AMERICAN GENERAL HOSPITALITY CORP, 10-Q, 1997-05-15

AMERICAN GENERAL HOSPITALITY CORP
10-Q, 1997-05-15
REAL ESTATE INVESTMENT TRUSTS

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<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 March 31, 1997 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 of American
General Hospitality Corporation, outstanding on May 14, 1997, was 14,657,141.

1 of 30
<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 filings 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 Sheets - March 31, 1997 (unaudited)
and December 31, 1996 (audited).............................. 3

Consolidated Statement of Operations for the Three Months
Ended March 31, 1997 (unaudited)............................. 4

Consolidated Statement of Shareholders' Equity for the
Three Months Ended March 31, 1997 (unaudited)................ 5

Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1997 (unaudited)............................. 6

Notes to Consolidated Financial Statements.................... 8

Pro Forma Consolidated Balance Sheet - March 31, 1997
(unaudited).................................................. 13

Pro Forma Consolidated Statement of Operations for the
Three Months Ended March 31, 1997 (unaudited)................ 14

AGH LEASING, L.P. (the "Lessee")

Balance Sheet - March 31, 1997 (unaudited) and
December 31, 1996 (audited).................................. 15

Statement of Operations for the Three Months Ended
March 31, 1997 (unaudited)................................... 16

Statement of Partners' Deficit for the Three Months
Ended March 31, 1997 (unaudited)............................. 17

Statement of Cash Flows for the Three Months Ended
March 31, 1997 (unaudited)................................... 18

Notes to Financial Statements................................. 19

Pro Forma Statement of Operations for the Three Months
Ended March 31, 1997 (unaudited)............................. 22

Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 23

PART II Other Information............................................. 29

Item 6 Exhibits and Reports on Form 8-K........................ 29

SIGNATURE 30

2
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEET
March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>

March 31, December 31,
1997 1996
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Investment in hotel properties
Land and land improvements............................ $ 25,648,025 $ 17,287,136
Buildings and improvements............................ 268,086,731 195,294,012
Furniture, fixtures and equipment..................... 14,473,534 11,505,892
Construction in progress.............................. 24,226,694 10,861,976
------------ ------------
332,434,984 234,949,016
Less: accumulated depreciation....................... (6,115,421) (4,188,198)
------------ ------------
Net investment in hotel properties.................... 326,319,563 230,760,818
Cash and cash equivalents............................. 34,233,988 3,888,281
Restricted cash....................................... 463,283 544,541
Participating Lease receivable - AGH Leasing, L.P..... 4,403,806 3,982,424
Deferred expenses, net................................ 3,447,043 2,986,946
Other assets.......................................... 831,499 664,661
Note receivable - Lessee.............................. 274,833 287,684
------------ ------------
Total assets..................................... $369,974,015 $243,115,355
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Debt.................................................. $ 36,717,670 $ 19,122,398
Debt, Line of Credit.................................. 1,000 57,500,000
Distributions payable................................. 6,745,811 4,150,729
Accounts payable, trade, accrued expenses and other
liabilities........................................ 10,170,054 5,756,097
Minority interest in Operating Partnership............ 36,379,040 29,125,020
------------ ------------
Total liabilities................................ 90,013,575 115,654,244
------------ ------------
Shareholders' equity:
Common stock $0.01 par value per share, 100,000,000
shares authorized, 14,657,141 shares issued and
outstanding........................................... 146,571 82,888
Additional paid-in capital............................ 283,078,776 128,746,013
Unearned officers' compensation....................... (828,334) (850,521)
Distributions in excess of accumulated earnings....... (2,436,573) (517,269)
------------ ------------
Total shareholders' equity....................... 279,960,440 127,461,111
------------ ------------
Total liabilities and shareholders' equity....... $369,974,015 $243,115,355
============ ============
</TABLE>

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

3
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1997
(unaudited)

<TABLE>

<S> <C>
Revenues
Participating Lease revenue..................................... $ 9,508,365

Interest income................................................. 394,713
-----------

Total revenue................................................. 9,903,078
-----------
Expenses

Depreciation.................................................... 1,931,390

Amortization of deferred loan costs............................. 173,958

Amortization of franchise fees.................................. 18,226

Amortization of other deferred expenses......................... 5,030

Real estate and personal property taxes and property insurance.. 1,250,117

General and administrative...................................... 502,391

Ground lease expense............................................ 314,462

Amortization of unearned officers' compensation................. 22,187

Interest expense................................................ 942,000
-----------

Total expenses................................................ 5,159,761
-----------

Income before minority interest.................................... 4,743,317

Minority interest.................................................. 689,836
-----------

Net income applicable to common stockholders....................... $ 4,053,481
===========

Net income per common share........................................ $ 0.34
===========

Weighted average number of shares of Common Stock outstanding...... 11,862,258
===========
</TABLE>

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

4
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1997
(unaudited)

Common Stock Distributions
--------------------- Additional Unearned in Excess of
Paid-In Officers' Accumulated
Shares Dollars Capital Compensation Earnings Total
---------- ------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 8,288,841 $ 82,888 $128,746,013 $(850,521) $ (517,269) $127,461,111

Issuance of common share, net of
offering expense and allocation
to minority interest ($7,332,705).. 6,368,300 63,683 154,332,763 154,396,446

Distributions declared March 13,
1997 ($0.4075 per share)........... (5,972,785) (5,972,785)

Amortization of unearned officers'
compensation....................... 22,187 22,187

Net income.......................... 4,053,481 4,053,481
---------- -------- ------------ --------- ----------- ------------

Balance at March 31, 1997........... 14,657,141 $146,571 $283,078,776 $(828,334) $(2,436,573) $279,960,440
========== ======== ============ ========= =========== ============
</TABLE>

5
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1997
(unaudited)

<TABLE>

<S> <C>
Cash flows from operating activities:
Net income..................................................... $ 4,053,481
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation.............................................. 1,931,390
Amortization.............................................. 219,401
Minority interest......................................... 689,836
Changes in assets and liabilities:
Restricted cash........................................... 81,258
Participating Lease receivable - AGH Leasing, L.P......... (421,382)
Organization costs and franchise fees..................... 42,688
Other assets.............................................. (166,838)
Accounts payable, accrued expenses and other liabilities.. 4,413,957
------------
Net cash flow provided by operating activities........ 10,843,791
------------
Cash flows from investing activities:
Purchase of hotel properties and related assets............... (66,391,502)
Improvements and additions to hotel properties................ (13,364,717)
Payments received on note receivable - AGH Leasing, L.P....... 12,851
------------
Net cash flow used in investing activities............ (79,743,368)
------------
Cash flows from financing activities:
Proceeds from borrowings...................................... 18,500,000
Net proceeds from public offering............................. 161,729,151
Principal payments on borrowings.............................. (76,133,138)
Distributions paid............................................ (4,150,729)
Payments for deferred loan costs.............................. (700,000)
------------
Net cash flow provided by financing activities........ 99,245,284
------------
Net change in cash and cash equivalents....................... 30,345,707
------------
Cash and cash equivalents as of December 31, 1996................. 3,888,281
------------
Cash and cash equivalents as of March 31, 1997.................... $ 34,233,988
============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... $ 1,185,586
============
Supplemental schedule of non-cash investing activities:
Purchase of hotel properties and related assets............... 84,120,911
Less debt assumed............................................. 17,729,409
Net cash used to purchase hotel properties and related assets. $ 66,391,502
============
</TABLE>

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

6
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND INITIAL PUBLIC OFFERING

American General Hospitality Corporation (the "Company") was incorporated
and formed on April 12, 1996 as a Maryland corporation qualifying as a real
estate investment trust ("REIT"). The Company commenced operations and completed
an Initial Public Offering (the "IPO") of 7,500,000 shares of its Common Stock
on July 31, 1996. 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. The offering price of all shares sold in the IPO was $17.75 per share,
resulting in net proceeds of approximately $129.3 million after deducting IPO
expenses.

