<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, 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.)
5605 MacArthur Blvd., Suite 1200, Irving, Texas 75038
(Address of Registrant's Principal Executive Office) (Zip Code)
(972) 550-6800
(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 November 13, 1997, was 19,713,855.
1
<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
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
AMERICAN GENERAL HOSPITALITY CORPORATION
Consolidated Balance Sheets - September 30, 1997 (unaudited) and December 31, 1996............... 3
Consolidated Statements of Operations for the Nine and Three Months ended September 30, 1997
and the Period July 31, 1996 (inception of operations) through September 30, 1996 (unaudited)... 4
Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 1997
(unaudited)..................................................................................... 5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and the Period
July 31, 1996 (inception of operations) through September 30, 1996 (unaudited).................. 6
Notes to Consolidated Financial Statements........................................................ 8
Pro Forma Consolidated Balance Sheet - September 30, 1997 (unaudited)............................. 15
Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 1997
(unaudited)..................................................................................... 16
AGH LEASING, L.P. (the "Lessee")
Consolidated Balance Sheet - September 30, 1997 (unaudited) and December 31, 1996................. 17
Consolidated Statements of Operations for the Nine and Three Months Ended September 30, 1997, and
the Period July 31, 1996 (inception of operations) through September 30, 1996 (unaudited)....... 18
Consolidated Statement of Partners' Deficit for the Nine Months Ended September 30, 1997
(unaudited)..................................................................................... 19
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1997, and the
Period July 31, 1996 (inception of operations) through September 30, 1996 (unaudited)........... 20
Notes to Consolidated Financial Statements........................................................ 21
Pro Forma Consolidated Statement of Operations for the Nine Months Ended September 30, 1997
(unaudited)..................................................................................... 24
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..... 25
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds................................................. 34
Item 6 Exhibits and Reports on Form 8-K.......................................................... 34
SIGNATURE.................................................................................................. 35
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
(UNAUDITED) DECEMBER 31, 1996
--------------------- --------------------
<S> <C> <C>
ASSETS
Investment in hotel properties
Land and land improvements............................... $ 45,151,403 $ 17,287,136
Buildings and building improvements...................... 439,283,980 195,294,012
Furniture, fixtures and equipment........................ 35,655,137 11,505,892
Construction in progress................................. 37,458,003 10,861,976
--------------------- --------------------
557,575,523 234,949,016
Less: accumulated depreciation............................. (13,393,973) (4,188,198)
--------------------- --------------------
Net investment in hotel properties.......................... 544,181,550 230,760,818
Cash and cash equivalents................................... 1,537,567 3,888,281
Restricted cash............................................. 653,796 544,541
Participating Lease receivable - AGH Leasing, L.P........... 9,740,389 3,982,424
Deferred expenses, net ..................................... 4,670,759 2,986,946
Other assets................................................ 981,170 664,661
Note receivable - Lessee.................................... 248,160 287,684
--------------------- --------------------
Total assets $ 562,013,391 $ 243,115,355
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt........................................................ $ 36,336,431 $ 19,122,398
Debt, Line of Credit........................................ 180,501,000 57,500,000
Distributions payable....................................... 7,239,591 4,150,729
Accounts payable, trade, accrued expenses and other.........
liabilities.............................................. 11,602,161 5,756,097
Minority interest in Operating Partnership 41,705,512 29,125,020
--------------------- --------------------
Total liabilities 277,384,695 115,654,244
--------------------- --------------------
Commitments and Contingencies (Note 5)
Shareholders' equity:
Common stock $0.01 par value per share, 100,000,000
shares authorized, 14,770,110 and 8,288,841 shares issued
and outstanding at September 30, 1997 and December 31,
1996, respectively....................................... 147,701 82,888
Additional paid-in capital.................................. 286,863,208 128,746,013
Unearned officers' compensation............................. (769,167) (850,521)
Distributions in excess of accumulated earnings............. (1,613,046) (517,269)
--------------------- --------------------
Total shareholders' equity............................. 284,628,696 127,461,111
--------------------- --------------------
Total liabilities and shareholders' equity............. $ 562,013,391 $ 243,115,355
===================== =======================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS JULY 31, 1996
ENDED ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues
Participating Lease revenue.................... $ 42,108,012 $ 19,275,779 $ 5,218,526
Office building rental income.................. 592,629 592,629
Interest income................................ 738,688 56,044 32,227
----------------- ---------------- ----------------
Total revenue........................... 43,439,329 19,924,452 5,250,753
----------------- ---------------- ----------------
Expenses
Depreciation................................... 9,209,942 4,384,609 1,008,874
Amortization of deferred loan costs............ 669,754 299,022 104,117
Amortization of franchise fees................. 69,538 28,773 10,877
Amortization of other deferred
expenses..................................... 24,683 13,952 1,578
Real estate and personal property
taxes and property insurance................ 4,929,000 2,310,782 511,115
Office building operating expense.............. 303,979 303,979
General and administrative..................... 1,450,116 481,650 194,226
Ground lease expense........................... 956,518 354,419 218,000
Amortization of unearned
officers' compensation....................... 81,354 36,979 14,792
Interest expense............................... 5,973,945 3,978,769 347,622
----------------- ---------------- ----------------
Total expenses.......................... 23,668,829 12,192,934 2,411,201
----------------- ---------------- ----------------
Income before minority interest................... 19,770,500 7,731,518 2,839,552
Minority interest................................. 2,558,352 988,664 545,102
----------------- ---------------- ----------------
Net income applicable to common
stockholders................................. $ 17,212,148 $ 6,742,854 $ 2,294,450
================= ================ ================
Net income per common share....................... $ 1.25 $ 0.46 $ 0.29
----------------- ---------------- ----------------
Weighted average number of shares................. 13,768,442 14,754,147 8,002,331
of common stock outstanding.................... ================= ================ ================
</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 NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNEARNED
-------------------------------------
PAID-IN OFFICERS'
SHARES DOLLARS CAPITAL COMPENSATION
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................... 8,288,841 $ 82,888 $ 128,746,013 $ (850,521)
Issuance of common shares, net
of offering expenses and allocation
to minority interest ($7,332,705)............. 6,368,300 63,683 154,332,763
Distributions declared March 13,
1997 ($0.4075 per share)......................
Distributions declared June
15, 1997 ($0.4075 per share)..................
Distributions declared September 11,
1997 ($0.4275 per share)......................
Allocation of minority interest from the
issuance of Cocoa Beach OP Units............. 1,346,155
Issuance of common shares to
Wyndham Hotel Corporation and allocation
to minority interest ($60,593)................ 112,969 1,130 2,438,277
Amortization of unearned officers'
Compensation.................................. 81,354
Net income.....................................
