<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996 Commission File Number 1-11903
AMERICAN GENERAL HOSPITALITY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Maryland 75-2648842
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3860 West Northwest Highway, Suite 300, Dallas, Texas 75220
(Address of Registrant's Principal Executive Office) (Zip Code)
(214) 904-2000
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (ii) has been subject to such
filing requirements for the past 90 days.
X Yes No
------- -------
The number of shares of Common Stock, $.01 par value, outstanding on
November 13, 1996, was 8,288,841.
1 of 36
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
This Quarterly Report on Form 10-Q contains historical information and forward-
looking statements. Statements looking forward in time are included in this
Form 10-Q pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties that may cause the Company's actual results in future periods to
be materially different from any future performance suggested herein. In the
context of forward-looking information provided in this Form 10-Q and in other
reports, please refer to the discussion of risk factors detailed in, as well as
the other information contained in, the Company's filing with the Securities and
Exchange Commission during the past 12 months.
INDEX
PAGE
PART I. Financial Information
Item 1 Financial Statements
AMERICAN GENERAL HOSPITALITY CORPORATION
Consolidated Balance Sheet - September 30, 1996 (Unaudited).............. 4
Consolidated Statement of Operations for the Period from
July 31, 1996 (Inception of operations) Through September 30, 1996
(Unaudited).............................................................. 5
Consolidated Statement of Shareholders' Equity for the Period from
April 12,1996 (Inception of operations) Through September 30, 1996
(Unaudited).............................................................. 6
Consolidated Statement of Cash Flows for the Period from
July 31, 1996 (Inception of operations) Through September 30, 1996
(Unaudited).............................................................. 7
Notes to Consolidated Financial Statements............................... 8
Pro forma Consolidated Balance Sheet - September 30, 1996
(Unaudited).............................................................. 15
Pro forma Consolidated Statement of Estimated Revenues Less
Expenses for the Nine Months Ended September 30, 1996 (Unaudited)........ 16
Pro forma Consolidated Statement of Estimated Revenues Less
Expenses for the Nine Months Ended September 30, 1995 (Unaudited)........ 17
AGH LEASING, L.P. (the "Lessee")
Balance Sheet - September 30, 1996 (Unaudited)........................... 18
Statement of Operations for the Period from July 31, 1996
(Inception of operations) Through September 30, 1996 (Unaudited)......... 19
Statement of Cash Flows for the Period from July 31, 1996
(Inception of operations) Through September 30, 1996 (Unaudited)......... 20
Notes to Financial Statements............................................ 21
Pro forma Statement of Operations for the Nine Months Ended
September 30, 1996 (Unaudited)........................................... 25
Pro forma Statement of Operations for the Nine Months Ended
September 30, 1995 (Unaudited)........................................... 26
2
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION AND AGH LEASING, L.P.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 27
PART II Other Information
Item 6 Exhibits and Reports on Form 8-K................................... 35
SIGNATURE.................................................................... 36
3
<PAGE>
PART I. Financial Information
Item 1 Financial Statements
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEET
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1996
-------------
ASSETS
<S> <C>
Investment in hotel properties, net ................................ $ 175,613,813
Cash and cash equivalents .......................................... 4,186,235
Accounts receivable, net ........................................... 4,100,406
Deferred expenses, net ............................................. 3,106,315
Other assets ....................................................... 538,323
Advances to Lessee ................................................. 315,000
-------------
Total assets .................................................... $ 187,860,092
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt ............................................................... $ 19,297,508
Debt, Line of Credit ............................................... 3,000,000
Distributions payable .............................................. 2,790,057
Accounts payable, trade, accrued
expenses and other liabilities .................................... 6,069,701
Minority interest in Operating
Partnership ....................................................... 29,303,428
-------------
Total liabilities ............................................... 60,460,694
-------------
Shareholders' equity:
Common stock $0.01 par value per share, 100,000,000 shares
authorized, 8,262,008 shares issued and outstanding ........... 82,620
Additional paid-in capital ....................................... 128,163,784
Unearned officers' compensation .................................. (872,708)
Earnings in excess of distributions .............................. 25,702
-------------
Total shareholders' equity ...................................... 127,399,398
-------------
Total liabilities and shareholders'
equity ....................................................... $ 187,860,092
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period July 31, 1996 (Inception of operations)
Through September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
July 31, 1996
through
September 30, 1996
------------------
<S> <C>
Revenues:
Participating Lease revenue ............................ $5,218,526
Interest income ........................................ 32,227
----------
Total revenue ....................................... 5,250,753
----------
Expenses:
Depreciation ........................................... 1,008,874
Amortization ........................................... 116,572
Real estate and personal property taxes and
property insurance ................................... 511,115
General and administrative ............................. 194,226
Ground lease expense ................................... 218,000
Amortization of unearned officers'
compensation ......................................... 14,792
Interest expense ....................................... 347,622
----------
Total expenses ...................................... 2,411,201
----------
Income before minority interest ............................... 2,839,552
Minority interest ............................................. 545,102
----------
Net income applicable to common shareholders .............. $2,294,450
==========
Per Common Share Information:
Net income per common share ............................... $ 0.29
==========
Weighted average number of shares of common
shares outstanding ........................................ 8,002,331
==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period from April 12, 1996 (Date of capitalization)
Through September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Additional Unearned Earnings in
Common Stock Paid-In Officers' Excess of
Shares Dollars Capital Compensation Distributions Total
--------- ------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common shares,
net of offering expenses ........................ 8,212,008 $82,120 $127,276,784 $127,358,904
Issuance of officers' shares ...................... 50,000 500 887,000 $(887,500)
Distributions declared
September 28, 1996 ($0.2746 per share) .......... $(2,268,748) (2,268,748)
Amortization of unearned officers'
compensation .................................... 14,792 14,792
Net income ........................................ 2,294,450 2,294,450
--------- ------- ------------ --------- ------------ ------------
Balance at September 30, 1996 ..................... 8,262,008 $82,620 $128,163,784 $(872,708) $ 25,702 $127,399,398
========= ======= ============ ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period from July 31, 1996 (Inception of operations)
through September 30, 1996
(Unaudited)
<TABLE>
<S> <C>
Cash flow from operating activities:
Net income .............................................. $ 2,294,450
Adjustments to reconcile net income to net cash provided
by operating activities, net of effects of acquisition:
Depreciation .......................................... 1,008,874
Amortization .......................................... 131,364
Minority interest ..................................... 545,102
Changes in assets and liabilities:
Accounts receivable, net .............................. (4,100,406)
Organization costs and franchise agreements ........... (722,887)
Other assets .......................................... (538,323)
Accounts payable, trade, accrued expenses
and other liabilities ................................ 6,069,701
-------------
Net cash flow provided by operating activities: .. 4,687,875
-------------
Cash flows from investing activities:
Purchase of hotel properties ........................ (126,645,935)
Improvements and additions to hotel properties ...... (3,580,951)
-------------
Net cash flow used in investing activities: ...... (130,226,886)
-------------
Cash flows from financing activities:
Proceeds from borrowings ............................ 13,000,000
Net proceeds from public offering ................... 129,333,898
Principal payments on borrowings .................... (10,108,752)
Payments for deferred loan costs .................... (2,500,000)
-------------
Net cash flow provided by financing activities: .. 129,725,146
-------------
Net change in cash and cash equivalents ................. 4,186,135
Cash and cash equivalents as of July 25, 1996
(Inception of operations) ........................... 0
-------------
Cash and cash equivalents as of September 30, 1996 ...... $ 4,186,135
=============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE>
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 309,435
Supplemental schedule of non-cash investing and financing activities:
The Operating Partnership issued 506,825 units of limited partnership
interest ("OP Units") to AGHI Affiliates, 137,008 shares of restricted common
stock to the AGHI Employee Retirement Savings Plan ("Retirement Plan") and cash
of $282,229 in exchange for the AGH Predecessor Hotels' investment in hotel
properties of $22,757,560 (recorded at carryover historical cost) and assumed
related debt of $20,114,415, resulting in an assumed net surplus of $2,643,145.
