RFS HOTEL INVESTORS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
o	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		Exact name of registrants as specified in their charters, state of incorporation, address of principal executive offices, and telephone number		I.R.S. Employer Identification Number
0-22164		RFS Hotel Investors, Inc. A Tennessee Corporation 850 Ridge Lake Boulevard, Suite 300 Memphis, Tennessee 38120 Telephone (901) 767-7005		62-1534743
333-84334		RFS Partnership, L.P. A Tennessee Partnership 850 Ridge Lake Boulevard, Suite 300 Memphis, Tennessee 38120 Telephone (901) 767-7005		62-1541639

Indicate by check mark whether each Registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. ý Yes o No

This combined Form 10-Q is filed separately by two registrants: RFS Hotel Investors, Inc., issuer of publicly traded common stock on the New York Stock Exchange, and RFS Partnership, L.P., issuer of public debt. Information contained herein relating to either individual registrant is filed by such registrant solely on its own behalf. Each registrant makes no representation as to information relating exclusively to the other registrant.

The number of shares of RFS Hotel Investors, Inc. Common Stock, $.01 par value, outstanding on November 13, 2002 was 28,466,461. The number of units of RFS Partnership, L.P. outstanding on November 13, 2002 was 30,925,166 (92% of which were held by RFS Hotel Investors, Inc.).

INDEX

		Page #
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	RFS Hotel Investors, Inc.
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	RFS Partnership, L.P.
	Consolidated Balance Sheets	6
	Consolidated Statements of Operations	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements of RFS Hotel Investors, Inc. and RFS Partnership, L.P.	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	30
Item 4.	Internal Controls and Procedures	32
PART II. OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	33

RFS HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

				September 30, 2002			December 31, 2001
ASSETS
Investment in hotel properties, net				$	600,008		$	615,562
Cash and cash equivalents					7,898			5,735
Restricted cash					5,559			6,817
Accounts receivable					5,191			5,533
Deferred expenses, net					8,549			6,964
Other assets					4,107			3,517
Deferred income taxes					25,437			24,734

		Total assets		$	656,749		$	668,862

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses				$	22,241		$	20,857
Borrowings on Line of Credit					9,250			81,188
Mortgage notes payable					159,928			219,947
Senior notes payable					125,000
Minority interest in Operating Partnership, 2,459 units issued and outstanding at September 30, 2002 and December 31, 2001, respectively					28,950			31,059

		Total liabilities			345,369			353,051

Series B Preferred Stock, $0.01 par value, 5,000 shares authorized, 250 shares issued and outstanding at December 31, 2001								25,000

Commitments and contingencies
Shareholders' equity:
	Common Stock, $.01 par value, 100,000 shares authorized, 29,040 and 25,811 shares issued at September 30, 2002 and December 31, 2001, respectively				290			258
	Additional paid-in capital				409,613			368,361
	Other comprehensive income							(3,220	)
	Treasury stock, at cost, 576 shares				(8,100	)		(8,100	)
	Distributions in excess of earnings				(90,423	)		(66,488	)

		Total shareholders' equity			311,380			290,811

			Total liabilities and shareholders' equity	$	656,749		$	668,862

The accompanying notes are an integral part of these consolidated financial statements.

RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands, except per share data)
(unaudited)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2002			2001			2002			2001
Revenue:
	Rooms		$	45,542		$	47,430		$	132,608		$	149,499
	Food and beverage			4,084			3,868			12,961			13,205
	Other operating departments			1,673			2,242			5,009			7,231
	Lease revenue			1,131			1,268			3,999			4,585
	Deferred revenue			472			621			(1,032	)		(1,115	)
	Other			73			76			334			417