-------------- -------------- --------------- ---------------
Balance at September 30, 1997.................. 14,770,110 $ 147,701 $ 286,863,208 $ (769,167)
============== ============== =============== ===============
<CAPTION>
DISTRIBUTIONS
IN EXCESS OF
EARNINGS TOTAL
-------------- ------------
<S> <C> <C>
Balance at December 31, 1996.................................. $ (517,269) $127,461,111
Issuance of common shares, net
of offering expenses and allocation
to minority interest ($7,332,705)............................ 154,396,446
Distributions declared March 13,
1997 ($0.4075 per share)..................................... (5,972,785) (5,972,785)
Distributions declared June
15, 1997 ($0.4075 per share)................................. (6,018,820) (6,018,820)
Distributions declared September 11,
1997 ($0.4275 per share)..................................... (6,316,320) (6,316,320)
Allocation of minority interest from the
issuance of Cocoa Beach OP Units............................ 1,346,155
Issuance of common shares to
Wyndham Hotel Corporation and allocation
to minority interest ($60,593)............................... 2,439,407
Amortization of unearned officers'
Compensation................................................. 81,354
Net income.................................................... 17,212,148 17,212,148
------------- ------------
Balance at September 30, 1997................................. $(1,613,046) $284,628,696
============= ============
</TABLE>
5
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, 1996
NINE MONTHS THROUGH
ENDED SEPTEMBER 30,
SEPTEMBER 30, 1996
1997 (UNAUDITED)
----------------- -----------------
<S> <C> <C>
Cash flow from operating activities:
Net income........................................................... $ 17,212,148 $ 2,294,450
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation....................................................... 9,209,942 1,008,874
Amortization....................................................... 845,329 131,364
Minority interest.................................................. 2,558,352 545,102
Changes in assets and liabilities:
Restricted cash.................................................... (109,255)
Participating Lease receivable..................................... (5,757,965) (4,100,406)
Organization costs and franchise agreements........................ (510,288) (722,887)
Other assets....................................................... (316,509) (538,323)
Accounts payable, trade, accrued expenses and other liabilities.... 5,846,064 6,069,701
------------- --------------
Net cash flow provided by operating activities.................. 28,977,818 4,687,875
------------- --------------
Cash flow from investing activities:
Purchase of hotel properties......................................... (256,826,224 (126,645,935)
Improvements and additions to hotel properties....................... (41,610,255) (3,580,951)
Payments received from loan to Lessee................................ 39,524
------------- --------------
Net cash flow used in investing activities...................... (298,396,955) (130,226,886)
------------- --------------
Cash flow from financing activities:
Proceeds from borrowings............................................. 199,000,000 13,000,000
Net proceeds from public offerings................................... 161,729,151 129,333,898
Net proceeds from Wyndham strategic alliance stock sale.............. 2,500,000
Principal payments on borrowings..................................... (76,530,072) (10,108,752)
Distributions paid - common stockholders............................. (15,369,308)
Distributions paid - OP Unit holders................................. (2,323,848)
Payments for deferred loan costs..................................... (1,937,500) (2,500,000)
------------- --------------
Net cash flow provided by financing activities.................. 267,068,423 129,725,146
------------- --------------
Net change in cash and cash equivalents................................... (2,350,714) 4,186,135
Cash and cash equivalents at beginning of periods......................... 3,888,281 0
------------- --------------
Cash and cash equivalents at end of periods............................... $ 1,537,567 $ 4,186,135
============= ==============
</TABLE>
Supplemental disclosures of noncash investing activities:
On February 28, 1997, the Company assumed $8,218,755 of mortgage
indebtedness with the acquisition of the Radisson Hotel Arlington Heights.
On March 18, 1997, the Company assumed $9,510,654 of mortgage indebtedness
with the acquisition of the DoubleTree Guest Suites Hotel.
6
<PAGE>
Supplemental disclosures of noncash financing activities:
On June 27, 1997, the Company issued 266,301 Class B units of limited
partnership interest in American General Hospitality Operating Partnership, L.P.
("Class B OP Units"), as part of the purchase of the Hilton Hotel Cocoa Beach.
At the time of issuance, the Class B OP Units were valued at $24.20 per unit.
On July 16, 1997, these Class B OP Units automatically converted into standard
OP Units.
The accompanying notes are an integral part of these consolidated financial
statements.
7
<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 ("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.
The Company contributed all of the net proceeds of the IPO 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
81.3% aggregate equity interest in the Operating Partnership.
On July 31, 1996, the Operating Partnership acquired directly or
indirectly the 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.
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.
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. All of the net proceeds were contributed to AGH GP, Inc.,
and AGH LP, Inc., which in turn contributed such proceeds to the Operating
Partnership in exchange for an 88.5% aggregate equity interest in the Operating
Partnership.
On July 14, 1997, as part of the terms of the strategic alliance
between Wyndham Hotel Corporation ("Wyndham") and the Company, an affiliate of
Wyndham purchased 112,969 shares of restricted common stock (the "Wyndham
Shares") at a negotiated price of $22.13 per share. The shares were purchased
in connection with the conversion of the LeBaron Airport Hotel to the Wyndham
Airport Hotel San Jose.
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 Wyndham Safari in Lake Buena Vista, Florida $33.2 million
("Wyndham Safari 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")
</TABLE>
8
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
ACQUISITION DATE HOTEL ACQUISITION PRICE
- ---------------- ----- -----------------
<S> <C> <C>
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 Westin Resort in Key Largo, Florida ("Westin $26.3 million
Resort Key Largo")
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")
June 20, 1997 215-room Holiday Inn Select Bucks County in Trevose, $21.5 million
Pennsylvania ("Holiday Inn Select Bucks County")
June 25, 1997 742-room Radisson Twin Towers Hotel in Orlando, Florida $78.6 million
("Radisson Twin Towers Orlando")
June 25, 1997 302-room Marriott West Loop in Houston, Texas ("Marriott $38.6 million
Houston West Loop Hotel") and connecting 256,000 sq. ft.
Office building ("Houston office building")
June 27, 1997 296-room Hilton Hotel in Cocoa Beach, Florida ("Hilton Hotel $22.2 million
Cocoa Beach")
</TABLE>
At September 30, 1997, the Company owned 26 hotels in 16 states
consisting of the Initial Hotels and the hotels listed above (collectively the
"Hotels"). At September 30, 1997, the General Partner, a wholly owned
subsidiary of the Company, owns a 1.0% interest in the Operating Partnership and
the Limited Partner, also a wholly owned subsidiary of the Company, owns an
approximate 86.2% limited partnership interest in the Operating Partnership.
The Company currently leases 25 of the Hotels to AGH Leasing, L.P.
("AGH Leasing"), and one Hotel, the Radisson Twin Towers Orlando, to Twin Towers
Leasing, L.P. ("Twin Towers Leasing" and, together with AGH Leasing, the
"Lessee") pursuant to 12-year operating leases providing for the payment of
participating rent based on the revenues of the Hotels (the "Participating
Leases"). AGH Leasing is owned in part by certain executive officers of the
Company and AGH Leasing is the 51% sole general partner of Twin Towers Leasing.
In addition, the Lessee has engaged American General Hospitality, Inc.
("AGHI"), to manage 25 of the Hotels pursuant to separate management agreements
(the "Management Agreements"). The remaining Hotel, the Wyndham Garden Hotel
Marietta, 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 ("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.
9
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NET INCOME PER COMMON SHARE
Net income per common share for third quarter ended September 30,
1997, is computed based on the weighted average number of shares of common stock
outstanding. The impact of common stock equivalents to earnings per share is
immaterial.
In February 1997, Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share
("EPS"). SFAS 128 requires basic EPS to be computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period and diluted EPS to reflect the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997, and
requires restatement of all prior period EPS data presented. Earlier
application is not permitted. The impact of the implementation of SFAS 128 on
the Company's consolidated financial statements is expected to be immaterial.
3. DISTRIBUTIONS PAYABLE
On September 11, 1997, the Company increased its quarterly dividend by
approximately 5% from $0.4075 to $0.4275 per share of common stock, which
equates to an annualized dividend of $1.71. On this same date, the Company
declared a distribution of $0.4275 per share for the third quarter payable on
October 30, 1997, to stockholders of record on October 15, 1997.
4. DEBT OBLIGATIONS
Mortgage debt outstanding at December 31, 1996, remained outstanding
for the second quarter of 1997. The following debt was assumed in 1997 in
connection with the Radisson Hotel Arlington Heights and the DoubleTree Guest
Suites Atlanta acquisitions.
