UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File Number: 0-25060
HUMPHREY HOSPITALITY TRUST, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1889548
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
12301 Old Columbia Pike, Silver Spring MD 20904 (301) 680-4343
(Address of principal executive offices) (Registrant's telephone number
(zip code) including area code)
N/A
(former name, former address and former fiscal year,
if changed since last report)
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 short period that the Registrant was
required to file such report), and (ii) has been subject to such filing
requirements for the past 90 days.
YES __X____ NO _______
The number of shares of Common Stock, $.01 par value, outstanding on May 13,
1996 was 2,331,700.
<PAGE>
<TABLE>
<CAPTION>
HUMPHREY HOSPITALITY TRUST, INC.
INDEX
Page Number
<S> <C>
PART I. Financial Information
Item 1. HUMPHREY HOSPITALITY TRUST, INC.
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Income and Changes in Retained Earnings for the three months
ended March 31, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and
1995 (unaudited) 5
Notes to Consolidated Financial Statements 6
HUMPHREY HOSPITALITY MANAGEMENT, INC.
Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995 9
Statements of Operations and Changes in Retained Earnings for the three months ended
March 31, 1996 and 1995 (unaudited) 10
Statement of Cash Flows for the three months ended March 31, 1996 and 1995 (unaudited) 11
Notes to Financial Statements 12
Item 2. Management's Discussion and Analysis of Financial Condition 14
PART II. Other Information 18
None.
SIGNATURES 18
</TABLE>
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<PAGE>
Item 1.
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March December
31, 1996 31, 1995
(unaudited)
ASSETS
<S> <C> <C>
Investment in hotel properties, net of accumulated depreciation $19,947,458 $19,709,480
Cash and cash equivalents 453,769 168,636
Accounts receivable from Lessee 548,323 1,024,848
Deferred expenses, net of accumulated amortization 425,563 445,449
Replacement reserve 174,509 407,660
Other assets 146,591 142,562
------------- --------------
Total assets $21,696,213 $21,898,635
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage notes and bond payable $8,310,200 $8,327,000
Obligations under capital leases 50,645 56,394
Accounts payable and accrued expenses 57,590 75,123
Distributions payable 561,459 561,459
------------- -------------
8,979,894 9,019,976
------------ ------------
Minority interest 2,554,888 2,589,150
------------- -------------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock. $.01 par value, 25,000,000 shares
authorized, 2,331,700 and 2,331,700 shares issued
and outstanding 23,317 23,317
Additional paid-in capital 10,263,791 10,263,791
Retained earnings (125,677) 2,401
-------------- ---------------
10,161,431 10,289,509
------------ -------------
Total liabilities and shareholders' equity $ 21,696,213 $ 21,898,635
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENT OF INCOME AND CHANGES IN RETAINED EARNINGS
(unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31,
1996 1995
<S> <C> <C>
Revenue
Percentage lease revenue $833,751 $776,663
Other revenue 7,546 997
----------- ---------
Total revenue 841,297 777,660
Expenses
Interest 152,316 311,835
Real estate and personal property taxes and insurance 51,301 46,824
General and administrative 72,179 56,129
Depreciation and amortization 166,381 126,816
--------- ----------
Total expenses 442,177 541,604
--------- ----------
Income before allocation to minority interest 399,120 236,056
Income allocated to minority interest 84,175 67,370
--------- -----------
Net income 314,945 168,686
Retained earnings, beginning of period 2,401 13,781
Distributions declared 443,023 198,255
--------- -------
Accumulated deficit, end of period $(125,677) $(15,788)
========= ========
Income per common share outstanding $ 0.14 $ 0.13
Weighted average shares outstanding 2,955,050 (1) 1,849,566 (2)
</TABLE>
(1) Includes 527,866 and 95,484 units which are redeemable on a one-for-one
basis for shares of common stock at any time after November 29, 1995 and
January 21, 1996, respectively. The weighted average shares outstanding
calculation reflects the secondary offering that occurred on July 21, 1995.
(2) Includes 527,866 units which are redeemable on a one-for-one basis for
shares of common stock after November 29, 1995.
See notes to consolidated financial statements.