On February 7, 1997 the Company completed a follow-on primary offering (the
"1997 Public Offering") of 5,800,000 shares of its Common Stock. An additional
568,300 shares of Common Stock were issued by the Company on March 7, 1997 upon
exercise of the underwriters' over-allotment option. The offering price of all
shares sold in the 1997 Public Offering was $27.25 per share, resulting in net
proceeds of approximately $161.7 million after deducting offering expenses.

The Company contributed all of the net proceeds of the IPO and the 1997
Public Offering to AGH GP, Inc. (the "General Partner") and AGH LP, Inc. (the
"Limited Partner"), which in turn, contributed such proceeds to American General
Hospitality Operating Partnership, L.P. (the "Operating Partnership") in
exchange for an approximate 88.5% aggregate 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 87.5% limited
partnership interest in the Operating Partnership.

In connection with the IPO, 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. ("AGHI") and principals of
the Lessee and certain of their respective affiliates (the "Primary
Contributors"). The remaining nine Initial Hotels (the "AGH Acquisition
Hotels") were acquired primarily from parties unaffiliated with the Primary
Contributors. In addition, the Company acquired interests in five of the
Initial Hotels from the AGHI Employee Retirement Savings Plan (the "Retirement
Plan") in exchange for 137,008 shares of restricted common stock.

Also on July 31, 1996 the Operating Partnership acquired directly or
indirectly the remaining equity interests in each of the Initial Hotels for an
aggregate of 1,896,996 units of limited partnership interest in the Operating
Partnership ("OP Units") (560,178 OP Units to the Primary Contributors 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.

Subsequent to the IPO, the Company has acquired the following hotels:

<TABLE>
<CAPTION>
ACQUISITION DATE HOTEL ACQUISITION PRICE
- ---------------- ----- -----------------
<S> <C> <C>
October 22, 1996 490-room Days Inn in Lake Buena Vista, Florida ("Days Inn $33.2 million
Lake Buena Vista")
November 21, 1996 204-room Holiday Inn Resort in Monterey, California ("Holiday $15.8 million
Inn Resort Monterey")
January 8, 1997 152-room Hilton Hotel in Durham, North Carolina ("Hilton $12.4 million
Hotel Durham")
February 28, 1997 201-room Radisson Hotel in Arlington Heights, Illinois $11.8 million
("Radisson Hotel Arlington Heights")
March 17, 1997 219-room Wyndham Garden Hotel in Marietta, Georgia $17.3 million
("Wyndham Garden Hotel Marietta")
March 17, 1997 200-room Sheraton in Key Largo, Florida ("Sheraton Key $26.3 million
Largo")
</TABLE>

7
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
ACQUISITION DATE HOTEL ACQUISITION PRICE
- ---------------- ----- -----------------
<S> <C> <C>
March 17, 1997 155-room DoubleTree Guest Suites in Atlanta, Georgia $16.3 million
("DoubleTree Guest Suites Atlanta")
April 1, 1997 249-room Holiday Inn in Phoenix, Arizona ("Holiday Inn $16.0 million
Corporate Center Phoenix")
April 18, 1997 226-room Hilton Hotel in Grand Rapids, Michigan ("Hilton $16.9 million
Airport Hotel Grand Rapids")
</TABLE>

At March 31, 1997, the Company owned 20 hotels consisting, of the Initial
Hotels, the Days Inn Lake Buena Vista, the Holiday Inn Resort Monterey, the
Hilton Hotel Durham, the Radisson Hotel Arlington Heights, the DoubleTree Guest
Suites Atlanta, the Wyndham Garden Hotel Marietta and the Sheraton Key Largo
(collectively the "Current Hotels"). All of the Current Hotels were leased to
AGH Leasing, Inc. (the "Lessee") which is owned, in part, by certain officers of
the Company, under operating leases providing for the payment of participating
rent based on the revenues of the Current Hotels (the "Participating Leases").
The Lessee has entered into management agreements pursuant to which 19 of the
Current Hotels are managed by AGHI and the one remaining hotel is managed by
Wyndham Hotel Corporation.

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, the Lessee and the AGH Predecessor Hotels included in the Company's
Form 10-K for the fiscal year ended December 31, 1996 (the "10-K"). The notes to
the financial statements included herein highlight significant changes to the
notes included in the 10-K 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 adjustments are of a normal and recurring nature.

2. DISTRIBUTIONS PAYABLE

On March 13, 1997, the Company declared a distribution of $0.4075 per share
for the first quarter payable on April 30, 1997 to shareholders of record on
April 15, 1997.

3. DEBT OBLIGATIONS

Debt outstanding at December 31, 1996 remained outstanding for the first
quarter of 1997. The following debt was assumed in connection with the Radisson
Hotel Arlington Heights and the DoubleTree Guest Suites Atlanta acquisitions.

<TABLE>
<S> <C>
One year first mortgage note payable in monthly installments of
interest only at a fixed rate of 7.5%; maturing on February 28,
1998 at which time a balloon payment of $8,218,755 will be due
and payable; collateralized by the Radisson Hotel Arlington
Heights......................................................... $8,218,755

First mortgage note payable in monthly installments at a fixed
rate of 9.75%; maturing on July 1, 2002 at which time a balloon
payment of approximately $8,200,000 will be due and payable;
collateralized by the DoubleTree Guest Suites Atlanta........... $9,510,653
</TABLE>

Substantially all of the borrowings under the Line of Credit were repaid in
February, 1997, with a portion of the proceeds from the 1997 Public Offering.

4. COMMITMENTS AND CONTINGENCIES

The Company has a $150 million Line of Credit (the "Line of Credit") which
matures on July 31, 1999. At March 31, 1997, there was $1,000 outstanding on
the Line of Credit. The Line of Credit is with a consortium of banks led by

8
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Societe Generale, Southwest Agency and Bank One, Texas, N.A. The Line of Credit
is collateralized by, among other things, first mortgage liens on all of the
Current Hotels, other than the Holiday Inn Select Dallas DFW Airport South, the
Courtyard by Marriott Meadowlands, the Radisson Hotel Arlington Heights and the
DoubleTree Guest Suites Atlanta, which hotels collateralize other indebtedness.
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.