		Total hotel revenue		52,975			55,505			153,879			173,822

Hotel operating expenses by department:
	Rooms			8,999			9,292			26,537			28,751
	Food and beverage			3,107			3,186			9,614			10,247
	Other operating departments			524			497			1,463			1,594
Undistributed operating expenses:
	Property operating costs			6,083			6,212			16,862			17,673
	Property taxes, insurance and other			3,090			3,377			9,623			9,518
	Franchise costs			4,394			4,272			12,624			13,283
	Maintenance and repair			2,478			2,350			7,293			7,548
	Management fees			1,263			1,069			3,791			3,952
	Depreciation			7,594			7,376			22,527			22,253
	Hilton lease termination			—			—			—			65,496
	Amortization of franchise fees and unearned compensation			312			358			950			1,074
	General and administrative			4,907			4,757			14,715			14,849

		Total hotel operating expenses		42,751			42,746			125,999			196,238

Operating income (loss)				10,224			12,759			27,880			(22,416	)
Debt extinguishment and swap termination costs				—			—			10,122			—
Amortization of loan origination costs				427			364			1,204			1,058
Interest expense				6,470			5,955			19,025			18,727

Income (loss) before minority interest, gain on sale of assets and income taxes				3,327			6,440			(2,471	)		(42,201	)
	Minority interest in income (loss) of Operating Partnership			320			594			(356	)		(1,165	)
	Loss (gain) on sale of assets			—						(962	)		(1,200	)
	Benefit from income taxes			(323	)		(708	)		(703	)		(25,207	)

Net income (loss)				3,330			6,554			(450	)		(14,629	)
Preferred stock dividends				—			(781	)		(1,562	)		(2,343	)
Gain (loss) on redemption of Preferred Stock				—						(1,890	)		5,141

Net income (loss) applicable to common shareholders			$	3,330		$	5,773		$	(3,902	)	$	(11,831	)

Earnings (loss) per share—basic and diluted			$	0.12		$	0.23		$	(0.14	)	$	(0.47	)
Weighted average common shares outstanding—basic				28,465			25,211			27,103			24,981
Weighted average common shares outstanding—diluted				28,511			25,263			27,103			24,981

The accompanying notes are an integral part of these consolidated financial statements.

RFS HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands)
(unaudited)

				2002			2001
Cash flows from operating activities:
	Net loss			$	(450	)	$	(14,629	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization			24,681			24,385
		Minority interest in Operating Partnership			(356	)		(1,165	)
		Write-off of deferred expenses			1,361			—
		Gain on sale of assets			(962	)		(1,200	)
	Changes in assets and liabilities:
		Accounts receivable			342			6,872
		Other assets			(862	)		5,503
		Deferred income taxes			(703	)		(25,207	)
		Accounts payable and accrued expenses			4,604			8,707

			Net cash provided by operating activities		27,655			3,266

Cash flows from investing activities:
	Investment in hotel properties				(6,887	)		(15,763	)
	Cash paid for franchise fees				(70	)		(65	)
	Restricted cash				1,258			(641	)
	Proceeds from sale of assets				1,111			11,324

			Net cash used by investing activities		(4,588	)		(5,145	)

Cash flows from financing activities:
	Net proceeds (payments) on line of credit				(71,938	)		30,914
	Proceeds from issuance of debt				125,000
	Payments on mortgage notes payable				(60,019	)		(5,639	)
	Redemption of preferred stock				(25,850	)		(13,000	)
	Distributions to common and preferred shareholders				(21,593	)		(30,827	)
	Distributions to limited partners				(1,978	)		(2,889	)
	Issuance of common and preferred stock				39,653			28,439
	Loan fees paid				(4,179	)		(1,201	)

			Net cash provided (used) by financing activities		(20,904	)		5,797

Net increase in cash and cash equivalents					2,163			3,918
Cash and cash equivalents at beginning of period					5,735			3,681

Cash and cash equivalents at end of period				$	7,898		$	7,599

Supplemental disclosure of non-cash activities:

In 2002, the Company:

i.: Recorded a $0.2 million allocation from paid in capital to minority interest.
ii.: Recorded an expense of $1.9 million related to the issuance costs associated with the redemption of the Series B Preferred Stock on June 30, 2002, $1.1 million of which was previously included in additional paid-in capital.