-4-
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net income $ 314,945 $ 168,686
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 166,381 126,816
Income allocated to minority interest 84,175 67,370
Changes in assets and liabilities
Decrease (increase) in accounts receivable 476,525 (368,309)
(Increase) decrease in other assets (4,029) 1,320
Increase in financing cost -- (40,505)
Decrease in accounts payable
and accrued expenses (17,533) (33,547)
----------- ------------
Net cash provided by (used in) operating activities 1,020,464 (78,169)
---------- -----------
Cash flows from investing activities
Investment in hotel properties (384,473) --
Deposit to replacement reserve (130,953) (82,615)
Interest earned on replacement reserve (2,089) --
Withdrawals from replacement reserve 366,192 --
------- --------
Net cash used in investing activities (151,323) (82,615)
--------- --------
Cash flows from financing activities
Redemption of common stock -- (1,000)
Increase in line of credit -- 307,300
Distributions paid (561,459) (81,381)
Principal payments on long-term debt (16,800) (613,793)
Principal payments on capital leases (5,749) (3,638)
------------- -------------
Net cash used in financing activities (584,008) (392,512)
----------- ------------
Net increase (decrease) in cash and cash equivalents 285,133 (553,296)
Cash and cash equivalents, beginning 168,636 554,203
----------- -----------
Cash and cash equivalents, ending $ 453,769 $ 907
============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 152,316 $ 311,835
============= ============
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Trust, Inc. (the "Company") was incorporated on
August 23, 1994, to acquire equity interests in eight existing hotel properties.
The Company is a self-administered, Virginia corporation and qualifies as a real
estate investment trust (REIT) for federal income tax purposes. During the
fourth quarter of 1994, the Company completed an initial public offering (IPO)
of 1,321,700 shares of $.01 par value common stock. The offering price per share
was $6 resulting in gross proceeds of $7,930,200. Net of underwriters discount
and offering expenses, the Company received proceeds of $6,949,899.
Upon completion of the IPO, the Company contributed substantially all of
the net proceeds of the offering to Humphrey Hospitality Limited Partnership
(the "Partnership") in exchange for a 71.46% general partnership interest in the
Partnership. The Partnership used the proceeds from the Company to acquire an
equity interest in seven existing hotel properties and a general partnership
interest in Solomons Beacon Inn Limited Partnership (the "Subsidiary
Partnership") (such interests, collectively, the Initial Hotels) and to retire
certain indebtedness relating to the Initial Hotels. The Partnership acquired
the Initial Hotels in exchange for (i) approximately $4.8 million in cash, (ii)
527,866 units of limited partnership interest in the Partnership ("Units") which
are redeemable, subject to certain limitations, for an aggregate of 527,866
Common Shares, with a value of approximately $3.2 million based on the IPO
offering price, and (iii) the assumption of approximately $15.5 million of
indebtedness. James I. Humphrey, Jr. and Humphrey Associates, Inc. (the
"Humphrey Affiliates") received units of limited partnership interests in the
Partnership aggregating a 28.54% equity interest in the Partnership. The
Partnership owns a 99% general partnership interest and the Company owns a 1%
limited partnership interest in the Subsidiary Partnership. Hotel properties are
carried at the lower of cost or net realizable value. The Company began
operations on November 29, 1994.
On July 21, 1995, the Company completed a second public offering (the
"Second Stock Offering") of 1,010,000 shares of common stock. The gross proceeds
were $7,827,500 based on the offering price of $7.75 per share (the "Offering
Price"). Net of underwriters' discount and offering expenses, the Company
received proceeds of approximately $6,957,000. The Company used the proceeds to
repay certain debt and through the Partnership, acquired the Days Inn hotel in
Farmville, Virginia (the "Acquisition Hotel"). The Partnership acquired the
Acquisition Hotel from Farmville Lodging Associates, LLC (the "LLC"), a Maryland
limited liability company in which James I. Humphrey, Chairman of the Board of
Directors and President of the Company, owns a 98% equity interest. The
Partnership acquired the Acquisition Hotel in exchange for (i) 95,484 Units,
which are redeemable, subject to certain limitations, for an aggregate of
approximately 95,484 shares of common stock and (ii) assumption of approximately
$1.23 million of debt secured by the Acquisition Hotel, which was repaid
immediately with proceeds of the Second Stock Offering. The acquisition of the
Days Inn hotel has been recorded by the Company at the affiliates historical
cost which is less than net realizable value. The equity of the Acquisition
Hotel, net of the portion allocated to the minority interest, has been recorded
as an increase in paid-in capital. Upon completion of the Second Stock Offering,
the Company currently owns a 78.91% partnership interest, and Mr. Humphrey,
Humphrey Associates and the LLC collectively own a 21.09% interest in the
Partnership.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10- Q and accordingly, do not include
all of the disclosures normally required by generally accepted accounting
principles or those made in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission. The financial information has been
prepared in accordance with the Company's customary accounting practices. In the
opinion of management, the information presented reflects all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the Company's financial position as of March 31, 1996, and the
results of operations and cash flows for the three months ended March 31, 1996
and 1995. The results of operations for the three months ended March 31, 1996
and 1995 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. The
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<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 1995.
