UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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) (Registrants telephone number
(zip code) including area code)
N/A
----------------------------------------------------
(former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such short period that the Registrant was
required to file such report), and (ii) has been subject to such filing
requirements for the past 90 days.
YES __X____ NO _______
The number of shares of Common Stock, $.01 par value, outstanding on May 12,
1997 was 3,481,700.
Page 1 of 21
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
INDEX
Page Number
-----------
PART I. Financial Information
Item 1. HUMPHREY HOSPITALITY TRUST, INC.
--------------------------------
Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Income and Changes in
Retained Earnings (Deficit) for the three months
ended March 31, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (unaudited) 5
Notes to Consolidated Financial Statements 6
HUMPHREY HOSPITALITY MANAGEMENT, INC.
-------------------------------------
Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996 11
Statements of Operations and Changes in Retained
Earnings (Deficit) for the three months ended March
31, 1997 and 1996 (unaudited) 12
Statement of Cash Flows for the three months ended
March 31, 1997 and 1996 (unaudited) 13
Notes to Financial Statements 14
Item 2. Managements Discussion and Analysis of Financial Condition 17
PART II. Other Information 21
None.
SIGNATURES 21
-2-
<PAGE>
Item 1.
Humphrey Hospitality Trust, Inc.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
<S> <C>
ASSETS
Investment in hotel properties, net of accumulated depreciation $27,368,825 $21,405,005
Cash and cash equivalents ..................................... 2,560,072 7,100,692
Accounts receivable from Lessee ............................... 641,141 1,066,995
Deferred expenses, net of accumulated amortization ............ 508,996 373,466
Replacement reserve ........................................... 3,905 68,466
Other assets .................................................. 321,054 206,021
----------- ------------
Total assets .................................. $31,403,993 $30,220,645
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage notes and bond payable ............................... $ 9,370,609 $ 8,150,609
Obligations under capital leases .............................. 27,930 33,946
Accounts payable and accrued expenses ......................... 36,427 83,936
Distributions payable ......................................... 779,959 561,459
----------- ------------
10,214,925 8,829,950
----------- ------------
Minority interest ............................................. 3,216,527 3,247,108
----------- ------------
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, 3,481,700 shares issued and outstanding ......... 34,817 34,817
Additional paid-in capital .................................... 18,200,138 18,200,563
Retained earnings (deficit) ................................... (262,414) (91,793)
----------- ------------
17,972,541 18,143,587
----------- ------------
Total liabilities and shareholders' equity .... $31,403,993 $30,220,645
=========== ============
</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 March 31,
1997 1996
---- ----
<S> <C>
Revenue
Percentage lease revenue ............................ $ 963,576 $ 833,751
Other revenue ....................................... 73,723 7,546
---------- ----------
Total revenue .......................................... 1,037,299 841,297
Expenses
Interest ............................................ 156,060 152,316
Real estate and personal property taxes and insurance 55,222 51,301
General and administrative .......................... 41,853 72,179
Depreciation and amortization ....................... 205,407 166,381
---------- ----------
Total expenses ......................................... 458,542 442,177
---------- ----------
Income before allocation to minority interest .......... 578,757 399,120
Income allocated to minority interest .................. 87,855 84,175
---------- ----------
Net income ............................................. 490,902 314,945
Retained earnings, beginning of period ................. (91,793) 2,401
Distributions declared ................................. 661,523 443,023
---------- ----------
Accumulated deficit, end of period ..................... $ (262,414) $(125,677)
========== ==========
Income per common share outstanding .................... $ 0.14 $ 0.14
========== ==========
Weighted average shares outstanding .................... 4,105,050(1) 2,955,050(1)
========== ==========
</TABLE>
- -----------------------
(1) Includes 623,350 units which are redeemable on a one-for-one basis for
shares of common stock at any time.
See notes to consolidated financial statements.