<TABLE>
<CAPTION>
BALANCE
SEPTEMBER 30, 1997
----------------------
<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................................ $9,413,767
</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. Borrowings have been made subsequently to fund property acquisitions
and capital improvements and renovations at the Hotels.
5. COMMITMENTS AND CONTINGENCIES
The Company increased its Line of Credit ("Line of Credit") from $150
million to $300 million on July 24, 1997. The Line of Credit matures on July
31, 1999. At September 30, 1997, there was $180,501,000 outstanding on the Line
of Credit. The Line of Credit is with a consortium of banks led by 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
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 (London Interbank Offered Rate) plus 1.75% per annum (7.41% at September
30, 1997) payable monthly in arrears or one-half percent in excess of the prime
rate, at the option of the Company.
10
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Twenty-five 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 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 with one of the sellers of the Wyndham Safari 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 exceed 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.
Participating Leases
The Lessee has future lease commitments to the Company under the
Participating Leases, which expire from July 2008 to June 2009. Minimum future
rental income (i.e., base rents) under these noncancellable Participating Leases
at September 30, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
Remainder of 1997.............................. $ 11,912,706
1998........................................... 50,908,816
1999........................................... 52,691,684
2000........................................... 54,534,872
2001 and thereafter............................ 450,118,688
-------------
Total..................................... $ 620,166,766
=============
</TABLE>
At September 30, 1997, the Lessee owed the Company $9,740,389 for such
base and Participating Lease rent which was paid by the Lessee in October 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 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 and
equipment ("FF&E") and other capital expenditures to enhance the competitive
position of the Hotels. At September 30, 1997, actual capital expenditures were
greater than the amount required to be reserved.
11
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Ground Leases
Four of the Hotels are subject to ground leases with third parties
with respect to the land underlying each such Hotel and the Westin Resort Key
Largo has a ground lease related to the bay bottom area fronting the property.
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 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 CPI 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 construct 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
Albuquerque Airport Hotel for the twelve months ended September 30, 1997, was
74.0%.
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 Wyndham Airport Hotel San Jose 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 Westin Resort 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.
Minimum future rental payments for the ground leases to be paid by
Company at September 30, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
Remainder of 1997.............................. $ 67,531
1998........................................... 270,125
1999........................................... 270,125
2000........................................... 270,125
2001 and thereafter............................ 7,970,130
--------------
Total..................................... $ 8,848,036
==============
</TABLE>
12
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. AGH PREDECESSOR HOTELS INFORMATION
Pursuant to SEC regulations, which require the presentation of
corresponding periods of the preceding year's financial information, the
following information represents condensed combined balance sheet information as
of July 30, 1996, and condensed combined statements of operations and cash flows
information for the period January 1 through July 30, 1996, of AGH Predecessor
Hotels, which is considered to be the predecessor of the Company.
AGH PREDECESSOR HOTELS
<TABLE>
<CAPTION>
Balance Sheet Information: JULY 30, 1996
------------------
<S> <C>
Investments in hotel properties, net............................................ $22,757,560
Cash and cash equivalents....................................................... 1,802,692
Total assets.................................................................... 25,614,430
Debt............................................................................ 20,114,415
Total liabilities............................................................... 21,315,621
Total equity.................................................................... 4,298,809
<CAPTION>
JANUARY 1, 1996
THROUGH
Statements of Operations Information: JULY 30, 1996
------------------
<S> <C>
Room revenue................................................................. $ 6,770,568
Other revenue................................................................ 1,608,557
-----------
Total revenue................................................................. $ 8,379,125
-----------
Hotel operating expenses........................................................... 5,682,473
Depreciation and amortization................................................... 645,195
Interest expense................................................................ 1,129,060
Other expenses.................................................................. 443,295
-----------
Net income................................................................... $ 479,102
===========
<CAPTION>
JANUARY 1, 1996
THROUGH
Statement of Cash Flows Information: JULY 30, 1996
---------------
<S> <C>
Net cash provided by operating activities....................................... $ 872,786
Net cash used in investing activities........................................... $ (946,524)
Net cash provided by financing activities....................................... $ 631,995
</TABLE>
7. SUBSEQUENT EVENTS
On September 9, 1997, the Company entered into agreements to sell
2,671,705 shares of common stock (the "ABKB Offering") to certain investment
funds and separate accounts advised by ABKB/LaSalle Securities Limited
Partnership ("ABKB") and LaSalle Advisors Limited Partnership ("LaSalle"). On
November 3, 1997, the Company issued and sold 688,837 fully registered shares of
common stock at a price per share of $26.131 to such funds and accounts advised
by ABKB. The gross proceeds for this stock sale totaled approximately $18
million. The agreements also provide that at the option of the Company, subject
to satisfaction of certain conditions, the Company will sell the remaining
1,982,868 shares of common stock through private placement at a price per share
of $25.216 to such funds and accounts advised by ABKB and LaSalle on or before
January 31, 1998. Gross proceeds from this sale will total approximately $50
million.
13
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On November 13, 1997, the Company completed a follow-on primary public
offering (the "Second 1997 Offering") of 4,250,000 shares of its common stock.
The offering price of all shares sold in the Second 1997 Offering was $27.50 per
share, resulting in net proceeds of approximately $110.2 million after deducting
offering expenses. All of the net proceeds were contributed to AGH GP, Inc. and
AGH LP, Inc., which in turn contributed such proceeds to the Operating
Partnership in exchange for a 2.9% equity interest in the Operating Partnership
for a combined aggregate equity interest in the Operating Partnership of 90.1%.
8. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma consolidated balance sheet as of
September 30, 1997, and the unaudited pro forma consolidated statement of
operations for the nine months ended September 30, 1997, are presented as if the
acquisition of the 26 Hotels owned as of September 30, 1997, the IPO, the 1997
Public Offering, the two increases to the Line of Credit, the ABKB Offering and
the Second 1997 Public Offering had occurred on January 1, 1997, 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.