Note 2. Distributions
On January 29, 1996, the Company paid a $.19 per share distribution on
each share of common stock outstanding (including the distribution to minority
interest) for shareholders of record as of December 31, 1995. On March 12, 1996,
the Company declared a $.19 per share distribution on each share of common stock
outstanding on March 25, 1996. The distribution (including the distribution to
minority interest) was paid on May 3, 1996.
Note 3. Commitments and Contingencies
Pursuant to the Humphrey Hospitality Limited Partnership Agreement, the
Humphrey Affiliates received Redemption Rights, (the "Redemption Rights"), which
enables them to cause the Partnership to redeem their interests in the
Partnership in exchange for shares of Common Stock or for cash at the election
of the Company. The Redemption Rights may be exercised by the Humphrey
Affiliates and the LLC at any time. The number of shares of Common Stock
issuable to the Humphrey Affiliates and the LLC upon exercise of the Redemption
Rights is 527,866, and 95,484, respectively, which was determined based on the
cash value of their interests in the partnership that originally owned the
Initial Hotels and the Acquisition Hotel, divided by the Offering Price of $6
and $7.75 per share, respectively. The number of shares issuable upon exercise
of the Redemption Rights will be adjusted upon the occurrence of stock splits,
mergers, consolidations or similar pro rata share transactions, which otherwise
would have the effect of diluting the ownership interests of the Humphrey
Affiliates and the LLC or the shareholders of the Company.
The Company acts as the general partner in the Partnership, which acts
as a general partner in the Subsidiary Partnership and as such, is liable for
all recourse debt of the partnerships to the extent not paid by the
partnerships. In the opinion of management, the Company does not anticipate any
losses as a result of its general partner obligations.
The Company has entered into percentage leases relating to each of the
Initial Hotels and the Acquisition Hotel with Humphrey Hospitality Management,
Inc. (the "Lessee"), for a term of 10 years, with a five year renewal option at
the option of the Lessee. Pursuant to the terms of the percentage leases, the
Lessee is required to pay both base rent and percentage rent and certain other
additional charges and is entitled to all profits from the operations of the
Initial Hotels after the payment of certain specified operating expenses. Also
pursuant to the terms of the Percentage Leases, the Company is required to make
available to the Lessee an amount equal to 4% of room revenue on a quarterly,
cumulative basis for capital improvements and refurbishments. The Company has
future lease commitments from the Lessee through July 2005. Minimum future
rental income under these noncancellable operating leases at December 31, 1995
is as follows:
Year
1996 $ 1,678,334
1997 1,678,334
1998 1,678,334
1999 1,678,334
2000 1,678,334
Thereafter 6,657,059
----------
$15,048,729
-7-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1996
For the three months ended March 31, 1996, the Company earned base
rents of $419,587 and percentage rents of $414,164. As of March 31, 1996
approximately $548,323 was due from the Lessee. The percentage rents are based
on a percentage of gross room and other revenue.
The hotel properties are operated under franchise agreements assumed by the
Lessee that have a twenty year life but may be terminated by the franchisor on a
certain anniversary dates specified in the agreements. The agreements require
annual payments for franchise royalties, reservation, and advertising services
which are based upon percentages of gross room revenue. These fees are paid by
the Lessee.
Note 4. Mortgages and Bonds Payable
In January 1995, approximately $6.4 million of the Company's variable rate
debt was refinanced to a fixed annual percentage rate of 10.25%. The $6.4
million of debt was secured by a first mortgage on and cross collateralized by
the Comfort Inns located in Solomons, Maryland; Elizabethton, Tennessee;
Dahlgren, Virginia; Farmville, Virginia; and Princeton, West Virginia.
In July 1995, the Company assumed approximately $1.23 million of debt in
connection with the acquisition of the Acquisition Hotel. Proceeds from the
Second Stock Offering were utilized to pay off this debt immediately after its
assumption. Proceeds of the Second Stock Offering were also used to pay down
approximately $4.6 million of debt and refinanced $1.75 million of debt to a
fixed annual percentage rate of 8.64% from an annual percentage rate of 10.25%.
