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 June 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 August 12,
1996 was 2,331,700.
Page 1 of 18
<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 June 30, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Income and Changes in Retained
Earnings (Deficit) for the three months ended June 30, 1996
and 1995 (unaudited) ; and six months ended June 30, 1996
and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and
1995 (unaudited) 5
Notes to Consolidated Financial Statements 6
HUMPHREY HOSPITALITY MANAGEMENT, INC.
Balance Sheets as of June 30, 1996 (unaudited) and December 31, 1995 9
Statements of Operations and Changes in Retained Earnings
(Deficit) for the three months ended June 30, 1996 and 1995
(unaudited) ; and six months ended June 30, 1996 and 1995
(unaudited) 10
Statement of Cash Flows for the six months ended June 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 18
</TABLE>
-2-
<PAGE>
Item 1.
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June December
30, 1996 31, 1995
---------- --------
(unaudited)
ASSETS
<S> <C>
Investment in hotel properties, net of accumulated depreciation $20,398,309 $19,709,480
Cash and cash equivalents 134,106 168,636
Accounts receivable from Lessee 954,513 1,024,848
Deferred expenses, net of accumulated amortization 405,551 445,449
Replacement reserve 164,401 407,660
Other assets 181,288 142,562
----------- -----------
Total assets $22,238,168 $21,898,635
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage notes and bond payable $8,777,087 $8,327,000
Obligations under capital leases 45,079 56,394
Accounts payable and accrued expenses 185,682 75,123
Distributions payable 561,459 561,459
----------- -----------
9,569,307 9,019,976
----------- -----------
Minority interest 2,544,854 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) (163,101) 2,401
----------- -----------
10,124,007 10,289,509
----------- -----------
Total liabilities and shareholders' equity $22,238,168 $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 (DEFICIT)
(unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C>
Revenue
Percentage lease revenue $1,039,098 $939,520 $1,872,849 $1,716,183
Other revenue 5,082 1,047 12,628 2,044
------ ----- ------------ ----------
Total revenue 1,044,180 940,567 1,885,477 1,718,227
Expenses
Interest 154,394 316,774 306,710 628,609
Real estate and personal property taxes and insurance 51,102 46,898 102,403 93,722
General and administrative 137,991 88,801 210,170 144,930
Depreciation and amortization 186,691 127,127 353,072 253,943
------- ------- --------- ----------
Total expenses 530,178 579,600 972,355 1,121,204
------- ------- --------- ----------
Income before allocation to minority interest 514,002 360,967 913,122 597,023
Income allocated to minority interest 108,403 103,020 192,578 170,390
------- ------- ---------- ----------
Net income 405,599 257,947 720,544 426,633
Retained earnings (deficit) beginning of period (125,677) (15,788) 2,401 13,781
Distributions declared 443,023 198,255 886,046 396,510
------- ------- --------- -------
Accumulated earnings (deficit) end of period $(163,101) $43,904 $(163,101) $43,904
========= ====== ========= ======
Income per common share outstanding $ 0.17 $ 0.19 $ 0.31 $ 0.32
Weighted average shares outstanding 2,955,050 (1) 1,849,566 (2) 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.
(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 six months ended June 30,
1996 1995
<S> <C>
Cash flows from operating activities
Net income $ 720,544 $ 426,633
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 353,072 253,943
Income allocated to minority interest 192,578 170,390
Changes in assets and liabilities
Decrease (increase) in accounts receivable 70,335 (725,877)
Increase in other assets (38,726) (53,751)
Increase in financing cost -- (55,505)
Increase in accounts payable
and accrued expenses 110,559 92,071
---------- ----------
Net cash provided by operating activities 1,408,361 107,904
---------- ----------
Cash flows from investing activities
Investment in hotel properties (1,002,003) (10,567)
Deposit to replacement reserve (221,159) (164,122)
Interest earned on replacement reserve (2,485) --
Withdrawals from replacement reserve 466,903 (10,567)
------- --------
Net cash used in investing activities (758,745) (164,122)
--------- ---------
Cash flows from financing activities
Redemption of common stock -- (1,000)
Proceeds from lines of credit 506,478 600,000
Distributions paid (1,122,920) (358,816)
Principal payments on long-term debt (56,391) (724,794)
Principal payments on capital leases (11,315) (7,277)
------------ ------------
Net cash used in financing activities (684,146) (491,887)
----------- ------------
Net decrease in cash and cash equivalents (34,530) (548,105)
Cash and cash equivalents, beginning 168,636 554,203
----------- -----------
Cash and cash equivalents, ending $ 134,106 $ 6,098
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 306,710 $ 628,609
============ ============
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 (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. 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, 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 June 30, 1996, and the
results of operations for the three and six months ended June 30, 1996 and 1995.