The Operating Partnership issued 1,336,818 OP Units to parties
unaffiliated with the Primary Contributors, 53,353 OP Units to the Primary
Contributors and assumed $14,138,270 of indebtedness in exchange for partial
interests in four Initial Hotels.
The Operating Partnership advanced $315,000 in the form of a
receivable to the Lessee for the purchase of furniture, fixtures and equipment.
The Company issued 50,000 shares of restricted common stock to four
executive officers which, at the date of issuance, were valued at $17.75 per
share.
At September 28, 1996, $2,790,057 in distributions to share and unit
holders had been declare but not yet paid.
8
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND INITIAL PUBLIC OFFERING
Organization - American General Hospitality Corporation (the
"Company" or "Registrant") was incorporated and formed on April 12, 1996, as a
Maryland corporation which intends to qualify as a real estate investment trust
("REIT"). The Company commenced operations on July 31, 1996 (see Initial Public
Offering discussion below). Upon commencement of operations, the Company
acquired equity interests in 13 hotels (the "Initial Hotels"). Four of the
Initial Hotels (the "AGH Predecessor Hotels") were acquired primarily from
limited partnerships controlled by the shareholders of American General
Hospitality, Inc. (the "AGHI Affiliates"). The remaining nine Initial Hotels
(the "AGH Acquisition Hotels") were acquired primarily from parties unaffiliated
with the Company through contracts with the sellers acquired from an AGHI
affiliate.
Upon completion of the initial public offering described
below, the Company, through wholly owned subsidiaries, acquired an approximate
81.3% equity interest in American General Hospitality Operating Partnership,
L.P. (the "Operating Partnership"). A wholly owned subsidiary of the Company is
the sole general partner of the Operating Partnership. The Operating Partnership
and entities which it controls own the Initial Hotels and lease them to AGH
Leasing, L.P. (the "Lessee"), which is owned, in part, by certain officers of
the Company, under operating leases ("Participating Leases") which provide for
rent based on the revenues of the Initial Hotels. The Lessee has entered into
management agreements pursuant to which all of the Initial Hotels are managed by
American General Hospitality, Inc. ("AGHI").
Initial Public Offering - As of July 31, 1996, the Company
completed an initial public offering of 7,500,000 shares of its common stock and
an additional 575,000 shares of common stock were issued by the Company on
August 28, 1996 upon exercise of the underwriters over-allotment option at a
price per common share of $17.75 (the "Offering"). In addition, concurrently
with the July 31, 1996 closing of the Offering, the Company acquired interests
in five of the Initial Hotels from the Retirement Plan in exchange for 137,008
shares. Upon consummation of the Offering, the Company contributed all of the
net proceeds of the Offering ($129.3 million after deducting Offering expenses),
together with interests in five of the Initial Hotels acquired in connection
with the Retirement Plan acquisition, to AGH GP, Inc. ("General Partner") and
AGH LP, Inc. ("Limited Partner"), which, in turn, contributed such proceeds and
interests to the Operating Partnership in exchange for an approximate 81.3%
equity interest in the Operating Partnership. The General Partner, a wholly
owned subsidiary of the Company, owns a 1.0% interest in the Operating
Partnership. The Limited Partner, also a wholly owned subsidiary of the Company,
owns an approximate 80.3% limited partnership interest in the Operating
Partnership.
9
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Also on July 31, 1996 the Operating Partnership acquired
directly or indirectly the remaining interests in each of the Initial Hotels for
an aggregate of 1,896,996 OP Units (560,178 OP Units to the Primary
Contributors, which consist of the principals of AGHI and the Lessee and certain
of their respective affiliates and 1,336,818 OP Units to parties unaffiliated
with the Primary Contributors); and approximately $91.0 million in cash to
parties unaffiliated with the Primary Contributors. At the time of their
acquisition, these hotels were subject to approximately $52.9 million in
mortgage indebtedness of which approximately $33.5 million was repaid from the
net proceeds of the Offering and the initial draw from the Line of Credit. On
August 28, 1996, the Line of Credit was repaid with proceeds of the underwriters
over-allotment option. The Operating Partnership reimbursed AGHI for
approximately $900,000 for direct out-of-pocket expenses incurred in connection
with the acquisition of the Initial Hotels, including legal, environmental and
engineering expenses. In addition, the Operating Partnership sold certain
personal property relating to certain of the Initial Hotels to the Lessee in
exchange for a series of three five-year recourse promissory notes in the
aggregate principal amount of $315,000 that are collateralized by such personal
property.
Upon the closing of the Offering, the Company closed a $100
million line of credit with a consortium of banks led by Societe Generale,
Southwest Agency and Bank One, Texas, N.A. ("Line of Credit"). The Line of
Credit is secured by, among other things, first mortgage liens on all of the
Initial Hotels, other than Holiday Inn Dallas DFW Airport South and Courtyard by
Marriott-Meadowlands. The Line of Credit has an initial term of three years that
is subject to extension under certain circumstances for an additional one-year
term. Borrowings under the Line of Credit bear interest at 30-day, 60-day or
90-day LIBOR (the "London Interbank Offered Rate"), at the option of the
Company, plus 1.85% per annum, payable monthly in arrears or one-half percent in
excess of the prime rate.
These unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC") and should be read in conjunction with the financial statements and
notes thereto of the Company, Lessee, and AGH Predecessor Hotels included in the
Company's Registration Statement on Form S-11 dated July 25, 1996 (the
"Registration Statement"). The following notes to the financial statements
highlight significant changes to the notes included in the Registration
Statement and present interim disclosures required by the SEC. The accompanying
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature.
10
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. DISTRIBUTIONS PAYABLE
On September 28, 1996, the Company declared a distribution of
$0.2746 per share for the partial third quarter period beginning July 31, 1996
and ending September 30, 1996, payable October 31, 1996 to shareholders of
record on October 15, 1996. The distribution represents a pro rata distribution
of the regular quarterly distribution of $0.4075 per share for a full quarter.
3. COMMITMENTS AND CONTINGENCIES
The Company has an $100 million Line of Credit which matures
on July 31, 1999. At September 30, 1996, the Company has approximately $57
million available for borrowing under the Line of Credit ($41.2 million after
closing the Orlando Hotel acquisition and its admission into the approved
borrowing base - see note 5). The Company expects that its borrowing capacity
under the Line of Credit will increase to approximately $100 million, assuming
all additional borrowings are used to fund capital improvements to the Initial
Hotels or the acquisition of additional hotels. Borrowings under the Line of
Credit bear interest at 30-day, 60-day or 90-day LIBOR, at the option of the
Company plus 1.85% per annum (7.28% at September 30, 1996), payable monthly in
arrears or one-half percent in excess of prime rate.