The $1.75 million debt continued to be cross collateralized by a first mortgage
on the Comfort Inns located in Solomons, Maryland; Elizabethton, Tennessee;
Dahlgren, Virginia; Farmville, Virginia; and Princeton, West Virginia.
Additionally, with proceeds from the Second Stock Offering, the Company
paid off an unsecured line of credit from Mr. Humphrey in the approximate amount
of $600,000 which had an annual interest rate of 10%.
In August 1995, the Company refinanced approximately $2.46 million of
variable rate bonds, from an approximate annual interest rate of 10.832% to a
fixed annual interest rate of 8%. The debt is secured by a first mortgage on the
Comfort Inn at Dublin, Virginia.
The Company has obtained a $6.5 million line of credit from Mercantile Safe
Deposit and Trust Company on April 10, 1996. The term of the credit facility is
for three years with two one-year extensions at the option of the bank. The line
bears interest at prime rate plus 25 basis points, presently 8.75%. The line is
cross-collateralized by the Company hotels located in Elizabethton, Tennessee,
Farmville, Virginia, Princeton, West Virginia, Dahlgren, Virginia, and Solomons,
Maryland. The line of credit will be used to refinance approximately $1.72
million of debt and the remainder will be utilized to develop two new hotels, a
64 room Comfort Suites in Dover, Delaware and a 50 room Hampton Inn in Dublin,
Virginia. The Company has executed an agreement with Humphrey Development, Inc.,
a company that Mr. Humphrey is the sole shareholder of, to develop the two new
hotel facilities. The two new facilities are to be developed for a specific sum
of $4.8 million with savings or cost overruns, if any, to be realized by
Humphrey Development, Inc. All interest and construction related costs are
contained within the development agreement. Upon completion of the hotels, the
Company will lease the hotels to Humphrey Hospitality Management, Inc.
-8-
<PAGE>
Humphrey Hospitality Management, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 629,847 $ 1,253,229
Accounts receivable 122,726 78,585
Prepaid expenses 22,749 17,976
---------- ---------
Total current assets $ 775,322 $ 1,349,790
======= ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 278,731 $ 170,455
Prepaid slip rentals - Marina 67,813 38,065
Due to affiliates 574,173 1,092,473
-------- ----------
Total current liabilities 920,717 1,300,993
-------- ----------
COMMITMENTS -- --
SHAREHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding 1 1
Retained earnings (deficit) (145,396) 48,796
----------- -----------
Total shareholder's earnings (deficit) (145,395) 48,797
----------- -----------
Total liabilities and shareholder's equity $ 775,322 $ 1,349,790
======== ===========
</TABLE>
See notes to financial statements.
-9-
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENT OF OPERATIONS AND CHANGES IN RETAINED EARNINGS
(unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31,
1996 1995
<S> <C> <C>
Revenue from hotel operations
Room revenue $ 1,512,365 $ 1,404,111
Telephone revenue 43,069 40,914
Slip revenue 52,766 59,167
Other revenue 44,141 20,843
----------- -----------
Total revenue 1,652,341 1,525,035
--------- ---------
Expenses
Salaries and wages 461,046 376,469
Room expense 91,822 74,517
Telephone 37,770 31,199
Marina expense 12,749 9,332
General and administrative 92,248 51,613
Marketing and promotion 49,260 48,606
Utilities 112,100 96,752
Repairs and maintenance 38,138 34,083
Taxes and insurance 37,534 31,236
Management fees -- 45,751
Franchise fees 80,115 74,900
Lease payments 833,751 776,663
------- -------
Total expenses 1,846,533 1,651,121
--------- ---------
NET LOSS (194,192) (126,086)
Retained earnings (deficit), beginning of period 48,796 (89,599)
----------- --------------
Accumulated deficit, end of period $ (145,396) $ (215,685)
=============== ================
</TABLE>
See notes to financial statements.
-10-
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the three Months ended March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities
Net loss $ (194,192) $ (126,086)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities
Changes in assets and liabilities
Increase in accounts receivable (44,141) (57,650)
(Increase) decrease in prepaid expenses (4,773) 5,315
Increase in accounts payable 108,276 62,650
Increase in prepaid slip rentals 29,748 3,969
(Decrease) increase in due to affiliates (518,300) 342,458
----------- ---------
Net cash (used in) provided by
operating activities (623,382) 230,656
----------- ---------
Net decrease (increase) in cash and
cash equivalents (623,382) 230,656
Cash and cash equivalents, beginning 1,253,229 197,598
---------- --------
Cash and cash equivalents, ending $ 629,847 $ 428,254
========== ==========
</TABLE>
See notes to financial statements.