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 Hotel Maison de Ville or the Le Baron
Airport Hotel.

Nineteen of 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. The remaining hotel, the Wyndham Garden Hotel Marietta, is
managed by Wyndham Hotel Corporation under a similar agreement.

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.

The Company entered into an agreement for a license and an association
membership from one of the sellers of the Days Inn Lake Buena Vista which the
Company immediately assigned to the Lessee. Commencing January 1998, in
connection with the license and the association membership, the Lessee is
required to pay recurring association fees including a base monthly fee equal to
1.0% of the prior month's gross room revenues generated at the hotel, and an
additional fee of 0.5% to 1.0% of gross monthly revenues if the trailing twelve
month's gross room revenues at the hotel exceeds a threshold of approximately
$13 million, (subject to increase based on the percentage increase in the CPI).
In addition, the Lessee is obligated to pay a recurring royalty for the African
royal safari theme equal to an amount which ranges from 10% to 25% of net
operating income in excess of $6 million (subject to adjustment if the Operating
Partnership invests more than $40 million in the hotel). The Lessee is also
obligated to pay a marketing assistance fee equal to .25% of gross room
revenues. The marketing and association fees are not expected to exceed 2.25%
of gross room revenues for any twelve-month period. The association membership
agreement terminates in October 2008; the Lessee is obligated to pay liquidated
damages if the agreement is terminated earlier.

Participating Leases

The Lessee has future lease commitments to the Company under the
Participating Leases which expire from July 2008 to March 2009. Minimum future
rental income (i.e., base rents) under these noncancellable Participating Leases
at March 31, 1997 is as follows:

YEAR AMOUNT
---- ------
<S> <C>
Remainder of 1997................................ $ 25,035,906
1998............................................. 34,787,816
1999............................................. 35,988,684
2000............................................. 37,229,872
2001 and thereafter.............................. 322,456,680
------------

Total........................................ $455,498,958
============
</TABLE>

9
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At March 31, 1997, the Lessee owed the Company $4,403,806 for such lease
rent which the Lessee expects to pay in April, 1997.

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 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 Current Hotels. At March 31, 1997, actual capital expenditures were greater
than the amount required to be reserved.

Ground Leases

Five of the Current 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 Wyndham Hotel Albuquerque Airport 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 Wyndham Hotel
Albuquerque Airport for the twelve months ended March 31, 1997 was 76.6%.

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 San Jose 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.

The Sheraton Key Largo is subject to a ground lease with respect to 42,500
square feet of off-shore bay bottom land in the Florida Bay on which a
commercial marina is operated pursuant to a lease from the Board of Trustees of
the Internal Improvement Trust Fund of the State of Florida, as Lessor. The
lease terminates in May, 2021 and requires an annual lease fee of approximately
$3,100.

10
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Minimum future rental payments for the ground leases to be paid by Company
at March 31, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
Remainder of 1997............................... $ 278,640
1998............................................ 364,516
1999............................................ 369,966
2000............................................ 375,825
2001 and thereafter............................. 18,456,301
-----------
Total................................. $19,845,248
===========
</TABLE>

5. 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 March
31, 1996 and condensed combined statements of operations and cash flows
information of AGH Predecessor Hotels for the three months ended March 31, 1996,
which is considered to be the predecessor of the Company.

AGH PREDECESSOR HOTELS MARCH 31, 1996
--------------
<S> <C>
Balance Sheet Information:

Investments in hotel properties, net.......... 22,848,146
Cash and cash equivalents..................... 845,258
Total assets.................................. 25,115,004
Debt.......................................... 19,972,015
Total liabilities............................. 20,916,698
Total equity.................................. 4,198,306

Statement of Operations Information:

Room revenue.................................. $ 2,624,614
Other revenue................................. 682,781
-----------
Total revenue.............................. 3,307,395

Hotel operating expenses...................... 2,253,656
Depreciation and amortization................. 304,936
Interest expense.............................. 457,146
Other expenses................................ 163,058
-----------
Net income................................. $ 128,599
===========

Statement of Cash Flows Information:

Net cash used in operating activities......... $ (40,887)
Net cash used in investing activities......... $ (718,482)
Net cash provided by financing activities..... $ 747,019
</TABLE>

11
<PAGE>

6. SUBSEQUENT EVENTS

On April 1, 1997, the Operating Partnership purchased the 249-room Holiday
Inn Corporate Center in Phoenix, Arizona from an unrelated third party. The
acquisition cost of approximately $16.0 million was provided by cash on hand
from the 1997 Public Offering.

On April 18, 1997, the Operating Partnership purchased the 226-room Hilton
Airport Hotel in Grand Rapids, Michigan from an unrelated third party. The
acquisition cost of approximately $16.9 million was provided by cash on hand
from the 1997 Public Offering and borrowings from the Line of Credit.

On April 14, 1997, the Company announced that it had signed a contract to
purchase the 296-room Hilton Hotel in Cocoa Beach, Florida. The acquisition
cost of approximately $21.9 million will be provided by borrowings from the Line
of Credit and issuance of Limited Partnership Units in the Operating
Partnership. The acquisition is contingent upon the completion and satisfactory
results of business and financial due diligence review.

7. PRO FORMA INFORMATION (UNAUDITED)

The following unaudited pro forma consolidated statement of operations for
the three months ended March 31, 1997 is presented as if the acquisition of the
20 Current Hotels owned as of March 31, 1997, the acquisition of the Holiday Inn
Corporate Center Phoenix, the acquisition of the Hilton Airport Hotel Grand
Rapids, (together with the Current Hotels the "Hotels") the IPO and the 1997
Public Offering had occurred at the beginning of the periods presented and all
of the Hotels had been leased to the Lessee pursuant to the Participating
Leases. Such pro forma information is based in part upon the Statement 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.

In management's opinion, all adjustments necessary to reflect the effects
of the transactions previously described have been made. The pro forma
information does not purport to present what actual results of operations would
have been if the acquisitions and the consummation of the IPO had occurred on
such date or to project results for any future period.