The results of operations for the three and six months ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. The
-6-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 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. On June 11, 1996, the Company
declared a $.19 per share distribution on each share of common stock outstanding
on June 24, 1996. The distribution was paid on August 2, 1996.
Note 3. Commitments and Contingencies
Pursuant to the Humphrey Hospitality Limited Partnership Agreement, the
Limited Partners have Redemption Rights, (the "Redemption Rights"), which enable
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 Limited Partners at any time. The
number of shares of Common Stock issuable to the Limited Partners upon exercise
of the Redemption Rights is 624,330. 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 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
June 30, 1996
For the three and six months ended June 30, 1996, the Company earned
base rents of $419,587 and $839,174, and percentage rents of $619,511 and
$1,033,675, respectively. As of June 30, 1996 approximately $954,513 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 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 refinance $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 was 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 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 8.5%. 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 was used to refinance approximately $1.72 million
of debt and the remainder is being 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. The Comfort
Suites in Dover, Delaware is scheduled to be completed November, 1996 and the
Hampton Inn in Dublin, Virginia is scheduled to be completed March, 1997.
-8-
<PAGE>
Humphrey Hospitality Management, Inc.
BALANCE SHEETS
June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
(unaudited)
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,122,233 $ 1,253,229
Accounts receivable 171,715 78,585
Prepaid expenses 10,476 17,976
---------- ---------
Total current assets $ 1,304,424 $ 1,349,790
========= ===========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 315,657 $ 170,455
Prepaid slip rentals - Marina 83,407 38,065
Due to affiliates 961,942 1,092,473
-------- ----------
Total current liabilities 1,361,006 1,300,993
---------- ----------
COMMITMENTS -- --
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding 1 1
Retained earnings (deficit) (56,583) 48,796
-------- ------
Total shareholder's equity (deficit) (56,582) 48,797
--------- -----------
Total liabilities and shareholder's equity (deficit) $ 1,304,424 $ 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 Six Months ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C>
Revenue from hotel operations
Room Revenue 2,255,136 $ 2,028,548 3,767,501 $ 3,432,659
Telephone revenue 46,755 42,935 89,824 83,849
Slip revenue 72,887 69,456 125,653 128,623
Other revenue 58,699 25,201 102,840 46,044
------ ----------- ------- -----------
Total Revenue 2,433,477 2,166,140 4,085,818 3,691,175
--------- --------- --------- ---------
Expenses
Salaries and wages 550,956 469,679 1,012,002 846,148
Room expense 112,915 104,465 204,737 178,982
Telephone 40,740 37,306 78,510 68,505
Marina expense 8,899 8,928 21,648 18,260
General and administrative 116,984 69,104 209,232 120,717
Marketing and promotion 61,847 62,507 111,107 111,113
Utilities 100,195 87,577 212,295 184,329
Repairs and maintenance 83,641 42,006 121,779 76,089
Taxes and insurance 35,694 32,208 73,228 63,444
Management fees -- 64,946 -- 110,696
Franchise fees 108,695 97,272 188,810 172,173
Lease payments 1,039,098 939,520 1,872,849 1,716,183
--------- --------- --------- ---------
Total expenses 2,259,664 2,015,518 4,106,197 3,666,639
--------- --------- --------- ---------
NET INCOME (LOSS) 173,813 150,622 (20,379) 24,536
Retained earnings (deficit),
beginning of period (145,396) (215,685) 48,796 (89,599)
Distributions paid 85,000 -- 85,000 --
------ ------------ ------ -----------
Retained earnings (deficit),
end of period $ (56,583) $ (65,063) $ (56,583) $ (65,063)
============== =============== ============== ==============
</TABLE>
See notes to financial statements.