-4-
<PAGE>
Humphrey Hospitality Trust, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1997 1996
---- ----
<S> <C>
Cash flows from operating activities
Net income .......................................................... $ 490,902 $ 314,945
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization ................................... 205,407 166,381
Income allocated to minority interest ........................... 87,855 84,175
Changes in assets and liabilities
Decrease in accounts receivable ......................... 425,854 476,525
Increase in other assets ................................ (115,033) (4,029)
Decrease in accounts payable
and accrued expenses .................................. (47,509) (17,533)
----------- -----------
Net cash provided by operating activities ........... 1,047,476 1,020,464
----------- -----------
Cash flows from investing activities
Investment in hotel properties ...................................... (6,150,798) (384,473)
Deposit to replacement reserve ...................................... (71,366) (130,953)
Interest earned on replacement reserve .............................. (329) (2,089)
Withdrawals from replacement reserve ................................ 136,256 366,192
----------- -----------
Net cash used in investing activities ............... (6,086,237) (151,323)
----------- -----------
Cash flows from financing activities
Cost from sale of stock ............................................. (425) --
Financing cost ...................................................... (153,959) --
Distributions paid .................................................. (561,459) (561,459)
Proceeds from mortgage payable ...................................... 1,220,000 --
Principal payments on long-term debt ................................ -- (16,800)
Principal payments on capital leases ................................ (6,016) (5,749)
----------- -----------
Net cash provided by (used in) financing activities.. 498,141 (584,008)
----------- -----------
Net (decrease) increase in cash and cash equivalents .... (4,540,620) 285,133
Cash and cash equivalents, beginning .................................. 7,100,692 168,636
----------- -----------
Cash and cash equivalents, ending ..................................... $ 2,560,072 $ 453,769
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............................ $ 156,060 $ 152,316
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
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, a 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, acquire the Days Inn hotel in Farmville,
Virginia (the "Days Inn Hotel"). The Partnership acquired the Days Inn
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 Days Inn Hotel in exchange for (i) 95,484 Units and
(ii) the assumption of approximately $1.23 million of debt secured by the
Days Inn 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 Days Inn 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 owned a 78.91%
partnership interest, and Mr. Humphrey, Humphrey Associates and the LLC
(collectively, the "Limited Partners") owned a 21.09% interest in the
Partnership.
On December 6, 1996, the Company completed a third public offering (the
"Third Stock Offering") of 1,150,000 shares of common stock. The gross proceeds
were $9,487,500 based on the offering price of $8.25 per share. Net of
underwriters' discount and offering expenses, the Company received net proceeds
of approximately $8,645,000. The Company used the proceeds (i) to repay
approximately $660,000 of outstanding debt on the Credit Facility secured by six
of the hotels and the Comfort Suites hotel in Dover, Delaware (the "New
Development"), (ii) to repay the costs associated with the development of the
New Development which were approximately $1.6 million at December 31, 1996; and
(iii) to establish a fund for future acquisitions and development. Upon
completion of the Third Stock Offering, the Company owns an 84.82% partnership
interest, and the Limited Partners collectively own a 15.18% interest in the
Partnership.
On January 22, 1997, the Companys New Development, the 64 room Comfort
Suites hotel located in Dover, Delaware, opened for business. The hotel is
leased by the Lessee for a fixed lease payment of $378,840 a year, payable in
equal monthly installments and prorated for any partial month.
On February 26, 1997, the Company closed on the purchase of the 50 room
Comfort Inn hotel located in Culpeper, Virginia. The Company assumed
approximately $1,220,000 in taxable and tax exempt bond financing and utilized
-6-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997
approximately $680,000 in cash for the purchase. The hotel is leased by the
Lessee pursuant to a Percentage Lease (defined herein) which provides for rent
based, in part, on the room revenues from the hotel.
In February, 1997 the Company increased its Credit Facility from $6.5
million to $12.0 million. The term and rate remain unchanged. Mr. Humphrey's
personal guaranty obligation has been reduced from $6.5 million to $2.0 million.
The Credit Facility is secured by liens on the Company's hotels located in
Solomons, MD; Farmville, VA (2 hotels); Elizabethton, TN; Dahlgren, VA;
Princeton, WV; Dover, DE; Culpeper, VA; New Castle, PA; Harlan, KY; Danville KY;
and Murphy, NC.
On March 17, 1997, the Company closed on the purchase of the 79 room
Comfort Inn hotel located in New Castle, Pennsylvania. The Company paid $3
million in cash for the site. The hotel is leased by the Lessee pursuant to a
Percentage Lease which provides for rent based, in part, on the room revenues
from the hotel.
On April 17, 1997, the Company closed on the purchase of the 63 room
Best Western Hotel in Harlan, Kentucky. The Company paid $1.75 million in cash
and borrowed $875,000 from the Credit Facility. The hotel is leased by the
Lessee pursuant to a Percentage Lease which provides for rent based, in part, on
the room revenues from the hotel.