Franchise costs represent the annual expense for franchise
royalties and reservation services under the terms of hotel franchise agreements
which expire from 1998 to 2013. Franchise costs are based upon varying
percentages of gross room revenue ranging from 1.0% to 5.0%. These fees are paid
by the Lessee. No franchise costs were incurred for the Le Baron Airport Hotel
or the Hotel Maison de Ville.
The hotels are managed by AGHI on behalf of the Lessee. The
Lessee pays AGHI a base management fee of 1.5% of total revenue and an incentive
fee of up to 2.0% of total revenue. The incentive fee, if applicable, is equal
to 0.025% of annual total revenue for each 0.1% increase in annual total revenue
over the total revenues for the preceding twelve month period up to the maximum
incentive fee.
Each hotel, except the Le Baron Airport Hotel and the Hotel
Maison de Ville, is required to remit varying percentages of gross room revenues
ranging from 1.0% to 5.0% to the various franchisors for sales and advertising
expenses incurred to promote the hotel at the national level. Additional sales
and advertising costs are incurred at the local property level. These fees are
paid by the Lessee.
11
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Lessee has future lease commitments to the Company under
the Participating Leases which expire in July, 2008. Minimum future rental
income (i.e. base rents) under these noncancellable Participating Leases at
September 30, 1996 is as follows:
<TABLE>
<CAPTION>
Year Amount
------------------- ------------
<S> <C>
Remainder of 1996 $ 5,109,002
1997 20,096,208
1998 20,849,816
1999 21,631,684
2000 22,442,872
2001 and thereafter 200,608,680
------------------- ------------
Total $290,738,262
============
</TABLE>
Four of the Initial Hotels are subject to ground leases with
third parties with respect to the land underlying each such hotel. The ground
leases are triple net leases which require the tenant to pay all expenses of
owning and operating the hotel, including real estate taxes and structural
maintenance and repair.
The Courtyard by Marriott-Meadowlands is subject to a ground
lease with respect to approximately 0.37 acres. The ground lease terminates in
March, 2036, with two ten-year options to renew. The lease requires a fixed rent
payment equal to $150,000 per year, subject to a 25.0% increase every five years
thereafter beginning in 2001 and a percentage rent payment equal to 3.0% of
gross room revenues.
The Fred Harvey Albuquerque Airport Hotel is subject to a
ground lease with respect to approximately 10 acres. The ground lease terminates
in December 2013, with two five-year options to renew. The lease requires a
fixed rent payment equal to $19,180 per year subject to annual consumer price
index adjustment and a percentage rent payment equal to 5.0% of gross room
revenues, 3.0% of gross receipts from the sale of alcoholic beverages, 2.0% of
gross receipts from the sale of food and non-alcoholic beverages and 1.0% of
gross receipts from the sale of other merchandise or services. The lease also
provides the landlord with the right, subject to certain conditions, to require
the Company, at its expense, to construction 100 additional hotel rooms if the
occupancy rate at the hotel is 85.0% or more for 24 consecutive months and to
approve any significant renovations scheduled at the hotel. The occupancy rate
at the Fred Harvey Albuquerque Airport Hotel for the twelve months ended
September 30, 1996 was 80.0%.
12
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Hilton Hotel-Toledo is subject to a ground lease with
respect to approximately 8.8 acres. The ground lease terminates in June 2026,
with four successive renewal options, each for a ten-year term. The lease
requires annual rent payments equal to $25,000, increasing to $50,000 or $75,000
if annual gross room revenues exceed $3.5 million or $4.5 million, respectively.
The Le Baron Airport Hotel is subject to a ground sublease
with respect to approximately 5.3 acres, which in turn is subject to a ground
lease covering a larger tract of land. The sublease terminates in 2022, with one
30-year option to renew. The sublease requires the greater of a fixed minimum
annual rent of $75,945 (increasing to an annual minimum rent of $100,000 if the
option is exercised) or, in the aggregate, 4.0% of gross room revenues, 2.0% of
gross food receipts, and 3.0% of gross bar and miscellaneous operations
receipts. The sublease also provides the sublessor with the right to approve any
significant renovations scheduled at the hotel.
Under the Participating Leases, the Company is obligated to
pay the costs of real estate and personal property taxes, property insurance and
maintaining underground utilities and structural elements of the Initial Hotels.
Additionally, the Company is required to establish annual minimum reserves equal
to 4.0% of total revenue for each of the Initial Hotels which will be utilized
by the Lessee for the replacement and refurbishment of furniture, fixtures &
equipment (FF&E) and other capital expenditures to enhance the competitive
position of the Initial Hotels.
4. AGH PREDECESSOR HOTELS INFORMATION
Pursuant to SEC regulations which require the presentation of
corresponding periods of the preceding year's quarter financial information, the
following information represents condensed combined balance sheet information as
of December 29, 1995 and condensed combined statements of operations and cash
flows information of AGH Predecessor Hotels for the three and nine months ended
September 30, 1995, which is considered to be the predecessor of the Company.
AGH PREDECESSOR HOTELS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 29, 1995
-----------------
<S> <C>
Balance Sheet Information:
Investments in hotel properties, net....... $22,418
Cash and cash equivalents.................. $ 858
Total assets............................... $24,676
Debt....................................... $19,278
Total liabilities.......................... $20,671
Total equity............................... $ 4,005
</TABLE>
13
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AGH PREDECESSOR HOTELS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
------------------ ------------------
<S> <C> <C>
Statements of Operations Information:
Room revenue........................... $ 2,717,424 $ 6,430,967
Other revenue.......................... 500,201 1,219,308
----------- ------------
Total revenue....................... 3,217,625 7,650,275
Hotel operating expenses............... 2,294,559 5,168,116
Depreciation and amortization.......... 495,811 2,194,608
Interest expense....................... 461,777 1,080,906
Other expenses......................... 195,772 498,465
----------- ------------
Net loss............................ $ (230,294) $ (1,291,820)
=========== ============
Statements of Cash Flows Information:
Net cash provided by (used in)
operating activities................. $ (88,783) $ 429,194
Net cash used in investing activities.. $ (651,350) $ (9,482,221)
Net cash provided by financing
activities........................... $ 468,387 $ 9,263,447
</TABLE>
5. SUBSEQUENT EVENTS
On October 22, 1996 the Company and the Operating Partnership
purchased 100.0% of the limited and general partnership interest in the Days Inn
Lake Buena Vista Partnership, L.P. (the "Partnership") from the limited partners
of the Partnership, Kessler Lake Buena Vista, Ltd., Milstein Lake Buena Vista
Limited Partnership and Edward L. Milstein. The Partnership, which owns the 490
room Days Inn Hotel & Suites in the Lake Buena Vista area of Orlando, Florida
(the "Orlando Hotel" together with the Initial Hotels is "Hotels"), was acquired
for a purchase price of $30,500,000, plus estimated closing costs of $300,000,
which is payable as follows: (i) $30,000,000 in cash, and (ii) $500,000 through
the issuance of 25,397 shares of restricted common stock of the Company. In
connection with this acquisition, the Operating Partnership also entered into
agreements to purchase a license and an association membership, as well as
construction, design and other services related to the Orlando Hotel from
parties affiliated with one of the sellers for approximately $2,350,000.
The cash required to acquire the Partnership was provided from
borrowings under the Line of Credit.
