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 September 30, 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 November
14, 1996 was 2,331,700.
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. Financial Information
Item 1. HUMPHREY HOSPITALITY TRUST, INC.
Consolidated Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Income and Changes in Undistributed
Earnings (Deficit) for the three months ended September 30,
1996 and 1995 (unaudited); and nine months ended September
30, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and
1995 (unaudited) 5
Notes to Consolidated Financial Statements 6
HUMPHREY HOSPITALITY MANAGEMENT, INC.
Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 9
Statements of Operations and Changes in Retained Earnings for the three months ended
September 30, 1996 and 1995 (unaudited); and nine months ended September 30, 1996 and 1995
(unaudited) 10
Statement of Cash Flows for the nine months ended September 30, 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 19
</TABLE>
-2-
<PAGE>
Item 1.
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
September December
30, 1996 31, 1995
(unaudited)
ASSETS
<S> <C>
Investment in hotel properties, net of accumulated depreciation $20,473,583 $19,709,480
Cash and cash equivalents 381,128 168,636
Accounts receivable from Lessee 781,170 1,024,848
Deferred expenses, net of accumulated amortization 369,806 445,449
Replacement reserve 170,989 407,660
Other assets 222,285 142,562
------------- --------------
Total assets $22,398,961 $21,898,635
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage notes and bond payable $8,930,823 $8,327,000
Obligations under capital leases 39,513 56,394
Accounts payable and accrued expenses 135,706 75,123
Distributions payable 561,459 561,459
------------- -------------
9,667,501 9,019,976
------------ ------------
Minority interest 2,558,031 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 shares issued and outstanding 23,317 23,317
Additional paid-in capital 10,263,791 10,263,791
Retained earnings (deficit) (113,679) 2,401
-------------- ---------------
10,173,429 10,289,509
------------ -------------
Total liabilities and shareholders' equity $ 22,398,961 $ 21,898,635
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENT OF INCOME AND CHANGES IN UNDISTRIBUTED EARNINGS
(DEFICIT)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C>
Revenue
Percentage lease revenue $1,068,894 $1,036,867 $2,941,743 $2,753,050
Other revenue 6,452 9,392 19,080 11,436
------------- ------------- ------------ ------------
Total revenue 1,075,346 1,046,259 2,960,823 2,764,486
Expenses
Interest 155,381 204,753 462,091 833,362
Real estate and personal property taxes and insurance 59,057 50,399 161,460 144,121
General and administrative 46,644 55,167 256,815 200,097
Depreciation and amortization 190,205 242,308 543,277 496,251
---------- ---------- ---------- ----------
Total expenses 451,287 552,627 1,423,643 1,673,831
---------- ---------- ----------- -----------
Income before allocation to minority interest 624,059 493,632 1,537,180 1,090,655
Income allocated to minority interest 131,614 108,662 324,191 279,052
---------- ---------- ---------- -----------
Net income 492,445 384,970 1,212,989 811,603
Undistributed earnings (deficit) beginning of period (163,101) 43,904 2,401 13,781
Distributions declared 443,023 422,038 1,329,069 818,548
---------- ---------- ----------- ----------
Undistributed earnings (deficit) end of period $(113,679) $ 6,836 $(113,679) $ 6,836
========= ======= ========= =======
Income per common share outstanding $ 0.21 $ 0.18 $ 0.52 $ 0.51
Weighted average shares outstanding (1) 2,955,050 2,693,537 2,955,050 2,136,992
</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 occured on July 21, 1995.
See notes to consolidated financial statements.