On April 23, 1997, the Company closed on the purchase of the 62 room
Holiday Inn Express in Danville, Kentucky and the 56 room Comfort Inn in Murphy,
North Carolina. The Company paid $4.7 million collectively for both hotels with
borrowings from the Credit Facility. The hotels are leased by the Lessee
pursuant to a Percentage Lease which provides for rent based, in part, on the
room revenues from the hotels.
In April, 1997, the Company contracted to purchase four hotels, the 65
room Comfort Inn in Chambersburg, PA, the 83 room Holiday Inn Express in
Allentown, PA, the 81 room Comfort Inn in Gettysburg, PA and the 51 room Holiday
Inn Express in Gettysburg, PA (the "Pending Acquisitions") for an aggregate
purchase price of $13.4 million. The Company expects to purchase these four
hotels with proceeds from the Credit Facility. In conjunction with this
transaction the Company is increasing the Credit Facility from $12.0 million to
$23.0 million. The term and rate will remain unchanged. The four hotels will
serve as additional collateral for the Credit Facility.
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 March 31, 1997, and the
results of operations for the three months ended March 31, 1997 and 1996. The
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. 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,
1996.
Note 2. Distributions
On January 31, 1997, 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 1,
1996. On March 10, 1997, the Company declared a $.19 per share distribution for
each share of Common Stock outstanding on March 24, 1997. The distribution was
paid on May 5, 1997.
-7-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997
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
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 March, 2007.
Minimum future rental income under these noncancellable operating leases at
December 31, 1996 is as follows:
Year
----
1997 $ 2,407,183
1998 2,407,183
1999 2,407,183
2000 2,407,183
2001 2,407,183
Thereafter 12,637,710
-----------
$24,673,625
===========
For the three months ended March 31, 1997, the Company earned base
rents of $514,196 and percentage rents of $449,380. As of March 31, 1997,
approximately $637,853 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
On February 26, 1997 the Company assumed approximately $1.22 million in
taxable and tax exempt bond financing in conjunction with the purchase of the
Comfort Inn in Culpeper, VA. The tax exempt bonds, approximately $1.05 million,
bear interest at a rate of 7.5%, with annual increases to a maximum of 8.125% at
maturity in the year
-8-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997
2007. The annual interest rate on the taxable bonds, approximately $170,000, is
to be adjusted on November 1, 1997 to equal the then current yield on five year
Treasury bonds plus 4.0%, rounded up to the nearest 1/8 of 1%, with a minimum
interest rate of 10% and a maximum interest rate of 14%. The current interest
rate is 10%. The taxable bonds mature in the year 2002.
In February, 1997 the Company increased its Credit Facility from $6.5
million to $12.0 million. The term and rate will remain unchanged. Mr. Humphreys
personal guaranty obligation has been reduced from $6.5 million to $2.0 million.
The Credit Facility will be secured by the Companys hotels located in Solomons,
MD; Farmville, VA (2 hotels); Elizabethton, TN; Dahlgren, VA; Princeton, WV;
Dover, DE; Culpeper, VA; New Castle, PA; Harlan, KY; Danville, KY and Murphy,
NC.
-9-
<PAGE>
Humphrey Hospitality Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997
Note 5. Pro Forma Financial Information (Unaudited)
The following pro forma information is presented for informational
purposes as if the acquisition of both Comfort Inn hotels located in Culpeper,
Virginia and New Castle, Pennsylvania occurred on January 1, 1996. This
unaudited pro forma condensed statement of operations is not necessarily
indicative of what actual results of operations of the Company would have been
assuming such transactions had been completed as of January 1, 1996, nor does it
purport to represent the results of operations for future periods.
Humphrey Hospitality Trust, Inc.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(unaudited)
Three months Three months
ended ended
March 31, March 31,
1997 1996
------------ ------------
Revenue
Percentage lease revenue ................. $1,082,366 $ 989,989
Other revenue ............................ 73,723 7,546
---------- ----------
Total revenue ............................ 1,156,089 997,535
Expenses
Interest ................................. 184,864 181,120
Real estate and personal property taxes
and insurance ........................... 66,668 65,787
General and administrative ............... 43,215 73,541
Depreciation and amortization ............ 245,450 211,368
---------- ----------
Total expenses ........................... 540,197 531,816
---------- ----------
Income before allocation to minority interest .... 615,892 465,719
Income allocated to minority interest ............ 93,492 98,220
---------- ----------
Net income ....................................... $ 522,400 $ 367,499
========== ==========
Income per common share outstanding .............. $ 0.15 $ 0.16
Weighted average shares outstanding (1) .......... 4,105,050 2,955,050
- --------------------------------
(1) Includes 623,350 units which are currently redeemable on a one-for-one
basis for shares of common stock.