-10-
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the six Months ended June 30,
1996 1995
<S> <C>
Cash flows from operating activities
Net income (loss) $ (20,379) $ 24,536
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities
Changes in assets and liabilities
Increase in accounts receivable (93,130) (51,507)
Decrease in prepaid expenses 7,500 17,608
Increase in accounts payable 145,202 140,695
Increase in prepaid slip rentals 45,342 50,652
(Decrease) increase in due to affiliates (130,531) 688,231
----------- ---------
Net cash (used in) provided by
operating activities (45,996) 870,215
---------- ---------
Cash flows from financing activities
Distributions paid (85,000) --
-------- ---------
Net cash used in financing activities (85,000) --
---------- ----------
Net (decrease) increase in cash and
cash equivalents (130,996) 870,215
Cash and cash equivalents, beginning 1,253,229 197,598
---------- --------
Cash and cash equivalents, ending $ 1,122,233 $1,067,813
============ ==========
</TABLE>
See notes to financial statements.
-11-
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS
June 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 June 30, 1996, and the results of operations for the three and six months
ended June 30, 1996 and 1995. The results of operation for the six months ended
June 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 ("REIT") 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 REIT. 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.
-12-
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 1996
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 June 30,
1996, $7,429 was due to the affiliates for such allocated expenses.
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 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 six months ended June 30, 1996, the Lessee has
incurred base rents of $419,587 and $839,174, and percentage rents of $619,511
and $1,033,675, respectively. As of June 30, 1996, the amount due the
Partnership and Solomons Beacon Inn Limited Partnership for lease payments were
$954,513 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" and together with
the Initial Hotels, the "Hotels"). 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, owned a 98% equity interest. Upon completion of
the Second Stock Offering, the Company owned a 78.91% partnership interest, and
Mr. Humphrey, Humphrey Associates and the LLC collectively owned 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
Three months ended June 30, 1996
The Company's total revenues for the three month period ended June 30,
1996, substantially consisted of Percentage Lease revenue. The Company's revenue
was $1,044,180, an increase of $103,613, or 11%, during the three month period
ended June 30, 1996 as compared to the Company's revenue of $940,567 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 $147,652 to $405,599, or 57.2% for the three
months ended June 30, 1996 as compared to net income of $257,947 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 $226,588, or 11.1%,
to $2,255,136 for the three months ended June 30, 1996, as compared to
$2,028,548 of room revenue for the same period of 1995. Occupancy for the Hotels
decreased from 80.1% for the three month period ended June 30, 1995, to 78.8%
for the same period in 1996. The decrease in occupancy for the three month
period ended June 30, 1996 is attributed to the slowdown in construction-related
business at the Company hotels located in Elizabethton, Tennessee and Dublin,
Virginia. During 1995, both hotels received business as the result of special
industrial construction projects that were occurring in their respective
locales. The average daily rate of the Hotels increased to $50.99 for the three
months ended June 30, 1996, up 3.8% as compared to
-14-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
$49.11 for the same period of 1995. Revenue per available room (Revpar) was
$40.16 for the three months ended June 30, 1996, up 2%, as compared to $39.35
for the same period in 1995. Lessee operating expenses increased by $244,146, as
the result of the Acquisition Hotel, and consolidating the Operator with the
Lessee, to $2,259,664 for the three months ended June 30, 1996, as compared to
$2,015,518 for the same period in 1995.