-4-
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1996 1995
---- ----
<S> <C>
Cash flows from operating activities
Net income $ 1,212,989 $ 811,603
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 543,277 496,251
Income allocated to minority interest 324,191 279,052
Changes in assets and liabilities
Decrease (increase) in accounts receivable 243,678 (472,630)
Increase in other assets (79,723) (56,275)
Increase in financing cost -- (224,773)
Increase in accounts payable
and accrued expenses 60,583 43,107
--------- ----------
Net cash provided by operating activities 2,304,995 876,335
---------- ----------
Cash flows from investing activities
Investment in hotel properties (1,231,737) (35,639)
Deposit to replacement reserve (387,228) (608,740)
Interest earned on replacement reserve (3,039) --
Withdrawals from replacement reserve 626,937 (10,567)
------- --------
Net cash used in investing activities (995,067) (633,812)
--------- ---------
Cash flows from financing activities
Redemption of common stock -- (1,000)
Increase in capital lease obligations -- 20,170
Proceeds from lines of credit 660,213 600,000
Proceeds from sale of stock -- 6,956,862
Distributions paid (1,684,377) (636,251)
Principal payments on long-term debt (56,391) (6,563,413)
Principal payments on capital leases (16,881) (13,261)
-------------- --------------
Net cash used in financing activities (1,097,436) (236,893)
------------- ------------
Net increase (decrease) in cash and cash equivalents (212,492) 5,630
Cash and cash equivalents, beginning 168,636 554,203
----------- -----------
Cash and cash equivalents, ending $ 381,128 $ 559,833
============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest (net of amount $ 462,091 $ 833,362
capitalized of $21,321 in 1996) ============= ============
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 (a "REIT") for federal income tax purposes. During the
fourth quarter of 1994, the Company completed an initial public offering (the
"IPO") of 1,321,700 shares of $.01 par value common stock ("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 shares of Common Stock on a
one for one basis, value of approximately $3.2 million based on the IPO offering
price, and (iii) in exchange for their interests in the Initial Hotels, the
assumption of approximately $15.5 million of indebtedness. All of the units were
issued to James I. Humphrey, Jr. and Humphrey Associates, Inc. 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. 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, and 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 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, the "Limited
Partners") 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 or 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 September 30, 1996, and
the results of operations for the three and nine months ended September 30, 1996
and 1995. The results of operations for the three and nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
-6-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
September 30, 1996
The 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 May 3, 1996,
the Company paid a $.19 per share distribution on each share of Common Stock
outstanding on March 25, 1996. On August 2 1996, the Company paid a $.19 per
share distribution on each share of Common Stock outstanding on June 24, 1996.
On September 19, 1996, the Company declared a $.19 per share distribution on
each share of Common Stock outstanding on September 30, 1996. The distribution
will be paid on October 31, 1996.
Note 3. Commitments and Contingencies
Pursuant to the Humphrey Hospitality Limited Partnership Agreement, the
Limited Partners have Redemption Rights, (the "Redemption Rights"), that enable
them to cause the Partnership to redeem their Units in exchange for shares of
Common Stock or for cash at the election of the Company. The Redemption Rights
may be exercised by the Limited Partners at any time. The aggregate number of
shares of Common Stock currently issuable to the Limited Partners upon exercise
of the Redemption Rights is 623,350. 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 Limited
Partners 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 (collectively the "Hotels") with
Humphrey Hospitality Management, Inc. (the "Lessee"). Each such lease (the
"Percentage Leases") has 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
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
September 30, 1996
For the three and nine months ended September 30, 1996, the Company
earned base rents of $419,587 and $1,258,761, and percentage rents of $649,307
and $1,682,982, respectively. As of September 30, 1996, approximately $781,170
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
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 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 obtained a $6.5 million credit facility from Mercantile Safe
Deposit and Trust Company (the "Credit Facility") 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 Credit Facility bears interest at the prime rate plus 25
basis points, presently 8.5%. The Credit Facility is cross-collateralized by the
Company hotels located in Elizabethton, Tennessee, Farmville, Virginia,
Princeton, West Virginia, Dahlgren, Virginia, and Solomons, Maryland. The Credit
Facility was used to refinance approximately $1.7 million of debt and the
remainder is being utilized to develop a 64 room Comfort Suites in Dover,
Delaware (the "New Development") and a second development that the Company
considered but did not pursue in Dublin, Virginia. The Company has executed an
Amended Development Agreement (the "Development Agreement") with Humphrey
Development, Inc., a company in which Mr. Humphrey is the majority shareholder,
to develop the New Development. The New Development is to be developed for a
specific sum of approximately $2.8 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 New Development, the Company will lease the New Development to Humphrey
Hospitality Management, Inc. The Comfort Suites in Dover, Delaware is scheduled
to be completed in early 1997.