-10-
<PAGE>
Humphrey Hospitality Management, Inc.
BALANCE SHEETS
March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(unaudited)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................... $ 601,160 $1,127,573
Accounts receivable ........................... 115,255 89,060
Prepaid expenses .............................. 17,069 36,282
Other assets .................................. 1,073 818
Accounts receivable - shareholder ............. -- 51,250
---------- ----------
Total current assets .................. $ 734,557 $1,304,983
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable .............................. $ 194,179 $ 107,845
Accrued expenses .............................. 101,555 67,328
Advance deposit ............................... 6,768 1,730
Prepaid slip rentals - Marina ................. 41,694 31,203
Due to affiliates ............................. 644,327 1,066,996
---------- ----------
Total current liabilities ............. 988,523 1,275,102
---------- ----------
COMMITMENTS ........................................... -- --
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding 1 1
Retained (deficit) earnings ................... (253,967) 29,880
---------- ----------
Total shareholder's equity (deficit) .. (253,966) 29,881
---------- ----------
Total liabilities and shareholder's equity .... $ 734,557 $1,304,983
========== ==========
</TABLE>
See notes to financial statements.
-11-
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENTS OF OPERATIONS AND CHANGES IN RETAINED EARNINGS (DEFICIT)
(unaudited)
Three Months ended March 31,
1997 1996
---- ----
Revenue from hotel operations
Room revenue ............................. $1,720,234 $1,512,365
Telephone revenue ........................ 38,622 43,069
Slip revenue ............................. 56,414 52,766
Other revenue ............................ 38,738 44,141
---------- ----------
Total Revenue .................... 1,854,008 1,652,341
---------- ----------
Expenses
Salaries and wages ....................... 538,198 461,046
Room expense ............................. 110,014 91,822
Telephone ................................ 40,258 37,770
Marina expense ........................... 8,829 12,749
General and administrative ............... 107,446 92,248
Marketing and promotion .................. 72,605 49,260
Utilities ................................ 117,671 112,100
Repairs and maintenance .................. 35,655 38,138
Taxes and insurance ...................... 50,208 37,534
Franchise fees ........................... 93,395 80,115
Lease payments ........................... 963,576 833,751
---------- ----------
Total Expenses ................... 2,137,855 1,846,533
---------- ----------
NET LOSS ......................... (283,847) (194,192)
Retained earnings, beginning of period ... 29,880 48,796
---------- ----------
Accumulated deficit, end of period ....... $ (253,967) $ (145,396)
========== ==========
See notes to financial statements.
-12-
<PAGE>
Humphrey Hospitality Management, Inc.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months ended
March 31,
1997 1996
---- ----
<S> <C>
Cash flows from operating activities
Net loss ........................................... $ (283,847) $ (194,192)
Adjustments to reconcile net loss to net cash
used in operating activities
Changes in assets and liabilities
Increase in accounts receivable .............. (26,195) (44,141)
Decrease (increase) in prepaid expenses ...... 19,213 (4,773)
Increase in other assets ..................... (255) --
Increase in accounts payable ................. 86,334 108,276
Increase in prepaid slip rentals ............. 10,491 29,748
Decrease in due to affiliates ................ (422,669) (518,300)
Increase in accrued expenses ................. 34,227 --
Increase in advanced deposits ................ 5,038 --
----------- -----------
Net cash used in
operating activities ..................... (577,663) (623,382)
----------- -----------
Cash flows from financing activities
Decrease in accounts receivable - shareholder ...... 51,250 --
----------- -----------
Net cash provided by financing activities .. 51,250 --
----------- -----------
Net decrease in cash and
cash equivalents ......................... (526,413) (623,382)
Cash and cash equivalents, beginning ................. 1,127,573 1,253,229
----------- -----------
Cash and cash equivalents, ending .................... $ 601,160 $ 629,847
=========== ===========
</TABLE>
See notes to financial statements.
-13-
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Management, Inc. 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 Lessees financial position
as of March 31, 1997, and the results of operations for the three months
ended March 31, 1997 and 1996. The results of operation for the three months
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. 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, 1996.