12
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1997
(unaudited)

<TABLE>
<CAPTION>
HOTELS
ACQUIRED
COMPANY SUBSEQUENT PRO FORMA
HISTORICAL TO QUARTER END BALANCE SHEET
------------ -------------- -------------
<S> <C> <C> <C>
ASSETS

Investment in hotel properties, net.......... $326,319,563 $ 32,900,000 $359,219,563
Cash and cash equivalents.................... 34,233,988 (32,975,000) 1,258,988
Restricted cash.............................. 463,283 463,283
Accounts receivable, net..................... 4,403,806 4,403,806
Deferred expenses, net....................... 3,447,043 75,000 3,522,043
Other assets................................. 831,499 831,499
Advances to Lessee........................... 274,833 274,833
------------ ------------ ------------
Total assets............................ $369,974,015 $ $369,974,015
============ ============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY

Debt......................................... $ 36,717,670 $ 36,717,670
Debt, Line of Credit......................... 1,000 1,000
Distributions payable........................ 6,745,811 6,745,811
Accounts payable, trade, accrued
expenses and other liabilities............. 10,170,054 10,170,054
Minority interest in Operating Partnership... 36,379,040 36,379,040
------------ ------------ ------------
Total Liabilities....................... 90,013,575 90,013,575
------------ ------------ ------------
Common Stock................................. 146,571 146,571
Additional paid-in capital................... 283,078,776 283,078,776
Unearned officers' compensation.............. (828,334) (828,334)
Distributions in excess of accumulated
earnings.................................... (2,436,573) (2,436,573)
------------ ------------ ------------
Total shareholders' equity.............. 279,960,440 279,960,440
------------ ------------ ------------
Total liabilities and shareholders'
equity................................ $369,974,015 $369,974,015
============ ============ ============
</TABLE>

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

13
<PAGE>

AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1997
(unaudited)

<TABLE>
<CAPTION>
HISTORICAL HOTELS
THREE MONTHS ACQUIRED
ENDED PRO FORMA CURRENT SUBSEQUENT COMBINED
MARCH 31, 1997 ADJUSTMENTS HOTELS TO QUARTER END PRO FORMA
-------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues

Participating lease revenue........... $ 9,508,365 $1,836,549 $11,344,914 $1,054,623 $12,399,537
Interest income....................... 394,713 394,713 394,713
----------- ---------- ----------- ----------- ------------
Total revenue.................. 9,903,078 1,836,549 11,739,627 1,054,623 12,794,250
----------- ---------- ----------- ----------- ------------
Expenses

Depreciation.......................... 1,931,390 501,655 2,433,045 232,831 2,665,876
Amortization.......................... 197,214 2,513 199,727 1,875 201,602
Real estate and personal property
taxes and property insurance........ 1,250,117 246,144 1,496,261 157,138 1,653,399
General and administrative............ 502,391 502,391 502,391
Ground lease expense.................. 314,462 314,462 314,462
Amortization on unearned
officers' compensation.............. 22,187 22,187 22,187
Interest expense...................... 942,000 302,098 1,244,098 1,244,098
----------- ---------- ----------- ----------- ------------
Total expenses................. 5,159,761 1,052,410 6,212,171 391,844 6,604,015
----------- ---------- ----------- ----------- ------------

Income before minority interest.......... 4,743,317 784,139 5,527,456 662,779 6,190,235
Minority interest........................ 689,836 635,657 711,876
----------- ----------- ------------

Net income applicable to common
shareholders.......................... $ 4,053,481 $ 4,891,799 $ 5,478,359
=========== =========== ============
Per common share information:
Net income per common share.............. $ 0.34 $ 0.33 $ 0.37
=========== =========== ============
Weighted average number of
Common shares outstanding............. 11,862,258 14,657,141 14,657,141
=========== =========== ============
</TABLE>

14
<PAGE>

AGH LEASING, L.P.
BALANCE SHEET
March 31, 1997 and December 31, 1996
(unaudited)

<TABLE>
<CAPTION>
ASSETS

Investments in hotel properties, at cost MARCH 31, DECEMBER 31,
----------- -----------
1997 1996
---- ----
<S> <C> <C>
Furniture, fixtures and equipment............................ $ 315,000 $ 315,000
Less accumulated depreciation................................ (42,000) (26,250)
----------- -----------
Net investment in hotel properties................................ 273,000 288,750
Cash and cash equivalents......................................... 4,925,399 5,673,232
Accounts receivable, net of allowance for
doubtful accounts of $15,410.................................... 4,190,607 2,822,936
Inventories....................................................... 594,300 448,234
Prepaid expenses.................................................. 509,150 553,400
Deferred expenses................................................. 184,236 194,287
Other assets...................................................... 161,104 47,985
----------- -----------
Total assets............................................ $10,837,796 $10,028,824
=========== ===========

LIABILITIES AND PARTNERS' DEFICIT

Accounts payable, trade........................................... $ 1,474,903 $ 1,054,902
Participating rent payable, American General
Hospitality Operating Partnership, L.P.......................... 4,398,702 3,979,242
Note payable to American General Hospitality
Operating Partnership, L.P...................................... 274,833 287,684
Accrued expenses and other liabilities............................ 4,167,897 4,198,035
Deferred income................................................... 1,150,001 730,000
----------- -----------
Total liabilities....................................... 11,466,336 10,249,863
=========== ===========
Commitments and contingencies (Notes 1 and 2)
Partners' capital................................................. 500,000 500,000
Accumulated deficit............................................... (1,128,540) (721,039)
----------- -----------
Total Partners' deficit................................. (628,540) (221,039)
----------- -----------
Total liabilities and partners' deficit................. $10,837,796 $10,028,824
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.

15
<PAGE>

AGH LEASING, L.P.
STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1997
(unaudited)

<TABLE>
<S> <C>
Revenue

Room revenue........................... $19,465,968

Food and beverage revenue.............. 5,197,244

Other revenue.......................... 1,305,853
-----------
Total revenue..................... 25,969,065
-----------

Expenses

Property operating costs and expenses.. 5,340,286

Food and beverage costs and expenses... 4,239,312

General and administrative............. 2,475,288

Advertising and promotion.............. 1,820,589

Repairs and maintenance................ 1,032,093

Utilities.............................. 1,147,891

Management fees........................ 82,854

Franchise costs........................ 676,148

Depreciation........................... 15,750

Amortization........................... 10,052

Interest expense....................... 7,192

Other expense.......................... 20,746

Participating Lease expenses........... 9,508,365
-----------

Total expenses.................... 26,376,566
-----------

Net loss.......................... $ (407,501)
===========
</TABLE>

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

16
<PAGE>

AGH LEASING, L.P.
STATEMENT OF PARTNERS' DEFICIT
For the Three Months Ended March 31, 1997
(unaudited)

<TABLE>

<S> <C>
Balance at December 31, 1996......................... $(221,039)

Net loss............................................. (407,501)
---------

Balance at March 31, 1997............................ $(628,540)
=========
</TABLE>

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

17
<PAGE>

AGH LEASING, L.P.
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1997
(unaudited)

<TABLE>
<S> <C>
Cash flow from operating activities:

Net loss.................................................................................... $ (407,501)

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation............................................................................. 15,750

Amortization............................................................................. 10,052

Changes in assets and liabilities:

Accounts receivable.................................................................... (1,367,672)

Inventories............................................................................ (146,066)

Prepaid expenses....................................................................... 44,250

Other assets........................................................................... (113,119)

Accounts payable, trade................................................................ 420,001

Participating Lease payable, American General Hospitality Operating Partnership, L.P... 419,460

Accrued expenses and other liabilities................................................. (30,138)

Deferred income........................................................................ 420,001
-----------
Net cash provided by operating activities.............................................. (734,982)

Cash flows from financing activities:

Principal payments on borrowings............................................................ (12,851)
-----------

Net change in cash and cash equivalents.......................................................... (747,833)

Cash and cash equivalents at beginning of period................................................. 5,673,232
-----------

Cash and cash equivalents at end of period....................................................... $ 4,925,399
===========

Supplemental disclosures of cash flow information:

Cash paid during the period for interest.................................................... $ 7,192
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.