In 2001, the Company:

i.: Issued 103 thousand shares of common stock with a value of $1.6 million in exchange for 103 thousand Operating Partnership units and issued 7 shares of common stock with a value of $0.1 million for an interest in a subsidiary partnership.
ii.: Recorded a liability of $3.4 million for the fair value of the interest rate swap at September 30, 2001.
iii.: Sold a hotel that closed on February 20, 2001 in which a loss and related liability of $1.0 million was recorded in the financial statements in 2000 as a non-cash transaction at December 31, 2000.

The accompanying notes are an integral part of these consolidated financial statements.

RFS PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

			September 30, 2002		December 31, 2001
ASSETS
Investment in hotel properties, net			$	600,008	$	615,562
Cash and cash equivalents				7,898		5,735
Restricted cash				5,559		6,817
Accounts receivable				5,191		5,533
Deferred expenses, net				8,549		6,964
Other assets				4,107		3,517
Deferred income taxes				25,437		24,734

	Total assets		$	656,749	$	668,862

LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses			$	24,283	$	23,032
Borrowings on Line of Credit				9,250		81,188
Mortgage notes payable				159,928		219,947
Senior notes payable				125,000

	Total liabilities			318,461		324,167

Commitments and contingencies
Series B Preferred Units, $0.01 par value, 5,000 units authorized, 250 units issued and outstanding at December 31, 2001				—		25,000

Redeemable limited partnership units at redemption value, 2,459 units at September 30, 2002 and December 31, 2001, respectively				27,021		27,980

Partners' Capital:
Other comprehensive income						(3,220	)
General partnership units, 28,465 units and 25,235 units at September 30, 2002 and December 31, 2001, respectively				311,267		294,935

	Total partners' capital			311,267		291,715

		Total liabilities and partners' capital	$	656,749	$	668,862

The accompanying notes are an integral part of these consolidated financial statements.

RFS PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands, except per unit data)
(unaudited)

			Three Months Ended September 30,				Nine Months Ended September 30,
			2002		2001		2002			2001
Revenue:
	Rooms		$	45,542	$	47,430	$	132,608		$	149,499
	Food and beverage			4,084		3,868		12,961			13,205
	Other operating departments			1,673		2,242		5,009			7,231
	Lease revenue			1,131		1,268		3,999			4,585
	Deferred revenue			472		621		(1,032	)		(1,115	)
	Other			73		76		334			417

		Total hotel revenue		52,975		55,505		153,879			173,822

Hotel operating expenses by department:
	Rooms			8,999		9,292		26,537			28,751
	Food and beverage			3,107		3,186		9,614			10,247
	Other operating departments			524		497		1,463			1,594
Undistributed operating expenses:
	Property operating costs			6,083		6,212		16,862			17,673
	Property taxes, insurance and other			3,090		3,377		9,623			9,518
	Franchise costs			4,394		4,272		12,624			13,283
	Maintenance and repair			2,478		2,350		7,293			7,548
	Management fees			1,263		1,069		3,791			3,952
	Depreciation			7,594		7,376		22,527			22,253
	Hilton lease termination			—		—		—			65,496
	Amortization of franchise fees and unearned compensation			312		358		950			1,074
	General and administrative			4,907		4,757		14,715			14,849

		Total hotel operating expenses		42,751		42,746		125,999			196,238

Operating income (loss)				10,224		12,759		27,880			(22,416	)
Debt extinguishment and swap termination costs				—		—		10,122			—
Amortization of loan origination costs				427		364		1,204			1,058
Interest expense				6,470		5,955		19,025			18,727

Income (loss) before gain on sale of assets and income taxes				3,327		6,440		(2,471	)		(42,201	)
	Gain on sale of assets			—		—