14
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On November 6, 1996, the Company announced that it had signed a
contract to purchase the 152 room Hilton Hotel in Durham, North Carolina. The
acquisition cost of approximately $12.1 million will be provided by cash on hand
and borrowings from the Line of Credit. The acquisition is contingent upon the
completion and satisfactory results of the business and financial due diligence
reviews.
6. PRO FORMA AND ESTIMATED REVENUES
The following unaudited Pro Forma Consolidated Balance Sheet and
Statements of Estimated Revenues Less Expenses of the Company are presented as
if the consummation of the Formation Transactions, the application of the net
proceeds of the Offering and the acquisition of the Orlando Hotel had occurred
on September 30, 1996 and January 1, 1995, respectively, and all of the Hotels
(Initial Hotels and Orlando Hotel) had been leased pursuant to the Participating
Leases since January 1, 1995. The pro forma statements do not include the Hilton
Hotel in Durham, North Carolina. Such estimated and pro forma information is
based in part upon the Balance Sheet of the Company and the Statements of
Operations of the AGH Predecessor Hotels and the pro forma Statements of
Operations of the Lessee included elsewhere in this Quarterly Report on Form 10-
Q. Such information should be read in conjunction with the Financial Statements
listed in the Index on page 2 of this Form 10-Q and in the Company's
Registration Statement dated July 25, 1996. In management's opinion, all
adjustments necessary to reflect the effects of the Formation Transactions, the
Offering and the Orlando Hotel acquisition have been made. The pro forma and
estimated information does not purport to present what the financial position or
the results of operations of the Company would have been if the previously
mentioned transactions had occurred on such dates or to project the future
financial position or results of operations of the Company for any future
period.
15
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30,1996
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------
Company Orlando Pro Forma
Historical Hotel Balance Sheet
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Investment in hotel properties, net .. $175,613,813 $31,850,000 $207,463,813
Cash and cash equivalents ............ 4,186,235 (3,686,235) 500,000
Accounts receivable, net ............. 4,100,406 4,100,406
Deferred exenses, net ................ 3,106,315 1,300,000 4,406,315
Other assets ......................... 538,323 538,323
Advances to Lessee ................... 315,000 315,000
------------ ------------ ------------
Total assets ....................... $187,860,092 $ 29,463,765 $217,323,857
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt ................................. $ 19,297,508 $ 19,297,508
Debt, Line of Credit ................. 3,000,000 $ 28,963,765 31,963,765
Distributions payable ................ 2,790,057 2,790,057
Accounts payable, trade, accrued
expenses and other liabilities ...... 6,069,701 6,069,701
Minority interest in Operating
Partnership ......................... 29,303,428 (63,703) 29,239,725
------------ ------------ ------------
Total liabilities ................. 60,460,694 28,900,062 89,360,756
------------ ------------ ------------
Common stock ......................... 82,620 254 82,874
Additional paid in capital ........... 128,163,784 563,449 128,727,233
Unearned officers' compensation ...... (872,708) (872,708)
Earnings in excess of distributions .. 25,702 25,702
------------ ------------ ------------
Total shareholders' equity ........ 127,399,398 563,703 127,963,101
------------ ------------ ------------
Total liabilities and shareholders'
equity .......................... $187,860,092 $ 29,463,765 $217,323,857
------------ ------------ ------------
</TABLE>
16
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF ESTIMATED REVENUES LESS EXPENSES
For the Nine Months Ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
Combined -----------------------------------------
Historical
July 31, 1996
Through Pro Forma Initial Orlando Combined
September 30, 1996 Adjustments Hotels Hotel Pro Forma
------------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Participating Lease revenue ................... $5,218,526 $16,409,625 $21,628,151 $3,979,151 $25,607,302
Interest income ............................... 32,227 (8,602) 23,625 23,625
---------- ----------- ----------- ---------- -----------
Total revenue .............................. 5,250,753 16,401,023 21,651,776 3,979,151 25,630,927
---------- ----------- ----------- ---------- -----------
Expenses
Depreciation .................................. 1,008,874 3,450,7117 4,459,661 676,200 5,135,861
Amortization .................................. 116,572 410,399 526,971 81,250 608,221
Real estate and personal property taxes and
property insurance ........................... 511,115 1,262,960 1,774,075 423,678 2,197,753
General and administrative..................... 194,226 659,167 853,393 853,393
Ground lease expense........................... 218,000 504,245 722,245 722,245
Amortization of unearned officers'
compensation ................................. 14,792 51,771 66,563 66,563
Interest expense .............................. 347,622 810,090 1,157,712 1,647,314 2,805,026
---------- ----------- ----------- ---------- -----------
Total expenses .............................. 2,411,201 7,149,419 9,560,620 2,828,442 12,389,062
---------- ----------- ----------- ---------- -----------
Estimated revenues less expenses before minority
interest ....................................... 2,839,552 9,251,604 12,091,156 1,150,709 13,241,865
Minority interest ................................ 545,102 2,261,046 2,462,987
---------- ----------- -----------
Estimated revenues less expenses applicable to
common shareholders ............................ $2,294,450 $ 9,830,110 $l0,778,878
========== =========== ===========
Per common share information:
Estimated revenues less expenses per common
share .......................................... $ 0.29 $ 1.19 $ 1.30
========== =========== ===========
Weighted average number of shares of Common
shares outstanding ............................. 8,002,331 8,262,008 8,287,405
========== =========== ===========
</TABLE>
17
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF ESTIMATED REVENUES LESS EXPENSES
For the Nine Months Ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1995
----------------------------------------
Initial Orlando Combined
Hotels Hotel Pro Forma
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Participating Lease revenue ............... $19,065,736 $3,646,264 $22,712,000
Interest income ........................... 23,625 23,625
----------- ---------- -----------
Total revenue ........................... 19,089,361 3,646,264 22,735,625
----------- ---------- -----------
Expenses:
Depreciation .............................. 5,553,176 676,200 6,229,376
Amortization .............................. 526,971 81,250 608,221
Real estate and personal property taxes and
property insurance ....................... 1,623,805 423,678 2,047,483
General and administrative ................ 853,392 853,392
Ground lease expense ...................... 660,913 660,913
Amortization of unearned officers'
compensation ............................ 66,563 66,563
Interest expense .......................... 1,157,712 1,647,314 2,805,026
----------- ---------- -----------
Total expenses .......................... 10,442,532 2,828,442 13,270,974
----------- ---------- -----------
Estimated revenues less expenses before minority
interest .................................... 8,646,829 817,822 9,464,651
Minority interest .............................. 1,616,957 1,760,425
----------- -----------
Estimated revenues less expenses applicable to
common shareholders ......................... $ 7,029,872 $ 7,704,226
=========== ===========
Per Common Share Information:
Estimated revenues less expenses per common
share ....................................... $ 0.85 $ 0.93
=========== ===========
Weighted average number of shares of Common
Stock outstanding ........................... 8,262,008 8,287,405
=========== ===========
</TABLE>
18
<PAGE>
AGH LEASING, L.P.
BALANCE SHEET
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in hotel properties, at cost:
Furniture, fixtures and equipment................ $ 315,000
Less accumulated depreciation.................... (10,500)
----------
Net investment in hotel properties................. 304,500
Cash and cash equivalents.......................... 5,994,553
Accounts receivable, net .......................... 2,414,921
Inventories........................................ 366,653
Prepaid expenses................................... 462,960
Other assets....................................... 46,987
----------
Total assets..................................... $9,590,574
==========
LIABILITIES AND EQUITY
Accounts payable, trade............................ $ 472,191
Rent payable, American General Hospitality
Corporation...................................... 4,093,764
Advance from American General Hospitality
Operating Partnership, L.P....................... 315,000
Accrued expenses and other liabilities ............ 4,030,455
----------
Total liabilities................................ 8,911,410
----------
Commitments and contingencies (Notes 1 and 2)
Capital............................................ 500,000
Retained earnings.................................. 179,164
----------
Total equity..................................... 679,164
----------
Total liabilities and equity..................... $9,590,574
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
AGH LEASING, L.P.
