ---- -------- ------- ------- -------
Balance at December 31, 2000 2,750,000 $68,750 37,498,659 375 417,755 747,600 (5,173) (1,854)
Issuance of common shares to
officers in lieu of cash bonus 39,722 1 245
Issuance of common shares to
directors in lieu of cash
compensation 10,000 77
Issuance of restricted common
shares to officers and directors 31,820 197 (197)
Amortization of unearned officers'
and directors' compensation 898
Issuance of common shares upon
redemption of Units 11,421 97
Net income applicable to common
shareholders
Distributions ($1.24 per share)
Unrealized loss on interest rate swap
Adjustments to minority interest from
issuance of common shares and
partnership units (20)
--------- ------- ---------- ---- -------- ------- ------- -------
Balance at December 31, 2001 2,750,000 $68,750 37,591,622 $376 $418,351 747,600 $(5,173) $(1,153)
========= ======= ========== ==== ======== ======= ======= =======
Unrealized
Distributions Loss on
In Excess of Interest
Net Earnings Rate Swap Total
------------- ----------- --------
Amortization of unearned officers'
and directors' compensation 927
Issuance of common shares upon
redemption of Units 676
Net income applicable to common
shareholders 9,809 9,809
Distributions ($1.06 per share) (38,909) (38,909)
Adjustments to minority interest from
purchase of treasury stock,
issuance of common shares and
partnership units (24)
--------- ------- --------
Balance at December 31, 2000 (96,067) 383,786
Issuance of common shares to
officers in lieu of cash bonus 246
Issuance of common shares to
directors in lieu of cash
compensation 77
Issuance of restricted common
shares to officers and directors 0
Amortization of unearned officers'
and directors' compensation 898
Issuance of common shares upon
redemption of Units 97
Net income applicable to common
shareholders 3,633 3,633
Distributions ($1.24 per share) (27,630) (27,630)
Unrealized loss on interest rate swap $(2,923) (2,923)
Adjustments to minority interest from
issuance of common shares and
partnership units (20)
--------- ------- --------
Balance at December 31, 2001 $(120,064) $(2,923) $358,164
========= ======= ========
The accompanying notes are an integral part of
these consolidated financial statements.
30
EQUITY INNS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
2001 2000 1999
------- ------- -------
Cash flows from operating activities:
Net income $10,164 $16,340 $29,316
Adjustment to reconcile net income to net cash
provided by operating activities:
(Gain) loss on sale of hotel properties (83) 3,316 (1,130)
Depreciation and amortization 41,327 40,494 38,856
Amortization of loan costs 1,964 1,749 1,210
Change in accounting for corporate
organizational costs 133
Amortization of unearned directors' and
officers' compensation 898 927 891
Provision for doubtful accounts 125
Provision for write-off of notes receivable 3,304
Provision for land impairment 550
Directors' stock based compensation 77 80 80
Income tax benefit (3,452)
Minority interest 119 337 819
Changes in assets and liabilities:
Accounts receivable (2,659)
Due from Lessees 5,433 (471) 1,164
Notes receivable 75 (94) (99)
Deferred expenses 5
Deposits and other assets 2,571 (4,929) (1,089)
Accounts payable and accrued expenses 8,155 261 1,359
------- ------- -------
Net cash flow provided by operating
activities 68,568 58,010 71,515
------- ------- -------
Cash flows from investing activities:
Acquisitions of hotel properties (57,188)
Improvements and additions to hotel properties (22,176) (13,602) (32,800)
Cash paid for franchise applications (833) (234)
Proceeds from sale of hotel properties 1,251 12,234 28,323
------- ------- -------
Net cash flow used in investing activities (20,925) (2,201) (61,899)
------- ------- -------
Cash flows from financing activities:
Purchase of treasury stock (1,290) (2,815)
Payment of offering expenses (30)
Distributions paid to common and preferred shareholders
and unit holders (44,550) (49,114) (54,305)
Proceeds from borrowings 44,788 182,467 263,170
Payments on debt (44,025) (180,239) (213,320)
Cash paid for loan costs (290) (7,201) (2,286)
Payments on capital lease obligations (69)
------- ------- -------
Net cash flow used in financing activities (44,077) (55,377) (9,655)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents 3,566 432 (39)
Cash and cash equivalents at beginning of year 793 361 400
------- ------- -------
Cash and cash equivalents at end of year $ 4,359 $ 793 $ 361
======= ======= =======
Supplemental cash flow information:
Cash paid for interest $31,426 $32,156 $27,537
The accompanying notes are an integral part of these
consolidated financial statements.
31
EQUITY INNS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Equity Inns, Inc. (the "Company") is a hotel real estate investment trust
("REIT") for federal income tax purposes. The Company, through its wholly owned
subsidiary, Equity Inns Trust (the "Trust"), is the sole general partner of
Equity Inns Partnership, L.P. (the "Partnership") and at December 31, 2001 owned
an approximate 96.8% interest in the Partnership.
At December 31, 2001, the Partnership and its affiliates owned 96 hotel
properties with a total of 12,284 rooms in 34 states (the "Hotels"). In order to
qualify as a REIT, the Company and the Partnership cannot operate hotels.
Effective January 1, 2001 (the "2001 Effective Date") under the federal REIT
Modernization Act (the "RMA"), the Company and its affiliates (1) terminated or
assigned all existing operating leases providing for payment of percentage rent
(the "Percentage Leases") between the Company and certain affiliates of
Interstate Hotels Corporation ("IHC") leasing 75 of the Hotels (the "Interstate
Lessees") and (2) terminated related lease guaranties with Interstate Hotels,
L.L.C. and Wyndham International, Inc. and (3) entered into new Percentage
Leases with wholly-owned taxable REIT subsidiaries of the Company (the "TRS
Lessees") for the lease of 77 hotels. The terms of the Percentage Leases with
the TRS Lessees are substantially identical to the Percentage Leases terminated
with the Interstate Lessees.
Through December 31, 2001, the Partnership and its affiliates continued to lease
19 AmeriSuites Hotels to wholly-owned subsidiaries (the "Prime Lessees") of
Prime Hospitality Corporation ("Prime"), with all payments due under those
Percentage Leases guaranteed by Prime. Effective as of January 1, 2002 (the
"2002 Effective Date"), the Company and its affiliates terminated (1) the