-8-
<PAGE>
Humphrey Hospitality Management, Inc.
BALANCE SHEETS
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(unaudited)
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 957,070 $ 1,253,229
Accounts receivable 145,699 78,585
Prepaid expenses 57,197 17,976
---------- ---------
Total current assets $ 1,159,966 $ 1,349,790
========= ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 134,893 $ 170,455
Prepaid slip rentals - Marina 57,463 38,065
Due to affiliates 788,959 1,092,473
-------- ----------
Total current liabilities 981,315 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 178,650 48,796
------- ------
Total shareholder's equity 178,651 48,797
-------- -----------
Total liabilities and shareholder's equity $ 1,159,966 $ 1,349,790
========== ===========
</TABLE>
See notes to financial statements.
-9-
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF OPERATIONS AND CHANGES IN RETAINED EARNINGS
(unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C>
Revenue from hotel operations
Room Revenue $ 2,390,268 $ 2,305,145 $ 6,157,769 $ 5,737,804
Telephone revenue 45,550 47,233 135,374 131,082
Slip revenue 65,905 73,593 191,558 202,216
Other revenue 66,603 38,747 169,443 84,791
------ ----------- ------- -----------
Total Revenue 2,568,326 2,464,718 6,654,144 6,155,893
--------- --------- --------- ---------
Expenses
Salaries and wages 561,436 490,228 1,573,438 1,336,376
Room expense 118,304 115,989 323,041 294,971
Telephone 45,981 38,359 124,491 106,864
Marina expense 8,505 8,856 30,153 27,116
General and administrative 109,102 83,175 318,334 203,892
Marketing and promotion 75,820 71,474 186,927 182,587
Utilities 113,314 104,805 325,609 289,134
Repairs and maintenance 56,320 36,664 178,099 112,753
Taxes and insurance 34,178 31,242 107,406 94,686
Management fees -- 73,712 -- 184,409
Franchise fees 124,989 112,785 313,799 284,957
Lease payments 1,068,894 1,036,867 2,941,743 2,753,050
--------- --------- --------- ---------
Total expenses 2,316,843 2,204,156 6,423,040 5,870,795
--------- --------- --------- ---------
NET INCOME 251,483 260,562 231,104 285,098
Retained earnings (deficit),
beginning of period (56,583) (65,063) 48,796 (89,599)
Distributions paid (16,250) -- (101,250) --
-------- ------------ --------- -----------
Retained earnings,
end of period $ 178,650 $ 195,499 $ 178,650 $ 195,499
============= ============== ============= =============
</TABLE>
See notes to financial statements.
-10-
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months ended
September 30,
1996 1995
---- ----
<S> <C>
Cash flows from operating activities
Net income $ 231,104 $ 285,098
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Changes in assets and liabilities
Increase in accounts receivable (67,114) (52,621)
(Increase) decrease in prepaid expenses (39,221) 17,608
(Decrease) increase in accounts payable (35,562) 130,525
Increase in prepaid slip rentals 19,398 11,587
(Decrease) increase in due to affiliates (303,514) 414,808
----------- ---------
Net cash (used in) provided by
operating activities (194,909) 870,005
----------- ---------
Cash flows from financing activities
Distributions paid (101,250) --
----------- ------------
Net cash used in financing activities (101,250) --
----------- ------------
Net (decrease) increase in cash and
cash equivalents (296,159) 807,005
Cash and cash equivalents, beginning 1,253,229 197,598
---------- --------
Cash and cash equivalents, ending $ 957,070 $ 1,004,603
========== ============
</TABLE>
See notes to financial statements.