14
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ABKB OFFERING
COMPANY AND SECOND 1997 PRO FORMA
HISTORICAL PUBLIC OFFERING BALANCE SHEET
---------- --------------- -------------
<S> <C> <C> <C>
ASSETS
Investment in hotel properties, net..................... $544,181,550 $544,181,550
Cash and cash equivalents............................... 1,537,567 1,537,567
Restricted cash......................................... 653,796 653,796
Accounts receivable, net................................ 9,740,389 9,740,389
Deferred expenses, net.................................. 4,670,759 4,670,759
Other assets............................................ 981,170 981,170
Notes receivable - Lessee............................... 248,160 248,160
------------ ------------- ------------
Total assets....................................... $562,013,391 $ $562,013,391
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt.................................................... $ 36,336,431 $ 36,336,431
Debt, Line of Credit.................................... 180,501,000 $(127,938,823) 52,562,177
Distributions payable................................... 7,239,591 7,239,591
Accounts payable, trade, accrued
expenses and other liabilities........................ 11,602,161 11,602,161
Minority interest in Operating Partnership.............. 41,705,512 3,222,148 44,927,660
------------ ------------- ------------
Total liabilities.................................. 277,384,695 (124,716,675) 152,668,020
------------ ------------- ------------
Shareholders' Equity
Common stock............................................ 147,701 49,401 197,102
Additional paid-in capital.............................. 286,863,208 124,667,274 411,530,482
Unearned officers' compensation......................... (769,167) (769,167)
Earnings in excess of distributions..................... (1,613,046) (1,613,046)
------------ ------------- ------------
Total shareholders' equity......................... 284,628,696 124,716,675 409,345,371
------------ ------------- ------------
Total liabilities and shareholders'
Equity........................................... $562,013,391 $ 0 $562,013,391
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
AMERICAN GENERAL HOSPITALITY CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL NINE ABKB OFFERING
MONTHS ENDED AND SECOND
SEPTEMBER 30, PRO FORMA 1997 PUBLIC COMBINED
1997 ADJUSTMENTS OFFERING PRO FORMA
--------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues
Participating Lease revenue............................... $42,108,012 $13,549,658 $55,657,670
Office building rental income............................. 592,629 1,134,582 1,727,211
Interest income........................................... 738,688 0 738,688
----------- ----------- ------------- -----------
Total revenue...................................... 43,439,329 14,684,240 58,123,569
----------- ----------- ------------- -----------
Expenses
Depreciation.............................................. 9,209,942 3,790,044 12,999,986
Amortization.............................................. 763,975 168,649 932,624
Real estate and personal property
taxes and property insurance............................. 4,929,000 1,099,916 6,028,916
Office building operating expense......................... 303,979 658,611 962,590
General and administrative................................ 1,450,116 1,450,116
Ground lease expense...................................... 956,518 956,518
Amortization on unearned
officers' compensation................................... 81,354 81,354
Interest expense.......................................... 5,973,945 6,772,725 (7,196,559) 5,550,111
----------- ----------- ------------- -----------
Total expenses..................................... 23,668,829 12,489,945 (7,196,559) 28,962,215
----------- ----------- ------------- -----------
Income before minority interest........................... 19,770,500 2,194,295 7,196,559 29,161,354
Minority interest......................................... 2,558,352 2,884,061
----------- ----------
Net income applicable to common
stockholders............................................. $17,212,148 $26,277,293
----------- ----------
Net income per common share............................... $ 1.25 $ 1.33
----------- ----------
Weighted average number of shares
of common stock outstanding............................. 13,768,442 19,710,255
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
AGH LEASING, L.P.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
------------------ ------------
<S> <C> <C>
ASSETS
Investments in hotel properties, at cost
Furniture, fixtures and equipment................................................... $ 315,000 $ 315,000
Less accumulated depreciation....................................................... (73,500) (26,250)
----------- -----------
Net investment in hotel properties....................................................... 241,500 288,750
Cash and cash equivalents................................................................ 13,061,627 5,673,232
Accounts receivable, net of allowance for doubtful accounts of $19,341................... 7,094,297 2,822,936
Inventories.............................................................................. 942,150 448,234
Prepaid expenses......................................................................... 1,186,436 553,400
Deferred expenses........................................................................ 169,554 194,287
Other assets............................................................................. 346,710 47,985
----------- -----------
Total assets................................................................... $23,042,274 $10,028,824
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable, trade.................................................................. $ 3,581,501 $ 1,054,902
Participating Lease payable, American General Hospitality Operating
Partnership, L.P...................................................................... 9,740,389 3,979,242
Note payable to American General Hospitality Operating Partnership, L.P.................. 248,160 287,684
Accrued expenses and other liabilities................................................... 6,831,878 4,198,035
Deferred income.......................................................................... 1,700,003 730,000
Minority interest in Twin Towers Leasing, L.P............................................ 2,093,885 0
----------- -----------
Total liabilities.............................................................. 24,195,816 10,249,863
----------- -----------
Commitments and contingencies (Notes 1 and 2)
Partners' capital........................................................................ 500,000 500,000
Accumulated deficit...................................................................... (1,653,542) (721,039)
----------- -----------
Total partners' deficit........................................................ (1,153,542) (221,039)
----------- -----------
Total liabilities and partners' deficit........................................ $23,042,274 $10,028,824
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
AGH LEASING, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31,1996
NINE MONTHS THREE MONTHS THROUGH
ENDED ENDED SEPTEMBER 30,
SEPTEMBER 30, SEPTEMBER 30, 1996
1997 1997 (UNAUDITED)
----------------- ----------------- ------------------
Revenues
<S> <C> <C> <C>
Room revenue................................................ $ 88,220,166 $ 39,699,809 $ 11,185,140
Food and beverage........................................... 22,974,602 10,084,183 2,982,331
Other revenue............................................... 5,639,468 2,629,726 623,824
Minority interest income.................................... 906,115 906,115 0
----------------- ----------------- ------------------
Total revenue.......................................... 117,740,351 53,319,833 14,791,295
----------------- ----------------- ------------------
Expenses
Property operating costs and expenses....................... 23,768,303 10,779,302 3,135,269
Food and beverage costs and expenses........................ 18,599,366 8,254,478 2,260,935
General and administrative.................................. 10,557,733 4,574,262 1,205,355
Advertising and promotion................................... 8,549,791 4,051,362 772,999
Repairs and maintenance..................................... 4,688,910 2,169,546 522,792
Utilities................................................... 5,157,997 2,458,297 668,296
Management fees............................................. 1,740,554 435,081 390,736
Franchise costs............................................. 3,282,760 1,590,250 404,025
Depreciation................................................ 47,250 15,750 10,500
Amortization................................................ 30,649 10,348
Interest expense............................................ 20,605 6,542 5,250
Other expense............................................... 120,924 41,896 17,448
Participating Lease expenses................................ 42,108,012 19,275,779 5,218,526
----------------- ----------------- ------------------
Total expenses......................................... 118,672,854 53,662,893 14,612,131
----------------- ----------------- ------------------
Net loss............................................... $ (932,503) $ (343,060) $ 179,164
================= ================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
AGH LEASING, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
Balance at December 31, 1996 ......................... $ (221,039)
Net loss ............................................. (932,503)
-----------
Balance at September 30, 1997 ........................ $ (1,153,542)
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
19
<PAGE>
AGH LEASING, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND THE PERIOD JULY 31, 1996 (INCEPTION OF OPERATIONS)
THROUGH SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, 1996
NINE MONTHS THROUGH
ENDED SEPTEMBER 30,
SEPTEMBER 30, 1997 1996
--------------------- --------------------
<S> <C> <C>
Cash flow from operating activities:
Net loss..................................................... $ (932,503) $ 179,164
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 47,250 10,500
Amortization.............................................. 30,649 0
Minority interest......................................... (906,115 0
Changes in assets and liabilities:
Accounts receivable....................................... (4,271,361) (2,414,921)
Inventories............................................... (493,916) (366,653)
Prepaid expenses.......................................... (633,036) (462,960)
Deferred expenses......................................... (5,916) 0
Other assets.............................................. (298,725) (46,987)
Accounts payable, trade................................... 2,526,599 472,191
Participating Lease payable, American General Hospitality
Operating Partnership, L.P......................... 5,761,147 4,093,764
Accrued expenses and other liabilities.................... 2,633,843 4,030,455
Deferred income........................................... 970,003 0
-------------- ---------------
Net cash flow provided by operating activities............ 4,427,919 5,494,553
-------------- ---------------
Cash flow from financing activities:
Capital contributions, AGH Leasing, L.P...................... 0 500,000
Capital contributions, Twin Leasing, L.P..................... 3,000,000 0
Principal payments on borrowings............................. (39,524) 0
-------------- ---------------
Net cash (used in) provided by financing activities.......... 2,960,476 500,000
-------------- ---------------
Net change in cash and cash equivalents........................ 7,388,395 5,994,553
Cash and cash equivalents at beginning of periods.............. 5,673,232 0
-------------- ---------------
Cash and cash equivalents at end of periods.................... $13,061,627 $ 5,994,553
============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest..................... $ 20,605 $ 0
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
AGH Leasing, L.P. ("AGH Leasing") is a Delaware limited partnership
which was formed on May 29, 1996, and commenced operations on July 31, 1996.