Six months ended June 30, 1996
The Company's revenues for the six month period ended June 30, 1996,
consisted substantially of Percentage Lease revenue recognized pursuant to the
Percentage Leases. Total revenue increased by $167,250, or 9.7%, to $1,885,477
from $1,718,227 for the six month period ended June 30, 1995. Net income
increased by $293,911, or 68.9%, to $720,544 for the six month period ended June
30, 1996, from $426,633 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 $334,842, or 9.7%, to
$3,767,501 for the six month period ended June 30, 1996 as compared to
$3,432,659 for the same period in 1995. Occupancy at the Hotels decreased to
67.8% for the six month period ended June 30, 1996, from 70.1%. 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 $49.52, or by 4.2%,
for the six month period ended June 30, 1996, from $47.52 for the same period in
1995. Revpar increased to $33.55, or by 1%, for the six month period ended June
30, 1996, from $33.27 for the same six month period in 1995. Lessee operating
expenses increased by $439,558, as the result of the addition of the Acquisition
Hotel, and consolidating the Operator with the Lessee, to $4,106,197 for the six
months ended June 30, 1996, as compared to $3,666,639 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 June 30, 1996, the Company's cash and current
accounts receivable balances exceed the current obligations by approximately
$368,665.
The Company's Funds from Operations (net income plus minority interest and
depreciation and amortization) were $700,693 in the three months ended June 30,
1996 which is an increase of $212,599, or 43.5% over the Funds from Operations
in the comparable period in 1995, which were $488,094. For the six months ended
June 30, 1996, Funds from Operations were $1,266,194, which is an increase of
$415,228, or 48.8%, over Funds from Operations in the comparable period in 1995,
which were $850,966. 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
-15-
<PAGE>
Humphrey Hospitality, Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
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 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.
The computation of historical Funds from Operations is as follows:
<TABLE>
<CAPTION>
Historical Three Historical Three
Month Period Ended Month Period Ended
June 30,1996 June 30, 1995
<S> <C>
Net income applicable to
common shares $405,599 $257,947
Add:
Minority interest 108,403 103,020
Depreciation and amortization 186,691 127,127
--------- ---------
Total $700,693 $488,094
======== ========
Historical Six Historical Six
Month Period Ended Month Period Ended
June 30,1996 June 30, 1995
Net income applicable to
common shares $720,544 $426,633
Add:
Minority interest 192,578 170,390
Depreciation and amortization 353,072 253,943
--------- ---------
Total $1,266,194 $850,966
=========== ========
</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 8.5%. 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 liens on 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 approximately $4.8 million. Through June 30, 1996 the Company had drawn an
additional $506,478 from the New Line of Credit to fund construction in progress
for the hotels to be located in Dover, Delaware and Dublin, Virginia.
-16-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
Long-term debt as of June 30, 1996, was approximately $8.75 million as follows:
Approximately $2.2 million, from the New Line of Credit which is secured
by and cross-collateralized and cross-defaulted on the Initial Hotels
located in Solomons, Maryland; Farmville, Virginia; Elizabethton,
Tennessee; Dahlgren, Virginia; and Princeton, West Virginia and the two
hotels under construction in Dover, Delaware and Dublin, Virginia. The
interest rate on the New Line of Credit 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 adjusted weekly and is not to
exceed 15% and 11.3636% for Wytheville and Morgantown, respectively. At
June 30, 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 $26 million. As of
June 30, 1996, the Company's total outstanding indebtedness represents
approximately 33.7% of the aggregate amount paid by the Company for the Hotels.
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 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.
-17-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
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:___________________________
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 134,106
<SECURITIES> 0
<RECEIVABLES> 954,513
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,839,859
<PP&E> 21,222,287
<DEPRECIATION> 823,978
<TOTAL-ASSETS> 22,238,168
<CURRENT-LIABILITIES> 747,141
<BONDS> 8,822,166
0
0
<COMMON> 23,317
<OTHER-SE> 10,100,690
<TOTAL-LIABILITY-AND-EQUITY> 22,238,168
<SALES> 0
<TOTAL-REVENUES> 1,044,180
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 189,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,394
<INCOME-PRETAX> 405,599
<INCOME-TAX> 0
<INCOME-CONTINUING> 405,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 405,599
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