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<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Management, Inc. (the "Lessee") was incorporated
under the laws of the State of Maryland on August 18, 1994 to lease and operate
seven existing hotel properties (the "Initial Partnership Hotels") from Humphrey
Hospitality Limited Partnership (the "Partnership"), one hotel property from
Solomons Beacon Inn Limited Partnership (the "Subsidiary Partnership") (together
with the Initial Partnership Hotels, the "Initial Hotels") and the Days Inn
hotel (the "Acquisition Hotel") which was acquired by the Partnership on July
21, 1995. James I. Humphrey, Jr. is the sole shareholder of the Lessee. The
Lessee began operations on November 29, 1994. Prior to November 29, 1994, the
Initial Hotels were operated by Humphrey Hotels, Inc. From November 1, 1994, the
Acquisition Hotel was operated by Humphrey Hotels, Inc., and was owned and
operated by an unaffiliated party prior to November, 1994.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
the instructions to Form 10-Q and accordingly, do not include all of the
disclosures normally required by generally accepted accounting principles. The
financial information has been prepared in accordance with the Lessee's
customary accounting practices. In the opinion of management, the information
presented reflects all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the Lessee's financial position
as of March 31, 1996, and the results of operations and cash flows for the three
months ended March 31, 1996 and 1995. The results of operation for the three
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. The unaudited financial
statements should be read in conjunction with the financial statements and
footnotes thereto included in Humphrey Hospitality Trust, Inc.'s Form 10-K for
the year ended December 31, 1995.
Accounts Receivable
The Lessee considers accounts receivable to be fully collectable;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectable, they will be charged to operations when that determination is
made.
Income Taxes
The Lessee has elected to be treated as an S Corporation for federal
and state income tax purposes. Therefore, no provision or benefit for income
taxes has been included in these financial statements since taxable income or
loss passes through to, and is reportable by, the shareholder individually.
Note 2. Related Party Transactions
The Lessee had entered into separate management agreements, relating to
each of the Initial Hotels and the Acquisition Hotel, with Humphrey Hotels, Inc.
(the "Operator"), an affiliate. Pursuant to the management agreements, a fee
equal to 3% of total revenue was payable to the Operator and was subordinate in
all respects to the Lessee's obligations under the percentage leases. On
February 9, 1996, the Lessee announced the termination of its operating
agreements with the Operator, Humphrey Hotels, Inc., effective January 1, 1996.
The Lessee immediately began operating all of the hotels that it leases from the
Partnerships. All personnel from the Operator were hired in identical capacities
by the Lessee. The Lessee intends to operate the hotels throughout the lease
term. For the three months ended March 31, 1995, management fees of $45,751were
paid and charged to operations.
Shared Expenses
Humphrey Associates, Inc. and HAI Management, Inc., affiliates of the
Lessee, share certain operating expenses with the Lessee. Expenditures are
allocated based on each entity's pro rata share of the expense. At March 31,
1996, $25,850 was due to the affiliates for such allocated expenses.
-12-
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 1996
Note 3. Commitments
The Lessee has entered into percentage leases, each with a term of 10
years, relating to each of the Initial Hotels and the Acquisition Hotel with
Humphrey Hospitality Limited Partnership (the "Lessor"). Pursuant to the terms
of the percentage leases, the Lessee is required to pay both base rent and
percentage rent and certain other additional charges. The Lessee has future
lease commitments through July 2005. Minimum future lease payments due under
these noncancellable operating leases are as follows:
Year
1996 $ 1,678,334
1997 1,678,334
1998 1,678,334
1999 1,678,334
2000 1,678,334
Thereafter 6,657,059
----------
$15,048,729
For the three months ended March 31, 1996, the Lessee has incurred base
rents of $419,587 and percentage rents of $414,164. As of March 31, 1996, the
amount due Humphrey Hospitality Limited Partnership and Solomons Beacon Inn
Limited Partnership for lease payments were $548,323 collectively, and is
included in due to affiliates on the balance sheet.
-13-
<PAGE>
Item 2.