AGH Leasing is owned in part by certain executive officers of American General
Hospitality Corporation (the "Company") and American General Hospitality, Inc.
("AGHI"). AGH Leasing leases 25 of the 26 Hotels (the "Hotels") owned by
American General Hospitality Operating Partnership, L.P. (the "Operating
Partnership") at September 30, 1997, pursuant to operating leases
("Participating Leases") which provide for rent based on the revenues of the
Hotels.
Twin Towers Leasing, L.P. ("Twin Towers Leasing" and, together with
AGH Leasing, the "Lessee") leases the remaining Hotel, the Radisson Twin Towers
Orlando, pursuant to a Participating Lease which is substantially similar in
form to the other Participating Leases. Twin Towers Leasing is a Florida
limited partnership which was formed on June 1, 1997, and commenced operations
on June 25, 1997. AGH Leasing is the 51% sole general partner of Twin Towers
Leasing. The remaining 49% is owned by Regent Carolina Corporation ("Regent"),
an affiliate of the selling entity. Based on the partnership agreement, Regent
is allocated 100% of any losses generated by Twin Towers Leasing up to their
capital contribution of $3 million. The operations of Twin Towers Leasing are
consolidated with the operations of AGH Leasing for financial statement
purposes.
The consolidated 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 25 of the Hotels are managed by AGHI and the remaining 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 some quarters and may have net
losses in other quarters of the same year.
Upon consummation of the Company's Initial Public Offering ("IPO"),
the partners of AGH Leasing capitalized AGH Leasing 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. Twin Towers Leasing was capitalized
with $3 million by the 49% limited partner upon commencement of operations.
These unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission ("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. 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 Hotel Maison de Ville.
21
<PAGE>
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Twenty-five 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 ("Wyndham") on behalf of the Lessee. The Lessee pays
Wyndham 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 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.
The Company entered into an agreement for a license and an association
membership from one of the sellers of the Wyndham Safari 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 exceed 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.
The Lessee has future lease commitments to the Company under the
Participating Leases, which have various expiration dates between July 2008 to
June 2009. The Participating Lease expenses are based on percentages of room
revenues, food and beverage revenues, telephone and other revenues. The
departmental revenue thresholds in the Participating Leases are seasonally
adjusted for interim periods and the Participating Lease formulas are adjusted
effective January 1, 1997, by a percentage equal to the percentage increase in
the CPI, plus .75% as compared to the prior year. Additionally, several of the
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................ $ 11,912,706
1998............................. 50,908,816
1999............................. 52,691,684
2000............................. 54,534,872
2001 and thereafter.............. 450,118,688
------------
Total ...................... $620,166,766
============
</TABLE>
Five of the 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.
22
<PAGE>
AGH LEASING, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma consolidated statement of operations
for the nine months ended September 30, 1997, is presented as if the acquisition
of the 26 Hotels owned as of September 30, 1997, the IPO, the 1997 Public
Offering, the two increases to the Line of Credit, the ABKB Offering and the
Second 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 leasing to the Lessee had occurred on such
date or to project results for any future period.
23
<PAGE>
AGH LEASING, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
MANAGEMENT
PRO FORMA FEE COMBINED
HISTORICAL ADJUSTMENTS ADJUSTMENT PRO FORMA
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenues
Room revenue........................ $ 88,220,166 $25,705,067 $113,925,233
Food and beverage revenue........... 22,974,602 9,163,567 32,138,169
Other revenue....................... 5,639,468 1,651,882 7,291,350
Minority interest income............ 906,115 70,009 976,124
--------------- --------------- --------------- -----------------
Total revenue................ 117,740,351 36,590,525 154,330,876
--------------- --------------- --------------- -----------------
Expenses
Property operating costs and........ 23,768,303 6,275,280 30,043,583
expenses............................ 18,599,366 6,298,355 24,897,721
Food and beverage costs and......... 10,557,733 2,718,131 13,275,864
expenses............................ 8,549,791 2,362,637 10,912,428
General and administrative.......... 4,688,910 1,698,630 6,387,540
Advertising and promotion........... 5,157,997 1,453,801 6,611,798
Repairs and maintenance............. 1,740,554 1,049,217 $ 57,475 2,847,246
Utilities........................... 3,282,760 957,253 4,240,013
Management fees..................... 47,250 0 47,250
Franchise costs..................... 30,649 0 30,649
Depreciation........................ 20,605 0 20,605
Amortization........................ 120,924 170,085 291,009
Interest expense.................... 42,108,012 13,549,661 55,657,673
Other expense
Participating Lease expenses
--------------- --------------- --------------- -----------------
Total expenses............... 118,672,854 36,533,050 57,475 155,263,379
--------------- --------------- --------------- -----------------
Net loss..................... $ (932,503) $ 57,475 $(57,475) $ (932,503)
=============== =============== =============== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<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. Certain
statements in this Form 10-Q constitute "forward-looking statements" as that
term is defined under the Private Securities Reform Act of 1995 and the
Securities and Exchange Commission. The words "believe", "expect", "anticipate",
"intend", "estimate" and other expressions which are predictions of or indicate
future events and trends, and which do not relate to historical matters,
identify forward-looking statements. Although the Company believes that such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved.
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
million under the Line of Credit (which was repaid upon the exercise of the
underwriters' over-allotment option) to acquire the 13 Initial Hotels and to
repay existing mortgage indebtedness encumbering the Initial Hotels. In
addition, in connection with the IPO, the Company closed a $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 a $50 million 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.
On June 24, 1997, the Company increased its Line of Credit from $150
million to $300 million and improved the terms of the Line of Credit Agreement.
The interest rate on the increased facility decreased from 1.85% over LIBOR to
1.75% over LIBOR and the advance rate increased from 40% of the qualified
borrowing base to 50% of the qualified borrowing base, subject to other
financial ratio tests and limitations.
On July 14, 1997, as part of the terms of the strategic alliance
between Wyndham Hotel Corporation ("Wyndham") and the Company, an affiliate of
Wyndham purchased 112,969 shares of restricted common stock (the "Wyndham
Shares") at a negotiated price of $22.13 per share. The shares were purchased
in connection with the conversion of the LeBaron Airport Hotel to the Wyndham
Airport Hotel San Jose.
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>
Wyndham Safari 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
Westin Resort Key Largo.................... 26,375,000
DoubleTree Guest Suites Atlanta............ 16,300,000
Holiday Inn Corporate Center Phoenix....... 16,000,000
Hilton Airport Hotel Grand Rapids.......... 16,900,000
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
Holiday Inn Select Bucks County................ 21,455,000
Radisson Twin Towers Orlando................... 78,566,186
Marriott Houston West Loop and office building. 38,615,193
Hilton Hotel Cocoa Beach....................... 22,200,000
---------------
Total................................... $ 326,870,134
===============
</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 12 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 25 of the Hotels are managed by
AGHI and the remaining Hotel is managed by Wyndham. The management agreements
are for a period of 12 years from the date each Hotel was acquired.