-11-
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 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 from Humphrey Hospitality Limited Partnership
(the "Partnership"), one hotel property from Solomons Beacon Inn Limited
Partnership and the Days Inn 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.
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 September 30, 1996, and the results of operations for the three and nine
months ended September 30, 1996 and 1995. The results of operation for the nine
months ended September 30, 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 Hotels owned by the Company. Pursuant to the management agreements,
a fee equal to 3% of total revenue was payable to Humphrey Hotels, Inc. ("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 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.
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 September
30, 1996, $7,789 was due to the affiliates for such allocated expenses.
-12-
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
September 30, 1996
Note 3. Commitments
The Lessee has entered into Percentage Leases, each with a term of 10
years, relating to each of the Hotels with the Partnership. 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 and nine months ended September 30, 1996, the Lessee has
incurred base rents of $419,587 and $1,258,761, and percentage rents of $649,307
and $1,682,982, respectively. As of September 30, 1996, the amount due the
Partnership and Solomons Beacon Inn Limited Partnership for lease payments were
$781,170 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 is the general
partner of Humphrey Hospitality Limited Partnership (the "Partnership") owning a
78.91% interest in the Partnership. The Partnership owns directly or indirectly
nine hotel properties (the "Hotels"). Eight of the Hotels (the "Initial Hotels")
were acquired by the Company in connection with it's initial public stock
offering in November 1994 and the remaining hotel ( the "Acquisition Hotel") was
acquired in July 1995.
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.
Results of Operations
Three months ended September 30, 1996
The Company's total revenues for the three month period ended September 30,
1996, substantially consisted of Percentage Lease revenue. The Company's revenue
was $1,075,346 an increase of $29,087, or 2.8%, during the three month period
ended September 30, 1996 as compared to the Company's revenue of $1,046,259 for
the same period of 1995. Net income increased by $107,475 to $492,445, or 27.9%
for the three months ended September 30, 1996 as compared to net income of
$384,970 for the same period for 1995. The improvement in net income is
attributed to the additional lease revenue from the Acquisition Hotel and the
refinancing and/or retirement of Company debt on the hotels located in Solomons,
Maryland; Dahlgren, Dublin and Farmville, Virginia; Elizabethton, Tennessee, and
Princeton, West Virginia.
The Lessee's room revenues from the Hotels increased by $85,123, or
3.7%, to $2,390,268 for the three months ended September 30, 1996, as compared
to $2,305,145 of room revenue for the same period of 1995. Occupancy for the
Hotels decreased from 81.5% for the three month period ended September 30, 1995,
to 80.5% for the same period in 1996. The decrease in occupancy for the three
month period ended September 30, 1996 is attributed to the slowdown in
construction-related business at the Company hotel located in Dublin, Virginia.
During 1995, the hotel received business as the result of special industrial
construction projects that were occurring in its locale. The average daily rate
of the Hotels increased to $52.29 for the three months ended September 30, 1996,
up 3% as compared to $50.76 for the same period of 1995. Revenue per available
room "Revpar" was $42.11 for the three months ended September 30, 1996, up 1.8%,
as compared to $41.35 for the same period in 1995. Lessee operating expenses
increased by $112,687, as the result of consolidating the Operator with the
Lessee, to $2,316,843 for the three months ended September 30, 1996, as compared
to $2,204,156 for the same period in 1995.
Nine months ended September 30, 1996
The Company's revenues for the nine month period ended September 30, 1996,
consisted substantially of Percentage Lease revenue recognized pursuant to the
Percentage Leases. Total revenue increased by $196,337, or 7.1%, to $2,960,823
from $2,764,486 for the nine month period ended September 30, 1995. Net income
increased by $401,386,
-14-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
or 49.4%, to $1,212,989 for the nine month period ended September 30, 1996, from
$811,603 for the same period ended 1995. The improvement in net income is
attributed to the additional lease revenue from the Acquisition Hotel and the
refinancing and/or retirement of Company debt on the hotels located in Solomons,
Maryland; Dahlgren, Dublin and Farmville, Virginia; Elizabethton, Tennessee, and
Princeton, West Virginia.