STATEMENT OF OPERATIONS
For the Period July 31, 1996 (Inception of operations) Through
September 30, 1996
(Unaudited)
<TABLE>
<S> <C>
Revenues:
Room revenue..................................... $11,185,140
Food and beverage revenue........................ 2,982,331
Other revenue.................................... 623,824
-----------
Total revenue......................... 14,791,295
-----------
Expenses:
Property operating costs and
expenses..................................... 3,135,269
Food and beverage costs and
expenses.................................... 2,260,935
General and administrative....................... 1,205,355
Advertising and promotion........................ 772,999
Repairs and maintenance.......................... 522,792
Utilities........................................ 668,296
Management fees.................................. 390,736
Franchise costs.................................. 404,025
Depreciation .................................... 10,500
Interest expense................................. 5,250
Other expense.................................... 17,448
Participating Lease expenses..................... 5,218,526
-----------
Total expenses......................... 14,612,131
-----------
Net income ........................... $179,164
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
AGH LEASING, L.P.
STATEMENT OF CASH FLOWS
For the Period July 31, 1996 (Inception of operations) Through
September 30, 1996
(Unaudited)
<TABLE>
<S> <C>
Cash flow from operating activities:
Net income............................................ $ 179,164
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 10,500
Changes in assets and liabilities:
Accounts receivable............................. (2,414,921)
Inventories..................................... (366,653)
Prepaid expenses................................ (462,960)
Other assets.................................... (46,987)
Accounts payable, trade......................... 472,191
Rent payable, American General Hospitality
Corporation.................................. 4,093,764
Accrued expenses and other liablilities......... 4,030,455
-----------
Net cash provided by operating activities...... 5,494,553
-----------
Cash flows from financing activities:
Capital contributions................................. 500,000
-----------
Net change in cash and cash equivalents................. 5,994,553
Cash and cash equivalents at beginning of period........ 0
-----------
Cash and cash equivalents at end of period.............. $ 5,994,553
===========
</TABLE>
Supplemental schedule of non cash investing and financial activities:
The Operating Partnership advanced $315,000 in the form of a receivable to the
Lessee for the purchase of furniture, fixtures and equipment.
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
AGH LEASING, L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND INITIAL PUBLIC OFFERING
Organization - AGH Leasing, L.P. (the "Lessee"), was formed on
May 29, 1996, as a Delaware limited partnership. Upon completion of the initial
public offering described below and commencement of operations on July 31, 1996,
American General Hospitality Corporation (the "Company") acquired an approximate
81.3% interest in American General Hospitality Operating Partnership, L.P. (the
"Operating Partnership"). In order for the Company to qualify as a real estate
investment trust ("REIT"), neither the Company nor the Operating Partnership can
operate hotels; therefore, the Operating Partnership, which owns 13 hotels (the
"Initial Hotels"), leases the Initial Hotels to the Lessee under operating
leases ("Participating Leases") which provide for rent based on the revenues of
the Initial Hotels.
Upon completion of the initial public offering of the Company
and the commencement of the Participating Leases, the financial statements of
the Lessee include the results of operations of the hotels leased from the
Operating Partnership due to the Lessee's control over the operations of the
hotels during the 12 year term of the Participating Leases. The Lessee has
complete discretion in establishing room rates and all rates for hotel goods and
services. Likewise, all operating expenses of the hotels are under the control
of the Lessee. The Lessee has the right to manage or to enter into management
contracts with other parties to manage the hotels. If the Lessee elects to enter
into management contracts with parties other than American General Hospitality,
Inc. ("AGHI"), the Lessee must obtain the prior written consent of the Operating
Partnership, which consent may not be unreasonably withheld. The Lessee, with
the written consent of the Operating Partnership, has entered into management
agreements pursuant to which all of the Initial Hotels are managed by AGHI. The
Lessee is owned in part by certain executive officers of the Company and AGHI.
Initial Public Offering - As of July 31, 1996, the Company
completed an initial public offering of 7,500,000 shares of its common stock and
an additional 575,000 shares of common stock were issued by the Company on
August 28, 1996 upon exercise of the underwriters' over-allotment option at a
price per common share of $17.75 (the "Offering"). Upon consummation of the
Offering, the Company contributed all of the net proceeds of the Offering to the
Operating Partnership in exchange for an approximate 81.3% equity interest in
the Operating Partnership. The Operating Partnership used such funds to purchase
certain of the Initial Hotels, repay debt and other obligations of the Initial
Hotels, and for working capital.
Upon consummation of the Offering, the partners of the Lessee
capitalized the Lessee with $500,000 cash and pledged 275,000 units of limited
partnership interest ("OP Units") to the Company to secure the Lessee's
obligations under the Participating Leases.
22
<PAGE>
AGH LEASING, L.P.
NOTES TO FINANCAL STATEMENTS, CONTINUED
2. COMMITMENTS AND CONTINGENCIES
Franchise costs represent the annual expense for franchise royalties
and reservation services under the terms of hotel franchise agreements which
expire from 1998 to 2013. Franchise costs are based upon varying percentages of
gross room revenue ranging from 1.0% to 5.0%. These fees are paid by the Lessee.
No franchise costs were incurred for the Le Baron Airport Hotel or the Hotel
Maison de Ville.
The hotels are managed by AGHI on behalf of the Lessee. The Lessee
pays AGHI a base management fee of 1.5% of total revenue and an incentive fee of
up to 2.0% of total revenue. The incentive fee, if applicable, is equal to
0.025% of annual total revenue for each 0.1% increase in annual total revenue
over the total revenues for the preceding twelve month period up to the maximum
incentive fee.
Each hotel, except the Le Baron Airport Hotel and the Hotel Maison de
Ville, is required to remit varying percentages of gross room revenue ranging
from 1.0% to 5.0% to the various franchisors for sales and advertising expenses
incurred to promote the hotel at the national level. Additional sales and
advertising costs are incurred at the local property level. These fees are
prepaid by the Lessee.
The Lessee has future lease commitments to the Company under the
Participating Leases which expire in July, 2008. Minimum future rental expense
(i.e. base rents) under these noncancellable Participating Leases is as follows:
<TABLE>
<CAPTION>
Year Amount
------------------- ------------
<S> <C>
Remainder of 1996 $ 5,109,002
1997 20,096,208
1998 20,849,816
1999 21,631,684
2000 22,442,872
2001 and thereafter 200,608,680
------------
Total $290,738,262
============
</TABLE>
Four of the Initial Hotels are subject to ground leases with third
parties with respect to the land underlying each such hotel. The ground leases
are triple net leases which require the tenant to pay all expenses of owning and
operating the hotel, including real estate taxes and structural maintenance and
repair. The Company is responsible for payments under the ground leases.