RESULTS OF OPERATIONS
Actual for the Nine Months Ended September 30, 1997
For the nine months ended September 30, 1997, the Company had revenues of
$43,439,329 consisting of Participating Lease revenue of $42,108,012, office
building rental income of $592,629 and interest income of $738,688. The
interest income earned was primarily from the excess cash from the Company's
1997 Public Offering and from excess cash balances of the Company's
subsidiaries. Depreciation expense for the nine months was $9,209,942
reflecting the additional depreciation expense related to the Company's recent
property acquisitions. Amortization expense was comprised of amortization of
deferred financing costs related to the Company's Line of Credit and the two
subsequent increases to the Line of Credit of $669,754, franchise transfer fees
of $69,538, other deferred expenses, such as organization costs, of $24,683 and
amortization relating to the restricted stock grants issued at the IPO of
$81,354. Real estate and personal property taxes and property insurance for the
nine month period were $4,929,000. Operating expenses related to the office
building were $303,979 for the period ended September 30, 1997. The Company
reported $5,973,945 of interest expense for the period which consists of
$912,297 attributable to the indebtedness on the Holiday Inn Select Dallas DFW
Airport South, $288,945 attributable to the indebtedness on the Courtyard by
Marriott Meadowlands, $366,420 attributable to the indebtedness on the Radisson
Hotel Arlington Heights, $494,154 attributable to the indebtedness on the
DoubleTree Guest Suites Atlanta and $3,912,129 attributable to the borrowings on
the Line of Credit. The balance outstanding on the Line of Credit at September
30, 1997, was approximately $181 million. The minority interest in income for
the period was $2,558,352. The resulting net income applicable to the common
stockholders was $17,212,148 or $1.25 per share.
The Company believes that the Hotels it acquires will generally experience
increases in revenues (and accordingly, provide the Company with increases in
Participating Lease revenues) after the completion of the renovation and
conversion process; however, as individual hotels undergo such renovations,
their performance has been, and is expected to continue to be, adversely
affected by such temporary factors as rooms out-of-service and disruptions of
hotel operations. (A more detailed discussion of hotel revenue is contained in
"The Lessee - Actual" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
Actual for the Three Months Ended September 30, 1997
For the three months ended September 30, 1997, the Company had revenues of
$19,924,452 consisting of Participating Lease revenue of $19,275,779, office
building rental income of $592,629 and interest income of $56,044. The interest
income earned was primarily from excess cash balances of the Company's
subsidiaries. Depreciation expense for the three months was $4,384,609.
Amortization expense was comprised of amortization of deferred financing costs
related to the Company's Line of Credit and the two subsequent increases to the
Line of Credit of $299,022, franchise transfer fees of $28,773, other deferred
expenses, such as organization costs, of $13,952 and amortization relating to
the restricted stock grants issued at the IPO of $36,979. Real estate and
personal property taxes and property insurance for the three month period were
$2,310,782. Operating expenses for
26
<PAGE>
the office building were $303,979 for the period ended September 30, 1997. The
Company reported interest expense for the quarter of $3,978,769, which consists
of $302,487 attributable to the indebtedness on the Holiday Inn Select DFW
Airport South, $95,692 attributable to the indebtedness on the Courtyard by
Marriott Meadowlands, $154,102 attributable to the indebtedness on the Radisson
Hotel Arlington Heights, $230,259 attributable to the indebtedness on the
DoubleTree Guest Suites Atlanta and $3,196,229 attributable to the borrowings on
the Line of Credit. During the quarter, the Company borrowed approximately $10
million to fund renovations and working capital. The minority interest in income
for the period was $988,664. The resulting net income applicable to the common
stockholders was $6,742,854 or $0.46 per share.
Pro Forma for the Nine Months Ended September 30, 1997
Pro forma revenues for the nine months ended September 30, 1997, would have
been $58,123,569 consisting of Participating Lease revenue of $55,657,670,
interest income of $738,688 earned on excess cash balances and office building
rental income of $1,727,211. The office building rental income is related to
the office building connected to the Marriott West Loop Hotel, which was
acquired on June 25, 1997. The office building is currently 77% occupied with
two major leases in the process of being negotiated. The office building, which
is not part of the Company's business strategy, is not intended to be a long-
term asset.
Pro forma expenses for the period consist of depreciation expense of
$12,999,986, real estate and personal property taxes and property insurance of
$6,028,916, general and administrative expense of $1,450,116, ground lease
expense of $956,518, amortization expense of $1,013,978 and office building
operating expense of $962,590. Also included in pro forma expense is interest
expense of $5,550,111 relating to the Line of Credit and mortgage indebtedness
assumed relating to the Holiday Inn Select DFW Airport South, the Courtyard by
Marriott Meadowlands, the Radisson Hotel Arlington Heights and the DoubleTree
Guest Suites Atlanta.
Funds from Operations
Actual Funds from Operations for the nine months and three months ended
September 30, 1997, calculated using the NAREIT definition of Funds from
Operations, was $25,230,301 and $10,566,784, respectively, 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 net income applicable to common
stockholders to Funds from Operations and illustrates the difference in the two
measures of operating performance:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
-------------------- -------------------
<S> <C> <C>
Net income applicable to common
Stockholders............................... $17,212,148 $26,277,293
Depreciation (Company share).................. 8,018,152 11,714,287
-------------------- -------------------
Funds from Operations......................... $25,230,301 $37,991,580
==================== ===================
Weighted average number of shares of
common stock outstanding.................... 13,768,442 19,710,255
</TABLE>
27
<PAGE>
THE LESSEE
The "Lessee" refers to the consolidated operations of AGH Leasing and Twin
Towers Leasing. Twin Towers Leasing commenced operations on June 25, 1997, with
the acquisition of the Radisson Twin Towers Hotel in Orlando, Florida. Twin
Towers Leasing is owned 51% by AGH Leasing, which is the sole general partner,
and 49% by Regent Carolina Corporation, which is an affiliate of the selling
entity of the Radisson Twin Towers Orlando and the sole limited partner. Regent
Carolina Corporation is allocated 100% of the losses of Twin Towers Leasing up
to their capital contribution of $3 million.
Actual for the Nine Months Ended September 30, 1997
For the nine months ended September 30, 1997, the Lessee's revenues were
$117,740,351 consisting of room revenues of $88,220,166, food and beverage
revenues of $22,974,602, other revenues of $5,639,468 and an allocation of
minority interest for the investment in Twin Towers Leasing of $906,115.
Participating Lease payments and property operating costs and expenses were
$42,108,012 and $76,564,842, respectively. The resulting net loss for the
period was $932,503.
Certain Hotels are performing below the Company's expectations and below
last year's performance due to increased market supply, disruptions in
operations due to renovations and capital improvements and a slower than
expected improvements in operations created by the renovations and rebranding
process. Hotels which have completed the renovation process are reflecting
marked improvements in operations. The Company expects these trends to continue
for the remainder of the current year and into the following year.
Actual for the Three Months Ended September 30, 1997
For the three months ended September 30, 1997, the Lessee's revenues were
$53,319,833 consisting of room revenues of $39,699,809, food and beverage
revenues of $10,084,183, other revenues of $2,629,726 and an allocation of
minority interest for the investment in Twin Towers Leasing of $906,115.
Participating Lease payments and property operating costs and expenses were
$19,275,779 and $34,387,114, respectively. The resulting net loss for the
period was $343,060.
SUMMARY OPERATIONAL HIGHLIGHTS
<TABLE>
<CAPTION>
THIRD QUARTER
-------------------------------------------------------
1996 %
1997 PROFORMA(1) CHANGE
------------ -------------- -------------
<S> <C> <C> <C>
REVENUE PER AVAILABLE ROOM (REVPAR)
11 hotels not undergoing repositioning $ 68.89 $ 58.80 17%
15 hotels undergoing repositioning $ 61.47 $ 58.95 4%
All hotels $ 64.51 $ 58.89 10%
OCCUPANCY
11 hotels not undergoing repositioning 80% 75% 6%
15 hotels undergoing repositioning 73% 76% (4%)
All hotels 76% 76% 0%
AVERAGE DAILY RATE
11 hotels not undergoing repositioning $ 86.60 $ 78.24 11%
15 hotels undergoing repositioning $ 84.61 $ 77.72 9%
All hotels $ 85.47 $ 77.93 10%
</TABLE>
(1) In this reference, pro forma results are calculated as if the
Company owned all 26 Hotels for the full period from July 1,
1996, through September 30, 1996.