The Lessee's room revenues increased by $419,965, or 7.3%, to
$6,157,769 for the nine month period ended September 30, 1996 as compared to
$5,737,804 for the same period in 1995. Occupancy at the Hotels decreased to
72.1% for the nine month period ended September 30, 1996, from 73.9%. The
decrease in occupancy is attributed to record snowfall in the first quarter of
1996 that all of the Hotels experienced and a slowdown in construction related
business at the Hotels located in Dublin, Virginia and Elizabethton, Tennessee.
During the second quarter of 1995 both hotels received business as the result of
special industrial construction projects that were occurring in their respective
locales. The average daily rate at the Hotels increased to $50.56, or by 3.8%,
for the nine month period ended September 30, 1996, from $48.63 for the same
period in 1995. Revpar increased to $36.42, or by 1.2%, for the nine month
period ended September 30, 1996, from $35.99 for the same nine month period in
1995. Lessee operating expenses increased by $552,245, as the result of the
addition of the Acquisition Hotel, and consolidating the Operator with the
Lessee, to $6,423,040 for the nine months ended September 30, 1996, as compared
to $5,870,795 for the same period in 1995.
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
future working capital. As of September 30, 1996, the Company's cash and current
accounts receivable balances exceed the current obligations by $465,133.
The Company's Funds from Operations (net income plus minority interest
and depreciation and amortization ("FFO")) were $814,264 in the three months
ended September 30, 1996 which is an increase of $78,324, or 10.6% over the
Funds from Operations in the comparable period in 1995, which were $735,940. For
the nine months ended September 30, 1996, Funds from Operations were $2,080,457,
which is an increase of $493,551, or 31.1%, over Funds from Operations in the
comparable period in 1995, which were $1,586,906. 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. (the "NAREIT"), Funds from
Operations represents net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization on real estate assets and
after adjustments for unconsolidated partnerships. 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 Funds from Operations is as follows:
<TABLE>
<CAPTION>
Historical Three Historical Three
Month Period Ended Month Period Ended
September 30,1996 September 30, 1995
<S> <C>
Net income applicable to
common shares $492,445 $384,970
Add:
Minority interest 131,614 108,662
Depreciation and amortization 190,205 242,308
--------- ---------
Total $814,264 $735,940
======== ========
Historical Nine Historical Nine
Month Period Ended Month Period Ended
September 30,1996 September 30, 1995
Net income applicable to
common shares $1,212,989 $811,603
Add:
Minority interest 324,191 279,052
Depreciation and amortization 543,277 496,251
----------- ----------
Total $2,080,457 $1,586,906
========== ==========
</TABLE>
In April, 1996, the Company established a secured credit facility in the
amount of $6.5 million with Mercantile Safe Deposit and Trust Company (the
"Credit Facility") to refinance certain existing debt (approximately $1.7
million) and pay the development cost of the Comfort Suites (the "New
Development") located in Dover, Delaware and a second development that the
Company considered but did not pursue in Dublin, Virginia. The term of the
Credit Facility is for three years with two one year extensions at the option of
the bank. The Credit Facility bears interest at prime rate plus 25 basis points,
presently 8.5% and is cross-collateralized by liens on the Company hotels
located in Dahlgren, Virginia; Farmville, Virginia (both Hotels); Elizabethton,
Tennessee; Princeton, West Virginia; and Solomons, Maryland and the Comfort
Suites hotel being developed in Dover, Delaware. The Company expects that the
total costs for developing this hotel will be approximately $2.8 million and
that the hotel will be completed in early 1997. Through September 30, 1996 the
Company had drawn an additional $660,213 from the Credit Facility to fund
construction in progress for the New Development. The Company has executed an
Amended Development Agreement (the "Development Agreement") with Humphrey
Development, Inc., a Humphrey Affiliate, pursuant to which Humphrey Development
provides construction supervision and will pay any development costs in excess
of $2.8 million in exchange for a right to purchase the New Development from the
Company on the sixth anniversary of its commencement of operations for $2.8
million.