23
<PAGE>
AGH LEASING, L.P.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. PRO FORMA INFORMATION
The following unaudited pro forma Statements of Operations of AGH
Leasing, L.P. are presented as if the consummation of the Formation Transactions
and the application of the net proceeds of the Offering and the Orlando Hotel
acquisition had occurred on January 1, 1995 and all of the Hotels (Initial
Hotels and the Orlando Hotel) had been leased pursuant to the Participating
Leases. The pro forma statements do not include the acquisition of the Hilton
Hotel in Durham, North Carolina. Such pro forma information is based in part
upon the Pro Forma Statements of Estimated Revenues Less Expenses of the Company
and the Statements of Operations of the AGH Predecessor Hotels included
elsewhere in this Form 10-Q. Such information should be read in conjunction
with the Financial Statements listed in the Index on page 2 of this Form 10-Q
and in the Company's Registration Statement dated July 25, 1996.
In management's opinion, all adjustments necessary to reflect the
effects of the Formation Transactions, the Offering, and the Orlando Hotel
acquisition have been made. The pro forma information does not purport to
present what the actual financial position of or the results of operation of the
Lessee would have been if the previously mentioned transactions had occurred on
such date or to project the future financial position or results of operations
of the Lessee for any future period.
24
<PAGE>
AGH LEASING, L.P.
PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Lessee Historical
July 31, 1996 January 1, 1996
Through Through
September 30, July 30, Pro Forma
1996 1996 (1) Adjustments (2) Pro Forma
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Room revenue $11,185,140 $35,200,441 $6,352,901 $52,738,482
Food and beverage revenue 2,982,331 10,836,410 611,170 14,429,911
Other revenue 623,824 2,518,325 1,957,745 5,099,894
---------------------------------------------------------------------
Total revenue 14,791,295 48,555,176 8,921,816 72,268,287
---------------------------------------------------------------------
Expenses:
Property operating costs and expens 5,396,204 18,167,985 2,240,067 25,804,256
General and administrative 1,205,355 4,425,849 527,269 6,158,473
Advertising and promotion 772,999 2,890,082 432,298 4,095,379
Repairs and maintenance 522,792 1,997,826 391,571 2,912,189
Utilities 668,296 1,959,274 412,309 3,039,879
Management fees 390,736 962,503 485,288 1,838,527
Franchise costs 404,025 1,266,021 264,704 1,934,750
Depreciation 10,500 2,641,420 (2,604,670) 47,250
Amortization 478,438 (478,438)
Real estate and personal property taxes,
and property insurance 1,122,606 (1,122,606)
Interest expense 5,250 3,838,271 (3,819,896) 23,625
Other expense 17,448 1,411,272 (1,219,074) 209,646
Participating Lease expenses 5,218,526 20,388,776 25,607,302
---------------------------------------------------------------------
Total expenses 14,612,131 41,161,547 15,897,598 71,671,276
---------------------------------------------------------------------
Net income (loss) $179,164 $7,393,629 ($6,975,782) $597,011
====================================================================
</TABLE>
(1) AGH Predecessor Hotels and AGH Acquisition Hotels combined historical
statements of operations for the period from January 1, 1996 through
July 30, 1996.
(2) Pro forma adjustments for the AGH Predecessor Hotels, AGH Acquisition
Hotels and Orlando Hotel.
25
<PAGE>
AGH LEASING, L.P.
PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Prior to Pro Forma
Historical (1) Acquisition (2) Adjustments Pro Forma
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Room revenue $40,995,065 $1,532,369 $5,469,459 $47,996,893
Food and beverage revenue 12,847,174 420,569 720,127 13,987,870
Other revenue 3,047,780 92,884 1,468,300 4,608,964
--------------------------------------------------------------------
Total revenue 56,890,019 2,045,822 7,657,886 66,593,727
--------------------------------------------------------------------
Expenses:
Property operating costs and expenses 21,459,111 743,827 1,719,679 23,922,617
General and administrative 5,054,356 157,452 230,263 5,442,071
Advertising and promotion 3,464,366 97,924 282,059 3,844,349
Repairs and maintenance 2,569,890 104,843 326,613 3,001,346
Utilities 2,599,628 91,129 417,439 3,108,196
Management fees 1,239,223 61,199 732,277 2,032,699
Franchise costs 1,424,930 83,718 227,052 1,735,700
Depreciation 6,435,400 126,676 (6,514,826) 47,250
Amortization 141,647 (141,647)
Real estate and personal property taxes,
and property insurance 1,484,999 37,406 (1,522,405)
Interest expense 4,638,518 (4,614,893) 23,625
Other expense 875,587 (679,626) 195,961
Participating lease expenses 22,712,000 22,712,000
--------------------------------------------------------------------
Total expenses 51,387,655 1,504,174 13,173,985 66,065,814
--------------------------------------------------------------------
Net income (loss) $5,502,364 $541,648 ($5,516,099) $527,913
================ ================ ================ ================
</TABLE>
(1) AGH Predecessor Hotels and AGH Acquisition Hotels combined historical
statements of operations for the period from January 1, 1995 through
September 30, 1995.
(2) Represents the historical results of operations of the Holiday Inn
Dallas DFW Airport West prior to the acquisition by the AGH Predecessor
Hotels in June 1995.
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Upon consummation of the Offering and related transactions,
the Company acquired an approximate 81.3% interest in the Initial Hotels through
its interest in the Operating Partnership. In addition, the Company acquired the
Orlando Hotel on October 22, 1996 (the Initial Hotels and the Orlando Hotel are
collectively referred to as the "Hotels"). In order for the Company to qualify
as a REIT, neither the Company nor the Operating Partnership can operate hotels;
therefore, the Operating Partnership leases the Hotels to the Lessee. The
principal source of revenue for the Operating Partnership and the Company is
lease payments paid by the Lessee under the Participating Leases. Participating
Rent is based upon the Hotels' gross revenues. The Lessee's ability to make
payments to the Company under the Participating Leases is dependent on the
Lessee's and AGHI's ability to generate cash flow from the operations of the
Hotels.
The accompanying discussion and analysis of financial
condition and results of operations is based on the consolidated historical
financial statements of the Company and the Lessee and the combined historical
financial statements of the AGH Predecessor Hotels that are included elsewhere
in this Form 10-Q. The AGH Predecessor Hotels' financial statements include the
results of operations of the following hotels since their dates of acquisition
by affiliates of AGHI: Courtyard by Marriott-Meadowlands (December 1993), Hotel
Maison de Ville (August 1994), Hampton Inn Richmond Airport (December 1994) and
Holiday Inn Dallas DFW Airport West (June 1995). The four AGH Predecessor Hotels
were combined into one set of financial statements since they were acquired by
the Company from a group of Limited Partnerships controlled by shareholders of
AGHI.
RESULTS OF OPERATIONS
The Company - Actual. For the period July 31, 1996 through
September 30, 1996, the Company earned $5,218,526 in Participating Lease revenue
from the Lessee. Depreciation of the Company's investment in hotel properties
was $1,008,874. Amortization, primarily of deferred financing costs and
franchise transfer fees was $131,364 and real estate and personal property taxes
and insurance was $511,115. Interest expense attributable to indebtedness
relating to the Holiday Inn Dallas DFW Airport South, Courtyard by
Marriott-Meadowlands and borrowings under the Company's Line of Credit were
$205,682, $68,344, and $73,596, respectively. Interest expense relating to the
Line of Credit borrowings include borrowings of approximately $10,000,000 from
July 31, 1996, to August 28, 1996, which is the date of receipt of funds from
the underwriters' exercise of their overallotment option and borrowings of
$3,000,000 from September 16, 1996 to September 30, 1996 which was utilized for
working capital purposes. Minority interest of $545,102 represents the weighted
average minority interest percentage for the period.