28
<PAGE>
Revenue per available room (REVPAR) for the Company's 11 Hotels that were
not undergoing repositioning during the quarter increased 17% to $68.89, while
average daily room rate (ADR) increased 11% to $86.60. Occupancy for these
Hotels increased to 80% in the third quarter from 75% in last year's third
quarter.
Excluding the Company's two Atlanta properties, which reflect the impact of
the Olympics in last years third quarter, REVPAR increased to $62.61 from $57.31
last year, up 9% on the remaining 13 Hotels experiencing renovation or brand
repositioning, reflecting higher rates being generated from those rooms which
have been refurbished. These same 13 Hotels increased ADR 13% to $84.63 from
$74.96. Occupancy was reduced to 74% from 77%, reflecting the impact of both
rooms out-of-service and public area and exterior construction.
In total, the 26 Hotels currently in the Company's portfolio produced
REVPAR for the third quarter of $64.51, an increase of 10%. ADR rose 10% to
$85.47 for the three months, while occupancy remained stable at 76%.
Pro Forma Operations for the Nine Months Ended September 30, 1997
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, 1997
--------------------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Room revenue................................ 73.8%
Food and beverage revenue................... 20.8
Other revenue............................... 4.7
Minority interest income.................... .7
-----------------
Total revenue........................ 100.0
Hotel operating expenses.................... 65.4
Other corporate expenses.................... 0.2
Participating Lease expenses................ 36.0
-----------------
Net loss................... (1.6%)
=================
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, 1997
--------------------
<S> <C>
KEY FACTORS:
Occupancy................................... 72.6%
ADR......................................... $86.01
REVPAR...................................... $62.43
</TABLE>
29
<PAGE>
The following table sets forth room revenue for each of the Hotels:
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS
ENDED
SEPTEMBER 30, 1997
----------------------
<S> <C>
Hotels:
Holiday Inn Dallas DFW Airport West............................. $ 3,419,265
Courtyard by Marriott Meadowlands............................... 3,917,610
Hampton Inn Richmond Airport.................................... 1,902,403
Hotel Maison de Ville........................................... 1,114,912
Hilton Hotel-Toledo............................................. 2,767,284
Holiday Inn Select Dallas DFW Airport South..................... 6,381,903
Holiday Inn Select New Orleans International Airport............ 5,249,266
Hampton Inn Ocean City.......................................... 2,213,687
Crowne Plaza Madison............................................ 4,236,365
Holiday Inn Park Center Plaza................................... 5,137,587
Wyndham Albuquerque Airport Hotel............................... 3,274,906
Wyndham Airport Hotel San Jose.................................. 5,938,630
Holiday Inn Select Mission Valley............................... 4,546,934
Wyndham Safari Lake Buena Vista................................. 6,648,163
Holiday Inn Resort Monterey..................................... 4,270,597
Hilton Hotel Durham............................................. 2,775,582
Radisson Hotel Arlington Heights................................ 3,382,101
Wyndham Garden Hotel Marietta................................... 2,722,674
DoubleTree Guest Suites Hotel................................... 2,792,321
Westin Resort Key Largo......................................... 5,736,225
Holiday Inn Corporate Center Phoenix............................ 3,219,447
Hilton Airport Hotel Grand Rapids............................... 3,448,526
Holiday Inn Select Bucks County................................. 4,115,738
Marriott Houston West Loop...................................... 6,295,693
Radisson Twin Towers Orlando.................................... 13,236,002
Hilton Hotel Cocoa Beach........................................ 5,181,412
----------------------
Total (all Hotels).............................................. $ $113,925,233
======================
</TABLE>
For the nine months ended September 30, 1997, the Lessee would have had pro
forma room revenues of $113,925,233 from the Hotels and pro forma total revenues
of $154,330,876. Pro forma operating expenses would have been $99,605,706 and
pro forma Participating Lease payments would have been $55,657,673.
Pro forma net loss for the period would have been $932,503.
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. For the nine months ended
September 30, 1997, cash flow provided by operating activities, consisting
primarily of Participating Lease revenue, was $28,977,818 and Funds from
Operations (as previously defined) was $25,230,301. The Lessee's obligations
under the Participating Leases are collateralized by the pledge of 275,000 OP
Units by the partners of AGH Leasing and the remaining capital of $2.1 million
contributed by the 49% limited partner of Twin Towers Leasing. 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.
30
<PAGE>
During the nine months ended September 30, 1997, the Company completed the
1997 Public Offering, producing net proceeds to the Company of $161.7 million.
In addition, the Company increased its Line of Credit from $100 million to $150
million in February 1997 and from $150 million to $300 million in June 1997. The
June 1997 amendment to the Company's Line of Credit decreased the applicable
interest rate from 1.85% plus LIBOR to 1.75% plus LIBOR and increased the
advance rate from 40% of the qualified borrowing base to 50% of the qualified
borrowing base, subject to other financial ratio tests and limitations. The June
25, 1997, Line of Credit amendment also increased the number of facility banks,
led by Societe Generale and Bank One, from five banks to eleven banks. The
Company's borrowing capacity under the Line of Credit at September 30, 1997, is
approximately $242 million.
At September 30, 1997, the Company had $1.5 million in cash and cash
equivalents and $181 million outstanding under the Line of Credit. The Line of
Credit balance outstanding at December 31, 1996, and the additional borrowings
made before the Company's 1997 Public Offering were substantially repaid with
the net proceeds from the 1997 Public Offering. The Company has subsequently
borrowed approximately $181 million to fund property acquisitions, renovations,
capital improvements and working capital needs. Borrowings under the Line of
Credit bear interest at 30-day, 60-day or 90-day LIBOR (5.66%, 5.69% and 5.77%
at September 30, 1997) plus 1.75% per annum, payable monthly in arrears or one-
half percent in excess of the prime rate at the option of the Company. While no
definitive agreements with respect to the acquisition of any additional hotels
have 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. To the extent that the Line of
Credit is not sufficient to make additional property acquisitions, complete the
renovation and capital improvement programs and for working capital, the Company
expects that it will return to the equity market or will seek alternative
financing opportunities.
Cash and cash equivalents as of September 30, 1997, were $1,537,567.
Restricted cash of $653,796 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 $28,977,818 for nine months
ended September 30, 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 $298,396,955
resulted from the purchase of and improvements made to the Hotels. Cash flows
from financing activities of $267,068,423 during this period was primarily
related to the receipt of proceeds from the 1997 Public Offering and borrowings
on the Line of Credit, net of principal payments on borrowings and payments for
deferred loan costs. The Company also paid dividends of $17,693,156 on common
stock and OP Units outstanding.
To provide for additional financing flexibility, the Company has registered
up to an aggregate of $500 million in common stock, $0.01 par value per share,
and warrants to purchase common stock pursuant to a shelf registration filed on
August 6, 1997, and declared effective by the Securities and Exchange Commission
on August 28, 1997. Under the terms of the registration, the Company may decide
the amount of securities to sell from time to time. Any proceeds from such a
sale would be for various purposes, which may include, without limitation, the
repayment of outstanding indebtedness, the acquisition of additional hotels, the
improvement and/or expansion of one or more of its hotel properties or for
working capital purposes.