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
Shared Expenses
- ---------------
Humphrey Associates, Inc. and HAI Management, Inc., affiliates of the
Lessee, share certain operating expenses with the Lessee. Expenditures are
allocated based on each entity's pro rata share of the expense. At March 31,
1997, $6,474 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 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 March 2007. Minimum future lease payments due under
these noncancellable operating leases are as follows:
-14-
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 1997
Year
----
1997 $ 2,407,183
1998 2,407,183
1999 2,407,183
2000 2,407,183
2001 2,407,183
Thereafter 12,637,710
-----------
$24,673,625
===========
For the three months ended March 31, 1997, the Lessee has incurred base
rents of $514,196 and percentage rents of $449,830. As of March 31, 1997, the
amount due the Partnership and Solomons Beacon Inn Limited Partnership for lease
payments were $637,853 collectively, and is included in due to affiliates on the
balance sheet.
-15-
<PAGE>
Humphrey Hospitality Management, Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
March 31, 1997
Note 4. Pro Forma Financial Information (Unaudited)
The following pro forma condensed statements of operations of
the Lessee are presented as if the acquisition of the Comfort Inn at Culpeper,
Virginia and the Comfort Inn at New Castle, Pennsylvania occurred on January 1,
1996. This unaudited pro forma condensed statement of operati is not necessarily
indicative of what actual results of operations of the Lessee would have been
assuming such operations had commenced as of January 1, 1996, nor does it
purport to represent the results of operations for future periods.
Humphrey Hospitality Management, Inc.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(unaudited)
Three months ended Three months ended
March 31, 1997 March 31, 1996
-------------- --------------
Revenue from hotel operations
Room revenue .................... $1,950,927 $1,815,818
Telephone revenue ............... 45,202 51,628
Slip revenue .................... 56,414 52,766
Other revenue ................... 43,237 49,183
---------- ----------
Total revenue ................... 2,095,780 1,969,395
---------- ----------
Expenses
Salaries and wages .............. 607,143 552,677
Room expense .................... 116,916 107,081
Telephone ....................... 44,178 43,274
Marina expense .................. 8,829 12,749
General and administrative ...... 113,433 101,218
Marketing and promotion ......... 82,354 64,207
Utilities ....................... 137,644 135,478
Repairs and maintenance ......... 42,440 48,881
Taxes and insurance ............. 55,034 45,281
Franchise fees .................. 114,993 104,265
Lease payments .................. 1,082,366 989,989
---------- ----------
Total expenses .................. 2,405,330 2,205,100
---------- ----------
NET LOSS ........................ $ (309,550) $ (235,705)
========== ==========
-16-
<PAGE>
Item 2.
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
The Company is a Virginia corporation that operates as a real estate
investment trust 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 84.24% interest in the Partnership.
As of March 31, 1997, the Partnership owned directly or indirectly twelve hotel
properties (the "Hotels"). Eight of the Hotels (the "Initial Hotels") were
acquired by the Company in connection with its initial public stock offering in
November 1994, one hotel was acquired in July 1995, one hotel was developed
in 1996 and opened for business in January of 1997 and two hotels were
acquired prior to March 31, 1997.
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 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 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.
Results of Operations
Three months ended March 31, 1997
- ---------------------------------
The Company's total revenues for the three month period ended March 31,
1997, substantially consisted of Percentage Lease revenue. The Companys revenue
was $1,037,299 an increase of $196,002, or 23.2%, during the three month period
ended March 31, 1997 as compared to Company revenue of $841,297 for the same
period of 1996. Net income increased by $175,957 to $490,902, or 55.8% for the
three months ended March 31, 1997 as compared to net income of $314,945 for the
same period of 1996. The improvement in net income is attributed to the
additional lease revenue derived from the opening of the Comfort Suites hotel in
Dover, Delaware and the acquisitions of the Comfort Inn hotels located in
Culpeper, Virginia, and New Castle, Pennsylvania.
The Lessee's room revenues from the Hotels increased by $341,643, or
22.6%, to $1,720,234 for the three months ended March 31, 1997, as compared to
$1,512,365 of room revenue for the same period of 1996. Occupancy for the Hotels
decreased from 56.7% for the three month period ended March 31, 1996, to 56.1%
for the same period in 1997. The decrease in occupancy is attributed to a
slowdown in construction related business at the Company hotels located in
Farmville and Dublin, Virginia. During 1996, these hotels received business as
the result of special large construction projects that were occurring in their
respective locales. The average daily rate of the Hotels increased to $48.82 for
the three months ended March 31, 1997, up 3.3% as compared to $47.24 for the
same period of 1996. Revenue per available room ("Revpar") was $27.39 for the
three months ended March 31, 1997, up 2.3% as compared to $26.78 for the same
period of 1996. Lessee operating expenses increased by $291,323, as the result
of the opening of the hotel in Dover, Delaware and the acquisition of the hotels
located in Culpeper, Virginia, and New Castle, Pennsylvania, to $2,137,855 for
the three months ended March 31, 1997, as compared to $1,846,533 for the same
period of 1996.