-16-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
Long-term debt as of September 30, 1996, was approximately $8.93 million as
follows:
Approximately $2.38 million, from the Credit Facility which is secured
by and cross-collateralized and cross-defaulted on the Hotels located
in Solomons, Maryland; Farmville, Virginia; Elizabethton, Tennessee;
Dahlgren, Virginia; and Princeton, West Virginia and the hotel under
construction in Dover, Delaware. The interest rate on the Credit
Facility is variable at 25 basis points above prime rate, presently at a
rate of 8.5% per annum.
Approximately $4.15 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 is adjusted weekly and is not
to exceed 15% and 11.3636% for Wytheville and Morgantown, respectively.
At September 30, 1996, the interest rate was approximately 3.6% 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 is 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
September 30, 1996, the Company's total outstanding indebtedness represents
approximately 34.3% of the aggregate amount paid by the Company for the Hotels.
The Board of Directors has adopted a policy that will govern all of the
Company's investment in hotel properties (the "Investment Policy") including the
acquisition of existing hotels and the development of hotels until such time as
the Board amends such policy. Under the Investment Policy, the Company will make
no investment in a hotel property unless the Company can demonstrate that it can
reasonably expect an annual return on its investment (net of insurance, real
estate and personal property taxes and reserves for furniture, fixtures and
capital expenditure ("FFE Reserves")), that is greater than or equal to 12% of
the total purchase price to be paid by the Company for such property. Under the
Bylaws, the approval of a majority of the Board of Directors, including a
majority of the Independent Directors, is required for the Company to acquire
any property. In addition, the Investment Policy will be applied to a hotel
property prior to its acquisition or development by the Company, and therefore,
there can be no assurances that increases in insurance rate, real estate or
personal property taxe rates or FFE Reserves, which are based on room revenues,
will not decrease the Company's annual return on its investments in any hotel
property to a level below that set out in the Investment Policy.
Because a development project has no prior revenues on which the
Company's Investment Policy can be tested, the Company intends to invest only in
developments where it reasonably believes it will receive an annual return on
its investment that are consistent with the Investment Policy. The Company has
proposed to the Lessee and the Lessee has agreed to sign a lease agreement (the
"Fixed Lease" and together with Percentage Leases, the "Leases") pursuant to
which the Lessee would lease the New Development for an annual fixed rent
payment which will be payable in equal monthly installments. The annual rent
payment under the Fixed Lease (net of insurance paid by the Company, FFE
Reserves and real estate and personal property taxes) represents an
approximately 12% return on the Company's expected total investment in the New
Development.
Pursuant to the 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
-17-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
furniture, fixtures and equipment for the Initial Hotels for the years 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. 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 from 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.
PART II. OTHER INFORMATION.
None.
-18-
<PAGE>
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:_______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 381,128
<SECURITIES> 0
<RECEIVABLES> 781,170
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 763,080
<PP&E> 21,452,021
<DEPRECIATION> (978,438)
<TOTAL-ASSETS> 22,398,961
<CURRENT-LIABILITIES> 697,165
<BONDS> 8,970,336
0
0
<COMMON> 23,317
<OTHER-SE> 10,150,112
<TOTAL-LIABILITY-AND-EQUITY> 22,398,961
<SALES> 0
<TOTAL-REVENUES> 1,075,346
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 105,701
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,381
<INCOME-PRETAX> 492,445
<INCOME-TAX> 0
<INCOME-CONTINUING> 492,445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 492,445
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