On September 9, 1997, the Company entered into agreements to sell 2,671,705
shares of common stock to certain investment funds and separate accounts advised
by ABKB/LaSalle Securities Limited Partnership ("ABKB") and LaSalle Advisors
Limited Partnership (together with ABKB "ABKB/LaSalle") at an average price of
approximately $25.50 per share. The sale of the shares is scheduled to occur
periodically through January 31, 1998, at the option of the Company, subject to
the satisfaction of certain customary conditions. The gross proceeds from the
sale to ABKB/LaSalle will total approximately $68 million. On November 3, 1997,
688,837 of such shares were sold to certain investment funds and separate
accounts advised by ABKB.
On November 13, 1997, the Company completed a follow-on primary public
offering (the "Second 1997 Offering") of 4,250,000 shares of its common stock.
The offering price of all shares sold in the Second 1997 Offering was $27.50 per
share, resulting in net proceeds of approximately $110.2 million after deducting
offering expenses. All of the net proceeds were contributed to AGH GP, Inc. and
AGH LP, Inc., which in turn contributed such proceeds to the Operating
Partnership in exchange for a 2.9% equity interest in the Operating Partnership
for a combined aggregate equity interest in the Operating Partnership of 90.1%.
31
<PAGE>
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, the Company expects to use cash available for distribution in excess of
distributions paid or funds drawn under the Line of Credit or other borrowings
or equity to fund additional capital improvements, as necessary, including major
renovations at the Company's Hotels.
The Company has budgeted $117.9 million to fund capital improvements and
renovations at the Hotels. As of September 30, 1997, the Company had spent
approximately $52.4 million on capital improvements and renovations and the
Company has budgeted to spend the remaining $65.5 million on the Hotels during
the remainder of 1997, and in 1998 and 1999. In certain circumstances such
capital improvements are being completed in connection with franchisor
requirements. The following table describes the remaining renovations and
improvements (numbers reported in thousands) as of September 30, 1997:
<TABLE>
<CAPTION>
DESCRIPTION OF REMAINING
HOTELS RENOVATION/IMPROVEMENT BUDGETED AMOUNT
------ ---------------------- ---------------
<S> <C> <C>
Radisson Twin Towers Orlando................... Upgrade and renovation of guest rooms, public $ 17,109
areas and exterior.
Radisson Hotel Arlington Heights............... Upgrade and renovation of guest rooms and public 12,224
areas as well as addition of approximately 100
guest rooms.
Marriott Houston West Loop..................... Upgrade and renovation of guest rooms, public 7,675
areas and exterior.
Holiday Inn Select Bucks County................ Upgrade and renovation of guest rooms, public 4,529
areas and exterior in connection with conversion
to the Crowne Plaza brand.
Holiday Inn Resort Monterey.................... Upgrade and renovation of guest rooms and public 4,528
areas in connection with conversion to the Hilton
Hotel brand.
Westin Resort Key Largo........................ Upgrade and renovation of guest rooms, public 3,453
areas and exterior in connection with the
conversion to the Westin Resort brand.
Wyndham Garden Hotel Marietta.................. Upgrade and renovation of guest rooms, public 3,023
areas and restaurant in connection with the
conversion to the Wyndham Hotel brand.
Hilton Hotel Cocoa Beach....................... Upgrade and renovation of guest rooms, public 2,594
areas and exterior.
DoubleTree Guest Suites Atlanta................ Upgrade and renovation of guest rooms, atrium 2,424
and public areas in connection with conversion to
the DoubleTree Guest Suites brand.
Hilton Airport Hotel Grand Rapids.............. Upgrade and renovate guest bathrooms and public 1,586
areas.
Wyndham Safari Lake Buena Vista................ Upgrade and renovation of guest rooms and public 1,466
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 and
courtyard in connection with conversion to the
Wyndham Hotel brand.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF REMAINING
HOTELS RENOVATION/IMPROVEMENT BUDGETED AMOUNT
------ ---------------------- ---------------
<S> <C> <C>
Holiday Inn Corporate Center Phoenix........... Upgrade of guest rooms and public areas in 1,057
connection with conversion to the Crowne Plaza
brand.
Hampton Inn Richmond Airport................... Upgrade of public areas, guest rooms and 1,053
replacement of roof.
Wyndham Albuquerque Airport Hotel.............. Ballroom addition. 975
Wyndham Airport Hotel San Jose................. Upgrade of public areas and guest rooms and 394
convert ninth floor to concierge floor in
connection with conversion to the Wyndham
Hotel brand.
Holiday Inn Park Center Plaza.................. Ungrade of guest rooms and public areas and 394
conversion of the ninth floor to "club" level in
connection with the conversion to the Crowne
Plaza brand.
Hilton Hotel Durham............................ Addition of 42 guest rooms and renovation of 386
guest rooms and public areas.
Holiday Inn Select Mission Valley.............. Upgrade of guest rooms and public areas in 307
connection with conversion to the Holiday Inn
Select brand.
Hilton Hotel Toledo............................ Upgrade of guest rooms and renovation of public 222
areas.
Holiday Inn Select New Orleans
International Airport...................... Upgrade of guest rooms and public areas and 59
renovation of roof in connection with the
conversion to the Holiday Inn Select brand.
Holiday Inn Dallas DFW Airport West............ Upgrade of guest rooms and corridors. 39
-------------
Total (all Hotels) $ 65,497
=============
</TABLE>
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.
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. Changes in the scope of the work are inherent in
large renovation projects such as the ones undertaken by the Company. The
Company has increased the scope of the work in certain projects in response to
market conditions, building code and other requirements. The Company attempts to
schedule renovations and improvements during traditionally lower occupancy
periods in an effort to minimize disruption to the hotels' operations; however,
the impact of rooms out-of-service and public area construction remains
significant. As individual hotels undergo such renovation and capital
improvements, their performance may be adversely affected, although such effects
are expected to be temporary.
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.
33
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 14, 1997, the Company, as part of the terms of the strategic
alliance with Wyndham Hotel Corporation, sold 112,969 shares of restricted
common stock at a negotiated price of $22.13 per share. The shares were
purchased in connection with the conversion of the LeBaron Airport Hotel to the
Wyndham Airport Hotel San Jose. No registration statement was required in
connection with this issuance and sale because the transactions did not involve
a public offering and were exempt under Section 4(2) of the Securities Act of
1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated September 9, 1997,
reporting that the Company entered into agreements for the sale of 2,671,705
shares of common stock to certain investment funds and separate accounts advised
by ABKB/LaSalle Securities Limited Partnership and/or LaSalle Advisors Limited
Partnership.
34
<PAGE>
SIGNATURE
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 13, 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)
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 1,537,567 1,537,567
<SECURITIES> 0 0
<RECEIVABLES> 9,740,389 9,740,389
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 557,575,523 557,575,523
<DEPRECIATION> 13,393,973 13,393,973
<TOTAL-ASSETS> 562,013,391 562,013,391
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 147,701 147,701
<OTHER-SE> 284,480,995 284,480,995
<TOTAL-LIABILITY-AND-EQUITY> 562,013,391 562,013,391
<SALES> 0 0
<TOTAL-REVENUES> 43,439,329 19,924,452
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 17,694,884 8,214,165
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,973,945 3,978,769
<INCOME-PRETAX> 17,212,148 6,742,854
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 17,212,148 6,742,854
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,212,148 6,742,854
<EPS-PRIMARY> 1.25 .46
<EPS-DILUTED> 1.25 .46
</TABLE>