18
<PAGE>

AGH LEASING, L.P.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION

AGH Leasing, L.P. (the "Lessee"), is a Delaware limited partnership which
was formed on May 29, 1996 and commenced operations on July 31, 1996. The Lessee
is owned in part by certain executive officers of the American General
Hospitality Corporation (the "Company") and American General Hospitality, Inc.
("AGHI"). The Lessee leases each of the twenty hotels (the "Current Hotels")
owned by American General Hospitality Operating Partnership, L.P. (the
"Operating Partnership") at March 31, 1997 pursuant to operating leases
("Participating Leases") which provide for rent based on the revenues of the
Current Hotels.

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., the Lessee must obtain the prior written
consent of the Operating Partnership, which consent may not be unreasonably
withheld. The Lessee has entered into management agreements pursuant to which
nineteen of the Current Hotels are managed by AGHI and the remaining Current
Hotel is managed by Wyndham Hotel Corporation.

The Lessee's results of operations are seasonal. The aggregate room
revenues in the second and third quarters of each fiscal year may be higher than
room revenues in the first quarter and fourth quarter of each fiscal year.
Consequently, the Lessee may have net income in the second and third quarters
and may have a net loss in the first and fourth quarters.

Upon consummation of the Company's Initial Public Offering (the "IPO"), the
partners of the Lessee capitalized the Lessee with $500,000 cash and pledged
275,000 units of limited partnership interest in the Operating Partnership ("OP
Units") to the Company to collateralize the Lessee's obligations under the
Participating Leases.

2. COMMITMENTS AND CONTINGENCIES

Nineteen of the Current 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.

The remaining Current Hotel, the Wyndham Garden Hotel Marietta, is managed
by Wyndham Hotel Corporation ("WHC") on behalf of the Lessee. The Lessee pays
WHC a base management fee equal to 1.5% of gross revenues at the Hotel plus an
incentive management fee of up to 1.5% of gross revenues. The incentive fee, if
applicable, will be earned if gross revenues exceed certain year over year
thresholds.

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 paid
by the Lessee.

19
<PAGE>

AGH LEASING, L.P.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Company entered into an agreement for a license and an association
membership from one of the sellers of the Days Inn Lake Buena Vista which the
Company immediately assigned to the Lessee. Commencing January 1998, in
connection with the license and the association membership, the Lessee is
required to pay recurring association fees including a base monthly fee equal to
1.0% of the prior month's gross room revenues generated at the hotel, and an
additional fee of 0.5% to 1.0% of gross monthly revenues if the trailing twelve
month's gross room revenues at the hotel exceeds a threshold of approximately
$13 million, (subject to increase based on the percentage increase in the
Consumer Price Index ("CPI")). In addition, the Lessee is obligated to pay a
recurring royalty for the African royal safari theme equal to an amount which
ranges from 10% to 25% of net operating income in excess of $6 million (subject
to adjustment if the Operating Partnership invests more than $40 million in the
hotel). The Lessee is also obligated to pay a marketing assistance fee equal to
.25% of gross room revenues. The marketing and association fees are not
expected to exceed 2.25% of gross room revenues for any twelve-month period.
The association membership agreement terminates in October 2008; the Lessee is
obligated to pay liquidated damages if the agreement is terminated earlier.

The Lessee has future lease commitments to the Company under the
Participating Leases which have various expiration dates between July 2008 to
March 2009. The Participating Lease expenses are based on percentages of room
revenues, food and beverage revenues and telephone and other revenues. The
departmental revenue thresholds in the Participating Leases are seasonally
adjusted for interim periods and the Participating Lease formulas adjusted
effective January 1, 1997 by a percentage equal to the percentage increase in
the Consumer Price Index plus .75% as compared to the prior year. Additionally,
several of the Current Hotels will have further adjustments to the Participating
Lease formulas due to the significant renovations expected to be completed in
those hotels in 1997. Minimum future rental expense (i.e. base rents) under
these noncancellable Participating Leases is as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
Remainder of 1997........................................ $ 25,035,906
1998..................................................... 34,787,816
1999..................................................... 35,988,684
2000..................................................... 37,229,872
2001 and thereafter...................................... 322,456,680
------------
Total.......................................... $455,498,958
============
</TABLE>

3. SUBSEQUENT EVENTS

On April 1, 1997, the Lessee and the Operating Partnership entered into a
12-year Participating Lease on the 249-room Holiday Inn Corporate Center in
Phoenix, Arizona which was acquired by the Operating Partnership.

On April 18, 1997, the Lessee and the Operating Partnership entered into a
12-year Participating Lease on the 226-room Hilton Airport Hotel in Grand
Rapids, Michigan which was acquired by the Operating Partnership.

These Participating Leases are substantially similar to the leases with the
Operating Partnership for all other hotels owned by the Operating Partnership.
The Lessee has entered into management agreements with AGHI to manage these
hotels on terms substantially similar to all other agreements between AGHI and
the Lessee.

20
<PAGE>

AGH LEASING, L.P.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

On April 14, 1997, the Company announced that it had signed a contract to
purchase the 296-room Hilton Hotel in Cocoa Beach, Florida. The Lessee will
operate this hotel under a Participating Lease substantially similar to all
other Participating Leases between the Lessee and the Operating Partnership.
The Lessee will enter into an agreement with AGHI to manage this hotel. The
acquisition is contingent upon the completion and satisfactory results of the
business and financial due diligence.

4. PRO FORMA INFORMATION (UNAUDITED)

The following unaudited pro forma statement of operations for the three
months ended March 31, 1997 is presented as if the acquisition of the 20 Current
Hotels owned as of March 31, 1997, the acquisition of the Holiday Inn Corporate
Center Phoenix, the acquisition of the Hilton Airport Hotel Grand Rapids, the
IPO and the 1997 Public Offering had occurred at the beginning of the period
presented and all of the Hotels had been leased to the Lessee pursuant to the
Participating Leases. Such pro forma information is based in part upon the
Statement 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.

In management's opinion, all adjustments necessary to reflect the effects
of the transactions previously described have been made. The pro forma
information does not purport to present what actual results of operations would
have been if the acquisitions and the consummation of the IPO and the 1997
Public Offering had occurred on such date or to project results for any future
period.

21
<PAGE>

AGH LEASING, L.P.