27
<PAGE>
Funds from Operations, calculated using the new definition of
Funds From Operations adopted by the National Association of Real Estate
Investment Trusts ("NAREIT"), was $3,848,426, which is the sum of net income
applicable to common shareholders, minority interest and depreciation.
The Company - Pro Forma Estimated Revenues Less Expenses. On
an estimated basis for the nine months ended September 30, 1996, the Company
would have had $25,607,302 in revenue from the Participating Leases, calculated
by applying the rent provisions of the Participating Leases to the estimated
revenues of the Hotels. Interest income would have been $23,625 attributable
from the FF&E Note issued by the Lessee. Pro forma expenses would have been
$12,389,062. Depreciation expense would have been $5,135,861, which represents
depreciation of the AGH Predecessor Hotels' historical carryover cost basis plus
depreciation of the AGH Acquisition Hotels' and the Orlando Hotels new cost
basis. This is a $1,093,515 decrease from 1995 due to the accelerated
depreciation recorded in 1995 on FF&E that was replaced in connection with
renovations at the AGH Predecessor Hotels. General and administrative expenses
would have been $853,393 representing salaries and wages of $420,750,
professional fees of $93,750, directors' and officers' insurance expense of
$67,500 and other expenses of $271,393. Interest expense would have been
$1,157,712 on the indebtedness totaling approximately $19.2 million related to
the Holiday Inn Dallas DFW Airport South and the Courtyard by
Marriott-Meadowlands and borrowings under the Company's Line of Credit for
working capital purposes and $1,647,314 on the Line of Credit borrowings to
purchase the Orlando Hotel. The DFW South Loan and the Secaucus Loans mature
between December 2000 and February 2001 and bear interest at fixed rates ranging
from 7.50% to 8.75%. The line of credit interest rate utilized is 7.28%.
Funds From Operations - The Company considers Funds From
Operations to be an appropriate measure of the performance of an equity REIT.
Funds From Operations 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.
The following is a reconciliation of Estimated Revenues Less
Expenses to Funds From Operations, including the pro forma results of the
Orlando Hotel, and illustrates the difference in the two measures of operating
performance:
28
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Estimated Revenues Less Expenses before
Minority Interest $13,241,865 $ 9,464,651
Depreciation 5,135,861 6,229,376
----------- -----------
Funds From Operations $18,377,726 $15,694,027
=========== ===========
Weighted Average Number of shares of
Common Stock and OP Units Outstanding 10,184,401 10,184,401
=========== ===========
</TABLE>
Lessee - Actual. For the period July 31, 1996 through
September 30, 1996, the Lessee had room revenues of $11,185,140 from the Initial
Hotels. The Participating Lease payments and property operating costs and
expenses were $5,218,526 and $9,393,605, respectively. Net income for the period
was $179,164.
Lessee - Pro Forma Operations. The following table sets forth pro
forma financial information for the Lessee, as a percentage of revenue, for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1996 1995
------ ------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Room revenue 73.0% 72.1%
Food and beverage revenue 20.0 21.0
Other revenue 7.0 6.9
------ ------
Total revenue 100.0 100.0
Hotel operating expenses 63.4 64.7
Depreciation 0.1 0.1
Other corporate expenses 0.3 0.3
Participating Lease expenses 35.4 34.1
------ ------
Net Income 0.8% 0.8%
====== ======
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
KEY FACTORS:
Occupancy 76.9% 78.0% 75.4% 75.9%
ADR $75.30 $68.46 $72.64 $66.08
REVPAR $57.94 $53.41 $54.73 $50.19
</TABLE>
The following table sets forth pro forma room revenue for each of the Hotels and
the percentage changes between the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
(Dollars in thousands) (Dollars in thousands)
1996 1995 Percent 1996 1995 Percent
Change Change
----------- ---------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Holiday Inn Dallas DFW Airport West $ 1,002,832 $ 942,443 6.4% $3,069,720 $2,792,749 9.9%
Courtyard by Marriott-Meadowlands 1,207,192 1,006,422 19.9% 3,250,259 2,792,612 16.4%
Hampton Inn Richmond Airport 598,212 539,772 10.8% 1,555,913 1,444,733 7.7%
Hotel Maison de Ville 247,771 236,981 4.6% 958,853 941,437 1.8%
Hilton Hotel- Toledo 958,922 969,718 -1.1% 2,673,599 2,630,401 1.6%
Holiday Inn Dallas DFW Airport South 2,107,292 2,071,201 1.7% 6,491,623 6,194,350 4.8%
Holiday Inn New Orleans 1,619,839 1,554,101 4.2% 4,990,643 4,919,684 1.4%
International Airport
Days Inn Ocean City 1,318,958 1,274,528 3.5% 2,129,547 2,015,226 5.7%
Holiday Inn Select- Madison 1,536,234 1,422,188 8.0% 4,100,587 3,982,525 3.0%
Holiday Inn Park Center Plaza 1,496,644 1,324,308 13.0% 4,313,287 3,643,675 18.4%
Fred Harvey Albuquerque Airport Hotel 1,198,691 1,146,525 4.5% 3,344,851 3,267,688 2.4%
Le Baron Airport Hotel 1,819,854 1,348,171 35.0% 5,209,398 3,766,332 38.3%
Holiday Inn Mission Valley 1,709,271 1,607,891 6.3% 4,312,791 4,166,821 3.5%
Days Inn Hotel & Suites-Orlando 2,059,285 1,802,791 14.2% 6,337,411 5,438,660 16.5%
------------------------------------ -------------------------------------
Totals $18,880,997 $17,247,040 9.5% $52,738,482 $47,996,893 9.9%
==================================== =====================================
</TABLE>
Lessee - Comparison of the pro forma nine months ended
September 30, 1996 to the pro forma nine months ended September 30, 1995 (room
revenue). Room revenue increased to $52,738,482 from $47,996,893, an increase of
$4,741,589 or 9.9%, principally
30
<PAGE>
resulting from: (i) an increase of $457,647 in Courtyard by Marriott-
Meadowlands' room revenue due to an increase in ADR to $90.98 from $80.76, (ii)
an increase of $669,612 in Holiday Inn Park Center Plaza's room revenue due to
an increase in ADR to $86.94 from $80.40, (iii) an increase in Le Baron
Airport Hotel's room revenues of $1,443,066 due to an increase in ADR to $74.47
from $63.35, (iv) an increase of $898,751 in the Days Inn Hotel and Suites' room
revenue due to an increase in ADR to $61.44 from $49.01, and (v) an increase of
$276,971 in Holiday Inn Dallas DFW West's room revenue due to an increase in ADR
to $64.82 from $58.10.
Food and beverage revenue increased to $14,429,911 from
$13,987,870, an increase of $442,041 or 3.2%. Most of the hotels experienced
slight increases in food and beverage revenues with the exception of Holiday Inn
Dallas DFW Airport West which had a significant increase of $251,160. This
increase is mainly due to major renovations of the restaurant and the bar during
the fourth quarter of 1995.
Hotel operating expenses increased to $45,783,453 from
$43,086,978, an increase of $2,696,475 or 6.3%; however, as a percentage of
total revenue, expenses decreased to 63.4% from 64.7% due primarily to revenue
increases that were not accompanied by corresponding increases in hotel
operating expenses.