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
Humphrey Hospitality Trust, Inc. (the "Company"), is a Virginia
corporation that operates as a real estate investment trust (a "REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"). The Company commenced
operations on November 29, 1994 upon completion of its initial public offering
of shares of common stock (the "IPO"). In the IPO, the Company sold 1,321,700
shares of common stock and contributed substantially all of the net proceeds to
Humphrey Hospitality Limited Partnership (the "Partnership"). Contemporaneous
with the IPO, the Partnership acquired equity interests in eight existing hotel
properties (the "Initial Hotels"). The Company serves as the sole general
partner to the Partnership.
On July 21, 1995, the Company completed a second public offering (the
"Second Stock Offering") of 1,010,000 shares of common stock. The Company used
the proceeds to repay certain debt and through the Partnership, acquired the
Days Inn hotel in Farmville, Virginia (the "Acquisition Hotel"). The Partnership
acquired the Acquisition Hotel from Farmville Lodging Associates, LLC (the
"LLC"), a Maryland limited liability company in which James I. Humphrey,
Chairman of the Board of Directors and President of the Company, owns a 98%
equity interest. Upon completion of the Second Stock Offering, the Company owns
a 78.91% partnership interest, and Mr. Humphrey, Humphrey Associates and the LLC
collectively own a 21.09% interest in the Partnership.
In order for the Company to qualify as a REIT under the Code, neither the
Company nor the Partnership can operate hotels. Therefore, the Partnership
leases the Hotels to Humphrey Hospitality Management, Inc., (the "Lessee"). The
Partnership's, and therefore the Company's, principal source of revenue is lease
payments by the Lessee under the Percentage Leases, (the "Percentages Leases").
The Lessee's ability to make payments to the Partnership under the Percentage
Leases is dependent on its ability to generate cash flow from the operation of
the Hotels. The Hotels were managed by Humphrey Hotels, Inc. (the "Operator"),
pursuant to management contracts between the Lessee and the Operator. On
February 9, 1996, the Lessee announced the termination of its operating
agreements with the Operator, effective January 1, 1996. The Lessee immediately
began operating all of the hotels that it leases from the Partnerships. All of
the Initial Hotels had been operated by the Operator since 1989, the Acquisition
Hotel had been operated by the Operator since it was acquired by the LLC in
November 1994.
Results of Operations
The following is a discussion of operations of the Company and the Lessee
for the three month period ended March 31, 1996 compared to the three months
ended March 31, 1995.
The Company's total revenues for the three month period ended March 31,
1996, substantially consisted of Percentage Lease revenue. The Company's revenue
was $841,297, an increase of $63,637, or 8.2%, during the three month period
ended March 31, 1996 as compared to the Company's revenue for the same period of
1995, a significant portion of the increase in revenue is attributable to
revenue realized as a result of the addition of the Acquisition Hotel. Net
income increased by $146,259 to $314,945, or 86.7% for the three months ended
March 31, 1996 as compared to net income of $168,686 for the same period for
1995. The improvement in net income is attributed to the additional revenue from
the Acquisition Hotel and the refinancing and/or retirement of Company debt on
the hotels located in Solomons, Maryland; Dahlgren, Dublin, Farmville, Virginia;
Elizabethton, Tennessee, and Princeton, West Virginia.
The Lessee's room revenues increased by $108,254, or 7.7%, to $1,512,365
for the three months ended March 31, 1996, as compared to $1,404,111 of room
revenue for the same period of 1995. Occupancy for the Hotels decreased from
60.1% for the three month period ended March 31, 1995, to 56.7% for the same
period in 1996. The decrease in occupancy for the three month period ended March
31, 1996 is attributed to record-breaking snowfall that occurred, particularly
in January and February. The average daily rate increased to $47.47 for the
three months ended March 31, 1996, up 5.1% as compared to $45.15 for the same
period of 1995. Revenue per available room (REVPAR) was $26.94 for the three
months ended March 31, 1996, down 0.1%, as compared to $27.12 for the same
period in 1995. The decrease in REVPAR for the three month period ended March
31, 1996 is attributed to low occupancy due to record-breaking
-14-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
snowfall, particularly in January and February. Lessee operating expenses
increased by $195,412 as the result of the addition of the Acquisition Hotel,
and consolidating the Operator with the Lessee, to $1,846,533 for the three
months ended March 31, 1996, as compared to $1,651,121 for the same period in
1995. Room revenues for the Company and the Lessee are seasonal, with hotel
revenues greater in the second and third quarters than in the first and fourth
quarters. Accordingly, the Lessee anticipates an operating loss in the first
quarter of the year, however cash flow from operating activities from previous
quarters are sufficient to meet Lessee obligations during the first quarter.