PRO FORMA STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1997

<TABLE>
<CAPTION>
HOTELS
HISTORICAL ACQUIRED
JANUARY 1, 1997 MANAGEMENT TOTAL SUBSEQUENT MANAGEMENT COMBINED
THROUGH PROFORMA FEE CURRENT TO MARCH 31, FEE PROFORMA
MARCH 31, 1997 ADJUSTMENTS ADJUSTMENT HOTELS 1997 ADJUSTMENT March 31, 1997
--------------- ----------- ---------- ----------- ------------ ---------- ---------------

<S> <C> <C> <C> <C> <C> <C> <C>
Revenue

Room revenue..................... $19,465,968 $4,078,134 $23,544,102 $2,649,178 $26,193,280
Food and beverage revenue........ 5,197,244 1,120,052 6,317,296 1,176,131 7,493,427
Other revenue.................... 1,305,853 233,467 1,539,320 155,114 1,694,434
----------- ---------- --------- ----------- ---------- --------- -----------
Total revenue............. 25,969,065 5,431,653 31,400,718 3,980,423 35,381,141
----------- ---------- --------- ----------- ---------- --------- -----------
Expenses

Property operating costs
and expenses................. 5,340,286 950,601 6,290,887 684,234 6,975,121
Food and beverage costs
and expenses................. 4,239,312 914,558 5,153,870 838,912 5,992,782
General and administrative..... 2,475,288 390,212 2,865,500 292,622 3,158,122
Advertising and promotion...... 1,820,589 309,073 2,129,662 190,735 2,320,397
Repairs and maintenance........ 1,032,093 274,521 1,306,614 133,193 1,439,807
Utilities...................... 1,147,891 290,267 1,438,158 139,396 1,577,554
Management fees................ 82,854 96,380 261,027 440,261 118,898 230,264 789,423
Franchise costs................ 676,148 77,106 753,254 140,368 893,622
Depreciation................... 15,750 15,750 15,750
Amortization................... 10,052 10,052 10,052
Interest expense............... 7,192 7,192 7,192
Other expense.................. 20,746 31,359 52,105 27,063 79,168
Participating Lease
expenses..................... 9,508,365 1,836,549 11,344,914 1,054,623 12,399,537
----------- ---------- --------- ----------- ---------- --------- -----------

Total expenses.......... 26,376,566 5,170,626 261,027 31,808,219 3,620,044 230,264 35,658,527
----------- ---------- --------- ----------- ---------- --------- -----------

Net loss................ $ (407,501) $ 261,027 $(261,027) $ (407,501) $ 360,379 $(230,264) $ (277,386)
=========== ========== ========= =========== ========== ========= ===========
</TABLE>

The accompanying notes are an integral part of these financial statements

22
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW AND RECENT DEVELOPMENTS

The following should be read in conjunction with the Company's consolidated
financial statements included elsewhere in this report.

On July 31, 1996, the Company completed its IPO of 8,075,000 shares of
Common Stock (including 575,000 shares of common stock issued upon exercise of
the underwriters' over-allotment option on August 28, 1996) and contributed
substantially all of the net proceeds from the IPO in exchange for an
approximate 81.3% interest in the Operating Partnership.

The Operating Partnership used approximately $119.8 million of the net
proceeds from the IPO together with the proceeds of initial borrowings of $10.0
million under the Line of Credit (which was repaid upon the exercise of the
underwriters' over-allotment option) to acquire the thirteen Initial Hotels and
to repay existing mortgage indebtedness encumbering the Initial Hotels. In
addition, in connection with the IPO, the Company closed on its $100 million
Line of Credit that it utilizes primarily for the acquisition and renovation of
hotels, and for working capital.

On February 7, 1997, the Company completed the 1997 Public Offering of
6,368,300 shares of Common Stock (including 568,300 shares of Common Stock
issued upon exercise of the underwriters' over-allotment option on March 7,
1997). The Company contributed all of the net proceeds to the Operating
Partnership and, following such contribution, owned an approximate 88.5%
interest in the Operating Partnership. The Operating Partnership used the net
proceeds (i) to repay amounts borrowed under the Line of Credit, (ii) to pay
fees and expenses in connection with the increase in the borrowing limit under
the Line of Credit, (iii) to fund the cash portion of the purchase price of the
Radisson Hotel Arlington Heights and the Portfolio Purchase, (iv) for hotel
renovations and (v) for working capital purposes. Concurrent with the
completion of the 1997 Public Offering, the Company increased the borrowing
limit on its Line of Credit to $150 million.

Consistent with the Company's acquisition strategy, the Company has
acquired the following hotels since the IPO for the purchase prices (including
closing costs) set forth below:

<TABLE>
<S> <C>
Days Inn Lake Buena Vista........................... $ 33,150,000
Holiday Inn Resort Monterey......................... 15,790,000
Hilton Hotel Durham................................. 12,400,000
Radisson Hotel Arlington Heights.................... 11,818,755
Wyndham Garden Hotel Marietta....................... 17,300,000
DoubleTree Guest Suites Atlanta..................... 16,300,000
Sheraton Key Largo.................................. 26,375,000
Holiday Inn Corporate Center Phoenix................ 16,000,000
Hilton Airport Hotel Grand Rapids................... 16,900,000
------------
Total..................................... $166,033,755
============
</TABLE>

In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership can operate hotels. The Operating Partnership leases the
Hotels to the Lessee for terms of twelve years pursuant to separate
Participating Leases providing for the payment of base rent and participating
rent. The principal source of revenue for the Operating Partnership and the
Company is lease payments paid by the Lessee under the Participating Leases. The
Lessee's ability to make payments to the Operating Partnership under the
Participating Leases is dependent on the ability of the Lessee, AGHI and any
other lessees or operators to generate cash flow from the operations of the
Hotels. The Lessee has entered into management agreements whereby 21 of the
Hotels are managed by AGHI and the remaining Hotel is managed by Wyndham Hotel
Corporation. The management agreements are for a period of twelve years from
the date each Hotel was acquired.

23
<PAGE>

RESULTS OF OPERATIONS

Actual for the Three Months Ended March 31, 1997

The Company earned $9,508,365 in Participating Lease revenue from the
Lessee. Interest income, which was $394,713 for the period, consisted primarily
of income earned on excess cash balances from the 1997 Public Offering. The
excess cash balances were used to fund two hotel acquisitions subsequent to
March 31, 1997. Depreciation of the Company's investment in hotel properties
was $1,931,390. Amortization, consisting primarily of deferred financing costs
and franchise transfer fees, was $197,214 and real estate and personal property
taxes and insurance was $1,250,117. The Company reported $942,000 of interest
expense for the period which consists of $305,699 attributable to the
indebtedness on the Holiday Inn Dallas DFW Airport South, $100,074 attributable
to the indebtedness on the Courtyard by Marriott-Meadowlands, $51,367
attributable to the indebtedness on the Radisson Hotel Arlington Heights,
$33,459 attributable to the indebtedness on the DoubleTree Guest Suites Atlanta
and $451,401 attributable to the borrowings on the Line of Credit, net of
capitalized interest. The borrowings on the Line of Credit include the $76
million borrowed after the IPO and prior to the 1997 Public Offering for
property acquisitions, renovations and working capital needs. Substantially all
of the balance of the Line of Credit, ($76 million) was repaid with the proceeds
from the 1997 Public Offering. A $1,000 balance was left outstanding to allow
for mortgage debt restrictions in certain States. The minority interest in
income was $689,836 and the resulting net income applicable to the common
stockholders was $4,053,480 for the period.