Participating Lease expenses increased to $25,607,302 from
$22,712,000, an increase of $2,895,302 or 12.7%. The increase is primarily due
to increased revenues which moved the lease payment into a higher percentage
tier.
Liquidity and Capital Resources
The Company's principal source of cash to meet its cash
requirements, including distributions to stockholders, will be its share of the
Operating Partnership's cash flow from the Participating Leases. The Lessee's
obligations under the Participating Leases are secured by the pledge of 275,000
OP Units. The Lessee's ability to make rent payments under the Participating
Leases and the Company's liquidity, including its ability to make distributions
to shareholders, will be dependent on the ability of the Lessee and AGHI to
generate sufficient cash flow from the Hotels.
Upon consummation of the Offering, the Company had
approximately $29.4 million of outstanding indebtedness, including approximately
$19.4 million encumbering two of the Initial Hotels and $10 million borrowed
under the Line of Credit in connection with the closing. On August 28, 1996, all
amounts borrowed under the Line of Credit were repaid with the proceeds of the
underwriters' over-allotment option. The Company intends to acquire additional
hotels and may incur additional indebtedness to make such acquisitions or to
meet distribution requirements imposed on it under the Internal Revenue Code to
the extent that working capital and cash flow from the Company's investment are
insufficient to make such distributions. The Company intends to limit
consolidated indebtedness (measured at the time the debt is incurred) to no more
than 45.0% of the Company's investment in hotels.
31
<PAGE>
The Company has a $100 million Line of Credit which the
Company will use to fund acquisitions of additional hotels, make renovations and
capital improvements to hotels and for working capital requirements. The Company
currently has approximately $57.0 million available for borrowing under the Line
of Credit ($41.2 million after closing the Orlando Hotel acquisition and its
admission into the borrowing base). The Company expects that its borrowing
capacity under the Line of Credit will increase to approximately $100 million,
assuming all additional borrowings are used to fund capital improvements to the
Hotels or the acquisition of additional hotels. Borrowings under the Line of
Credit bear interest at 30-day, 60-day or 90-day LIBOR, at the option of the
Company, plus 1.85% per annum, payable monthly in arrears or one-half percent in
excess of the prime rate.
The Company will invest in additional hotel properties only as
suitable opportunities arise, and the Company will not undertake investment
unless adequate sources of financing are available. Future investments in hotel
properties will be financed, in whole or part, from proceeds from additional
issuances of Common Stock, borrowings under the Line of Credit or from the
issuance of other debt or equity securities.
On November 6, 1996, the Company announced that it had signed
a contract to purchase the 152 room Hilton Hotel in Durham, North Carolina. The
acquisition cost of approximately $12.1 million will be provided by cash on hand
and borrowings from the Line of Credit. The acquisition is contingent upon the
completion and satisfactory results of the business and financial due diligence
reviews.
The Participating Leases require the Company to establish
annual minimum reserves equal to 4.0% of total revenue of the Hotels which will
be utilized by the Lessee for the replacement and refurbishment of FF&E and
other capital expenditures to enhance the competitive position of the Hotels.
The Company and the Lessee will jointly determine the use of funds in this
reserve and the Company will have the right to approve the Lessee's capital
expenditure budgets. While the Company expects its reserve to be adequate to
fund recurring capital needs, including periodic renovations, the Company may
use Cash Available for Distribution, as defined below, in excess of
distributions paid or funds drawn under the Line of Credit or other borrowings
to fund additional capital improvements, as necessary, including major
renovations at the Company's hotels.
Cash Available for Distribution represents Funds From
Operations plus the sum of amortization of deferred financing costs, franchise
transfer costs and unearned officers' compensation. This amount is then reduced
by the sum of 4.0% of total revenue for each of the Hotels that is required to
be set aside by the Operating Partnership for refurbishment and replacement of
FF&E, capital expenditures, and other non-routine items as required by the
Participating Leases and the estimated cash used to pay interest expenses
related to the (i) $24.6 million costs of planned renovations and refurbishment
at the seven Initial Hotels the Company plans to covert to leading franchise
brands in order to reposition such hotels for future growth, (ii) the $2.6
million of planned improvements that the Company expects to make at five other
Initial Hotels, (iii) and $9.3 million for planned renovations that the
32
<PAGE>
Company expects to make at the Orlando Hotel. Estimated Cash Available for
Distribution does not include the effects of any revenue increases expected to
result from capital expenditures at the Initial Hotels.
Franchise Conversions and Other Capital Improvements
The Company plans to spend approximately $24.6 million at the
Initial Hotels and $9.3 million at the Orlando Hotel on capital improvements for
renovations and franchise brand conversions during the twelve months after
acquisition. The hotel properties and amounts are as follows:
<TABLE>
<CAPTION>
Hotel Anticipated Cost
---------- ----------------
<S> <C>
Holiday Inn Select - Madison $ 1,714,000
Holiday Inn Park Center Plaza 4,667,000
Fred Harvey Albuquerque Airport Hotel 5,017,000
Le Baron Airport Hotel 6,500,000
Days Inn Ocean City 1,905,000
Holiday Inn Mission Valley 2,505,000
Holiday Inn New Orleans International Airport 2,295,000
Days Inn Hotel & Suites - Orlando 9,300,000
===========
Total Expenditures $33,903,000
===========
</TABLE>
In addition, the Company expects to spend up to $2.6 million
on additional capital improvements during the twelve months after acquisition in
connection with certain renovations and improvements at properties that will not
undergo a conversion of franchise brands.
Through September 30, 1996, the Company spent approximately
$3.9 million on the franchise conversions and other capital improvements.
There can be no assurance that the Company will be able to
complete the scheduled capital improvements within the twelve months after
acquisition or that the anticipated costs for the capital improvements will not
exceed the amounts budgeted for that purpose. The Company intends to use
borrowings under the Line of Credit and the FF&E reserve established under the
Participating Leases to fund these expenditures.
33
<PAGE>
Inflation
Operators of hotels, in general, possess the ability to adjust
room rates quickly. Competitive pressures may, however, limit the Lessee's
ability to raise room rates in the face of inflation.
Seasonality
The hotel industry is seasonal in nature. Generally, hotel
revenue is greater in the second and third quarters of a calendar year, although
this may not be true for hotels in major tourist destinations. Revenue for
hotels in tourist areas generally is substantially greater during the tourist
season than other times of the year. Seasonal variations in revenue at the
Hotels may cause quarterly fluctuations in the Company's lease revenue.
34
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Form 27 - Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated October
22, 1996 reporting that the Company acquired 100.0% of the
limited and general partnership interests in the Days Inn
Lake Buena Vista Partnership, L.P., which owns the 490 room
Days Inn Hotel and Suites in Orlando, Florida.
35
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 14, 1996
AMERICAN GENERAL HOSPITALITY CORPORATION
By: /s/ Kenneth E. Barr
-------------------------------------------
Kenneth E. Barr
Executive Vice President,
Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,186,235
<SECURITIES> 0
<RECEIVABLES> 4,100,406
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 178,490,505
<DEPRECIATION> 2,876,692
<TOTAL-ASSETS> 187,860,092
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 82,620
<OTHER-SE> 127,316,778
<TOTAL-LIABILITY-AND-EQUITY> 187,860,092
<SALES> 0
<TOTAL-REVENUES> 5,250,753
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,063,579
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 347,622
<INCOME-PRETAX> 2,294,450
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,294,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,294,450
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