Liquidity and Capital Resources
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its share of the Partnership's cash
flow. The Partnership's principal source of revenue is Rent payments under the
Percentage Leases. The Lessee's obligations under the Percentage Leases are
unsecured. The Lessee's ability to make Rent payments, and the Company's
liquidity, including its ability to make distributions to common shareholders,
is dependent on the Lessee's ability to generate sufficient cash flow from the
operation of the Hotels.
The hotel business is seasonal, with hotel revenue generally greater in
the second and third quarters than in the first and fourth quarters. To the
extent that cash flow from operating activities is insufficient to provide all
of the estimated quarterly distributions (particularly in the first quarter),
the Company anticipates that it will be able to fund any such deficit from
working capital reserves. As of March 31, 1996, the Company had working capital
reserves of approximately $174,509.
The Company's Funds from Operations (net income plus minority interest
and depreciation and amortization) were $565,501 in the three months ended March
31, 1996 which is an increase of $202,629, or 55.8% over the Funds from
Operations in the comparable period in 1995, which were $362,872. Most of the
improvements in Funds from Operations can be attributed to significantly reduced
interest expense as the result of repayment of debt from the proceeds from the
Second Stock Offering and the addition of the Percentage Lease revenue from the
Acquisition Hotel. Management considers Funds from Operations to be a market
accepted measure of an equity REIT's cash flow which management believes
reflects on the value of real estate companies such as the Company in connection
with the evaluation of other measures of operating performances. In accordance
with the resolution adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts, Inc. (NAREIT), Funds from
Operations represents net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring or
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. For the periods presented,
depreciation and amortization and minority interest were the only non-cash
adjustments. Therefore, Funds from Operations represents cash flow from
operating activities. Funds from Operations should not be considered as an
alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance or to cash flows
from operating, investing or financing activities as a measure of liquidity.
Funds from Operations does not reflect working capital changes, cash
expenditures for capital improvements or debt service with respect to the hotel
properties.
-15-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
The computation of historical and pro-forma Funds from Operations is as
follows:
<TABLE>
<CAPTION>
Historical Three Historical Three
Month Period Ended Month Period Ended
March 31,1996 March 31, 1995
<S>
Net income applicable to <C> <C>
common shares $314,945 $168,686
Add:
Minority interest 84,175 67,370
Depreciation and amortization 166,381 126,816
--------- ---------
Total $565,501 $362,872
======== ========
</TABLE>
In April, 1996, the Company established a line of credit in the amount of
$6.5 million with Mercantile Safe Deposit and Trust Company (the "New Line of
Credit"). The term of the credit facility is for three years with two one year
extensions at the option of the bank. The line bears interest at prime rate plus
25 basis points, presently 8.75%. The credit facility was utilized to refinance
approximately $1.72 million of mortgage debt and will be utilized to develop two
new hotels. The New Line of Credit is cross-collateralized by the Company hotels
located in Dahlgren, Virginia, Farmville, Virginia, Elizabethton, Tennessee,
Princeton, West Virginia, and Solomons, Maryland. The two new hotels will be
located in Dover, Delaware and Dublin, Virginia and will be developed for $4.8
million.
Long-term debt as of March 31, 1996, was approximately $8.3 million as follows:
Approximately $1.7 million, secured by a first deed of trust which is
cross-collateralized and cross-defaulted, on the Initial Hotels located
in Solomons, Maryland; Farmville, Virginia; Elizabethton, Tennessee;
Dahlgren, Virginia; and Princeton, West Virginia. The interest rate
is fixed at a rate of 8.64% per annum. In April 1996 this debt was
refinanced from the New Line of Credit.
Approximately $4.2 million, secured by a first deed of trust on the
Hotels located in Wytheville, Virginia, and Morgantown, West Virginia.
Interest accrues at the rate necessary to remarket bonds at a price equal
to 100% of the outstanding principal balance. The interest rate is
approximately half of the prime rate, which adjusted weekly and is not to
exceed 15% and 11.3636% for Wytheville and Morgantown, respectively. At
March 31, 1996, the interest rate was approximately 4% for both. In
addition, letter of credit fees, trustee fees and financing fees
increased the effective rate to approximately 6.75% as of the same date.
Approximately $2.4 million, secured by a first deed of trust on the
Comfort Inn-Dublin, Virginia. The outstanding interest rate bears interest at a
rate equal to 7.75% per annum with additional Underwriters' fees increasing the
interest rate to 8%.