Pro Forma for the Three Months Ended March 31, 1997

Pro forma revenues for the three months ended March 31, 1997, would have
been $12,794,250 consisting of Participating Lease revenues from the Hotels of
$12,399,537 and interest income earned on excess cash balances of $394,713. Pro
forma expenses for the period consist of: depreciation expense of $2,665,876;
real estate and personal property taxes and insurance of $1,653,399; general and
administrative expenses of $502,391; ground lease expense of $314,462; and
amortization expense relating to deferred expenses of $201,602. Also included
in pro forma expense is the interest expense of $1,244,098 relating to the Line
of Credit and the mortgage indebtedness assumed relating to: the Holiday Inn
Select Dallas DFW South of approximately $14.0 million, 8.75% interest rate; the
Courtyard by Marriott Meadowlands of approximately $5.1 million, 7.54% average
interest rate; the Radisson Hotel Arlington Heights of approximately $8.2
million, 7.5% interest rate; and the DoubleTree Guest Suites Atlanta
approximately $9.6 million, 9.75% interest rate.

Funds From Operations

Actual Funds From Operations for the three months ended March 31, 1997,
calculated using the NAREIT definition of Funds From Operations, was $5,703,983,
which is the sum of net income applicable to common stockholders and the
Company's share of depreciation.

The Company considers Funds From Operations to be a key 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 an alternative
to cash flows from operating, investing or financing activities as a measure of
liquidity.

The following is a reconciliation of pro forma net income applicable to
common stockholders to Pro Forma Funds From Operations and illustrates the
difference in the two measures of operating performance:

24
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1996
--------------
<S> <C>
Pro forma net income applicable to common stockholders....... $ 5,478,359
Depreciation (Company share)................................. 2,359,300
------------
Funds From Operations........................................ $ 7,837,659
============

Weighted Average Number of shares of Common Stock
Outstanding................................................ 14,657,141
</TABLE>

THE LESSEE

Actual for the Three Months Ended March 31, 1997

The Lessee had room revenues of $19,465,968 from the Current Hotels. The
Participating Lease payments and property operating costs and expenses were
$9,508,365 and $16,868,201, respectively. Net loss for the period was $407,501.

Pro Forma Operations for the Three Months Ended March 31, 1997

The following table sets forth pro forma financial information for the
Lessee, as a percentage of revenue, for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1997
--------------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Room revenue................................................ 74.0%
Food and beverage revenue................................... 21.2
Other revenue............................................... 4.8
-----
Total revenue..................................... 100.0

Hotel operating expenses.................................... 65.4
Other corporate expenses.................................... 0.3
Participating lease expenses................................ 35.1
-----
Net loss................................. (0.8%)
=====
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1997
--------------
<S> <C>
Key Factors:
Occupancy............................................ 65.6%
ADR.................................................. $86.64
REVPAR............................................... $56.84
</TABLE>

25
<PAGE>

The following table sets forth room revenue for each of the Hotels:

<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS
ENDED
MARCH 31, 1997
--------------
<S> <C>
Hotels:

Holiday Inn Dallas DFW Airport West................... $ 1,055,576
Courtyard by Marriott Meadowlands..................... 1,123,247
Hampton Inn Richmond Airport.......................... 547,378
Hotel Maison de Ville................................. 410,664
Hilton Hotel-Toledo................................... 858,748
Holiday Inn Select Dallas DFW Airport South........... 1,967,669
Holiday Inn Select New Orleans International Airport.. 1,814,385
Hampton Inn Ocean City................................ 160,317
Crowne Plaza Madison.................................. 1,255,397
Holiday Inn Park Center Plaza......................... 1,406,034
Wyndham Albuquerque Airport Hotel..................... 873,151
Le Baron San Jose Airport Hotel....................... 1,543,841
Holiday Inn Mission Valley............................ 1,169,269
Days Inn Lake Buena Vista............................. 2,412,705
Holiday Inn Resort Monterey........................... 909,249
Hilton Hotel Durham................................... 862,403
Radisson Hotel Arlington Heights...................... 842,449
Wyndham Garden Hotel Marietta......................... 919,179
DoubleTree Guest Suites Hotel......................... 961,392
Sheraton Key Largo.................................... 2,451,049
Holiday Inn Corporate Center Phoenix.................. 1,549,294
Hilton Airport Hotel Grand Rapids..................... 1,099,884
-----------

Total (All Hotels).................................. $26,193,280
===========
</TABLE>

For the three months ended March 31, 1997, the Lessee had pro forma room
revenues of $26,193,280 from the Hotels and pro forma total revenues of
$35,381,141. Pro forma operating expenses were $23,258,988 and pro forma
Participating Lease payments were $12,399,537.

Pro forma net loss for the period was $277,386.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, is its share of the Operating
Partnership's cash flow from the Participating Leases. The Lessee's obligations
under the Participating Leases are also 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
stockholders, are substantially dependent on the ability of the Lessee, AGHI and
other operators and managers to generate sufficient cash flow from the operation
of the Hotels.

During the quarter ended March 31, 1997, the Company completed the 1997
Public Offering, producing net proceeds to the Company of $161.7 million. In
addition, on February 11, 1997, the Company increased its Line of Credit from
$100 million to $150 million. At March 31, 1997 the Company had $34.2 million in
cash and cash equivalents and $1,000 outstanding under the Line of Credit. The
Company's borrowing capacity under the Line of Credit is approximately $112
million. Prior to the 1997 Public Offering, the Company had borrowed
approximately $76 million to fund the

26
<PAGE>

acquisitions of the Days Inn Lake Buena Vista, the Holiday Inn Resort Monterey
and the Hilton Hotel Durham, to finance the renovations at the Hotels and for
working capital purposes. Substantially all of the borrowings under the Line of
Credit were repaid in February 1997 with a portion of the proceeds from the 1997
Public Offering. Borrowings under the Line of Credit bear interest at 30-day,
60-day or 90-day LIBOR (5.69%, 5.72% and 5.77% at March 31, 1997) 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. While no definitive agreements with respect
to the acquisition of any additional hotels has been entered into, the Company
expects that during 1997 additional acquisitions will be completed and funded
with borrowings under the Line of Credit or permanent debt or equity financing.
The Line of Credit requires the Company to limit consolidated indebtedness
(measured at the time the debt is incurred) to no more than 45.0% of the
Company's investments in hotels.