The Company's Board of Directors has adopted a resolution limiting the
Company's consolidated indebtedness to less than 50% of the aggregate purchase
prices of the hotels in which it has invested. The aggregate total purchase
price paid by the Company for the Hotels is approximately $25.5 million. As of
March 31, 1996, the Company's total outstanding indebtedness represents
approximately 32.6% of the aggregate amount paid by the Company for the Hotels.
-16-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
Pursuant to the Percentage Leases, the Partnership is required to make
available to the Lessee 4% of room revenue per quarter, on a cumulative basis,
for capital improvements and periodic replacement or refurbishment of furniture,
fixtures and equipment at each of the Hotels. The average annual expenditures
for capital improvements and refurbishments of furniture, fixtures and equipment
for the Initial Hotels for the year 1991 through 1994 was approximately 3.8% of
annual room revenues. Therefore, the Company believes that a 4% set-aside
represents a prudent estimate of future expenditure requirements for such items.
As of March 31, 1996, the Partnership has spent $590,398 of the total from the
1995 F.F. & E reserve of $736,665 to fund such improvements at the Hotels. The
Company intends to cause the Partnership to spend amounts in excess of the
obligated amounts if necessary to comply with the reasonable requirements of any
franchise license and otherwise to the extent that the Company deems such
expenditures to be in the best interests of the Company. The Partnership is
obligated to fund the cost of certain capital improvements to the operations to
fund the cost of capital improvements and any furniture, fixture and equipment
requirements in excess of the above.
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended, commencing with its
initial taxable year ending December 31, 1994, as such the Company will not be
subject to a federal income tax on its net income. REITs are subject to a number
of organizational and operational requirements. For example, a REIT, and
therefore the Company, is required to pay dividends to its shareholders of at
least 95% of its taxable income for federal income tax purposes. The Company
intends to pay these dividends from operating cash flows. The Company intends to
retain as a reserve such amounts as it considers necessary for the acquisition,
expansion and renovation of hotel properties consistent with continuing to
distribute to its shareholders amounts sufficient to maintain the Company's
qualification as a REIT.
The Company expects to meet its short-term liquidity requirements
generally through net cash provided by operations and existing cash balances.
The Company believes that its net cash provided by operations will be adequate
to fund both operating requirements and payment of dividends by the Company in
accordance with REIT requirements.
The Company expects to meet its long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowings, the issuance of additional equity securities of the
Company, or, in connection with acquisitions of hotel properties, issuance of
units of limited partnership interest in the Partnership.
Inflation
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the Lessee's ability to raise
room rates in the face of inflation.
Seasonality of Hotel Business and the Hotels
The hotel industry is seasonal in nature. Generally, hotel revenues for
hotels operating in the geographic areas in which the Hotels operate are greater
in the second and third quarters than in the first and fourth quarters. The
Hotel's operations historically reflect this trend. Although the hotel business
is seasonal in nature, the Company believes that it generally will be able to
make its expected distributions by using undistributed cash flow form the second
and third quarters to fund any shortfall in the cash flow from operating
activities from the Hotels in the first and fourth quarters.
Other Information
The Company adopted the provisions of Financial Accounting Standards
Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" which was issued in March 1995, on
January 1, 1996. The adoption of this standard did not have a material effect on
the financial statements. The Company adopted the provisions of Financial
Accounting Standards Board Statement No. 123 "Accounting for Stock Based
Compensation" which was issued in October 1995, on January 1, 1996. The adoption
of this standard did not have a material effect on the financial statements.
-17-
<PAGE>
PART II. OTHER INFORMATION.
None.
SIGNATURES
Pursuant to the requirements 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.
HUMPHREY HOSPITALITY TRUST, INC.
By: ________________________________________
James I. Humphrey, Jr.
President and Secretary
Date:________________________________________
-18-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 453,769
<SECURITIES> 0
<RECEIVABLES> 548,323
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,323,132
<PP&E> 20,618,357
<DEPRECIATION> 670,899
<TOTAL-ASSETS> 21,696,213
<CURRENT-LIABILITIES> 619,049
<BONDS> 8,360,845
0
0
<COMMON> 23,317
<OTHER-SE> 10,138,114
<TOTAL-LIABILITY-AND-EQUITY> 21,696,213
<SALES> 0
<TOTAL-REVENUES> 841,297
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 123,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152,316
<INCOME-PRETAX> 314,945
<INCOME-TAX> 0
<INCOME-CONTINUING> 314,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 314,945
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