Cash and cash equivalents as of March 31, 1997 were $34,233,988.
Restricted cash of $463,283 includes escrow deposits on the Holiday Inn Select
Dallas DFW Airport South hotel as required by its loan agreement and an escrow
deposit used to pay certain unused facility fees under the Line of Credit. Cash
flow from operating activities of the Company was $10,843,791 for three months
ended March 31, 1997, which primarily represents the collection of rents under
the Participating Leases, less the Company's operating expenses for the period,
adjusted for changes in other working capital components. Cash flow used in
investing activities during that period in the amount of $79,743,368 resulted
from the purchase of and improvements made to the Hotels. Cash flows from
financing activities of $99,245,284 during this period was primarily related to
the receipt of proceeds from the IPO and borrowings on the Line of Credit, net
of principal payments on borrowings and payments for deferred loan costs.

RENOVATIONS AND OTHER CAPITAL IMPROVEMENTS

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 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.

The Company has budgeted $72.6 million to fund capital improvements and
renovations at the Hotels. As of March 31, 1997, the Company had spent
approximately $24.2 million on capital improvements and renovations and the
Company has budgeted to spend approximately $48.4 million of the renovation
dollars on the Current Hotels during the remainder of 1997 and 1998. In certain
circumstances such capital improvements are being completed in connection with
franchisor requirements. The following table describes such renovations and
improvements:

<TABLE>
<CAPTION>
REMAINING 1997
DESCRIPTION OF AND 1998
HOTELS: RENOVATION/IMPROVEMENT BUDGETED AMOUNT
- ------- ---------------------- ---------------
<S> <C> <C>
Radisson Hotel Arlington Heights ........Upgrade and renovation of guest rooms and public $10,700,000
areas as well as addition of approximately 100
guest rooms.
Days Inn Lake Buena Vista ...............Upgrade and renovation of guest rooms and public 4,974,000
areas, including the addition of approximately
9,000 square feet of convention space as well as
the addition of extensive landscaping and
entertainment attractions to hotel exterior in
connection with conversion to the Wyndham Hotel
brand.
Holiday Inn Corporate Center Phoenix ....Upgrade of guest rooms and public areas in 4,566,000
connection with conversion to the Crowne Plaza
brand.
Sheraton Key Largo ......................Upgrade and renovation of guest rooms, public 3,985,000
areas and exterior in connection with the
conversion to the Westin Resort brand.
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
REMAINING 1997
DESCRIPTION OF AND 1998
HOTELS: RENOVATION/IMPROVEMENT BUDGETED AMOUNT
- ------- ---------------------- ---------------
<S> <C> <C>
Holiday Inn Resort Monterey .............Upgrade and renovation of guest rooms and public 3,858,000
areas in connection with conversion to the Hilton
Hotel brand.
DoubleTree Guest Suites Atlanta .........Upgrade and renovation of guest rooms, atrium 3,400,000
and public areas as a result of conversion to the
DoubleTree Guest Suites brand.
Le Baron San Jose Airport Hotel .........Upgrade of public areas and guest rooms and 2,831,000
convert ninth floor to concierge floor in
connection with conversion to the Wyndham Hotel
brand.
Wyndham Garden Hotel Marietta ...........Upgrade and renovation of guest rooms, public 2,753,000
areas and restaurant in connection with the
conversion to the Wyndham Hotel brand.
Hilton Hotel Durham .....................Addition of 42 guest rooms and renovation of 2,547,000
guest rooms and public areas.
Holiday Inn Park Center Plaza ...........Upgrade of guest rooms and public areas and 2,030,000
conversion of the ninth floor to ''club'' level in
connection with the conversion to the Crowne
Plaza brand.
Holiday Inn Mission Valley ..............Upgrade of guest rooms and public areas in 1,603,000
connection with conversion to the Holiday Inn
Select brand.
Wyndham Albuquerque Airport Hotel .......Upgrade of guest rooms and public areas and 1,467,000
convert meeting space to additional guest rooms in
connection with the conversion to the Wyndham
Hotel brand.
Hilton Airport Hotel Grand Rapids .......Upgrade and renovate guest bathrooms and public 1,300,000
areas.
Holiday Inn Select New Orleans Upgrade of guest rooms and public areas and 599,000
International Airport ..............renovation of roof in connection with the
conversion to the Holiday Inn Select brand.
Holiday Inn Select Dallas DFW Airport Upgrade of guest rooms, public areas and hotel 571,000
South ..............................exterior in connection with the conversion to the
Holiday Inn Select brand.
Hampton Inn Ocean City ..................Upgrade of guest rooms and public areas in 404,000
connection with the conversion to the Hampton
Inn brand.
Hilton Hotel Toledo .....................Upgrade of guest rooms and renovation of public 334,000
areas.
Holiday Inn Dallas DFW Airport West Upgrade of guest rooms and corridors. 219,000
Crowne Plaza Madison ................... Upgrade of guest rooms, public areas and 214,000
reservation equipment in connection with the
conversion to the Crowne Plaza brand.
Hotel Maison de Ville ...................Upgrade of selected guest rooms and public areas. 23,000
Hampton Inn Richmond Airport ............Upgrade of public areas and replacement of roof. 8,000
-----------
All Hotels--Total: $48,386,000
===========
</TABLE>

There can be no assurance that the Company will be able to complete the
scheduled capital improvements within the expected time frames 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. The Company attempts to schedule renovations and
improvements during traditionally lower occupancy periods in an effort to
minimize disruption to the hotels' operations.

28
<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. Seasonal variations in
revenue at the Hotels may cause quarterly fluctuations in the Company's lease
revenue. To the extent that cash flow from operations may be insufficient during
any quarter to pay distributions at its current distribution rate due to
temporary or seasonal fluctuations in lease revenues, the Company expects to
utilize other cash on hand or borrowings under the Line of Credit to make such
distributions.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits -

Item No. Description
-------- -----------

27.1 Financial Data Schedule

(b) Reports on Form 8-K

A Current Report on Form 8-K/A, dated January 3, 1997, which included Items
2 and 7, "Acquisition or Disposition of Assets" and "Financial statements and
Exhibits" with respect to the acquisition of the Days Inn Lake Buena Vista.

The Company filed a Current Report on Form 8-K dated March 17, 1997
reporting that the Company acquired a portfolio of hotels including the 219-room
Wyndham Garden Hotel in Marietta, Georgia; the 200-room Sheraton Key Largo in
Key Largo, Florida; and the 155-room French Quarter Suites Hotel in Atlanta,
Georgia.

29
<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: May 14, 1997

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)

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 34,233,988
<SECURITIES> 0
<RECEIVABLES> 4,403,806
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 326,319,563
<DEPRECIATION> 6,115,421
<TOTAL-ASSETS> 369,974,015
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 146,571
<OTHER-SE> 279,813,869
<TOTAL-LIABILITY-AND-EQUITY> 369,974,015
<SALES> 0
<TOTAL-REVENUES> 9,903,078
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,217,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 942,000
<INCOME-PRETAX> 4,053,481
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,053,481
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,053,481
<EPS-PRIMARY> .34
<EPS-DILUTED> .34

</TABLE>