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 Partnerships 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 Lessees 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 March 31, 1997, the Company's cash and current
accounts receivable balances exceed the current obligations by $2,384,827.
-17-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
The Company's Funds from Operations (net income plus minority interest
and depreciation and amortization ("FFO")) were $784,164 in the three months
ended March 31, 1997 which is an increase of $218,663, or 10.6% over the
Funds from Operations in the comparable period in 1996, which were $565,501.
Most of the improvements in Funds from Operations can be attributed to the
completion and opening of the Comfort Suites hotel in Dover, Delaware, and the
acquisition of the Comfort Inn hotels located in Culpeper, Virginia,
and New Castle, Pennsylvania. Management considers Funds from Operations to be
a market accepted measure of an equity REIT's cash flow which management
believes reflects on the value of real estate companies such as the Company
in connection with the evaluation of other measures of operating
performances. In accordance with the resolution adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts, Inc.
("NAREIT"), Funds from Operations represents net income (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring 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.
The computation of historical Funds from Operations is as follows:
Historical Three Historical Three
Month Period Ended Month Period Ended
March 31, 1997 March 31, 1996
-------------- --------------
Net income applicable to
common shares ............... $490,902 $314,945
-------- --------
Add:
Minority interest ........... 87,855 84,175
Depreciation and amortization 205,407 166,381
-------- --------
Total ......................... $784,164 $565,501
======== ========
In February, 1997 the Company increased its Credit Facility from $6.5
million to $12.0 million. The term and rate will remain unchanged. Mr.
Humphrey's personal guaranty obligation has been reduced from $6.5 million to
$2.0 million. The Credit Facility will be further secured by the Companys
hotels located in Solomons, MD; Farmville, VA (2 hotels); Elizabethton,
TN; Dahlgren, VA; Princeton, WV; Dover, DE; Culpeper, VA; New Castle, PA;
Harlan, KY; Danville, KY and Murphy, NC.
Long-term debt as of March 31, 1997, was approximately $9.4 million as follows:
Approximately $1.7 million, from the Credit Facility which is secured
by and cross-collateralized and cross-defaulted on the Hotels
located in Solomons, MD; Farmville, VA (2 hotels); Elizabethton,
TN; Dahlgren, VA; Princeton, WV; Dover, DE; Culpeper, VA; New Castle,
PA; Harlan, KY; Danville, KY and Murphy, NC. The interest rate on the
Credit Facility is variable at 25 basis points above prime rate,
presently at a rate of 8.75% per annum.
-18-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
Approximately $4.1 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 March 31, 1997, the interest rate was approximately 4%
for both. In addition, letter of credit fees, trustee fees and
financing fees increased the effective rate on the bonds.
Approximately $1.2 million, secured by a first deed of trust and a
second deed of trust on the Hotel located in Culpeper, Virginia. The
first deed of trust bears a variable interest rate, currently 7.5% ,
with annual increases to a maximum interest rate of 8.125% at maturity
in the year 2007. The interest rate on the second deed of trust is to
be adjusted on November 1, 1997 to equal the then current yield on five
year Treasury bonds plus 4%, rounded up to the nearest 1/8 of 1% with
a minimum interest rate of 10% and a maximum interest rate of 14%.
The current interest rate is 10%. The second deed of trust expires in
the year 2002.
Approximately $2.4 million is secured by a first deed of trust on the
Comfort Inn-Dublin, Virginia. The outstanding balance bears interest
at a rate equal to 7.75% per annum with additional Underwriters' fees
increasing the interest rate to 8%.
In April of 1997, the Company acquired three hotels for approximately
$1.75 million in cash and approximately $5.6 million of proceeds from the Credit
Facility. The Company has also executed contracts to purchase the Pending
Acquisitions for approximately $13.4 million, which purchase prices will be
funded from borrowings under the Credit Facility. Upon the completion of the
closing of the Pending Acquisitions, the Company expects to have approximately
$29.2 million of outstanding indebtness or 53.5% of the aggregate amount paid by
the Company for the Hotels.
Effective April 3, 1997, the Company's Board of Directors adopted a
resolution increasing the Company's limit on consolidated indebtedness from 50%
to 55% 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 as of
March 31, 1997 is approximately $33.5 million. As of March 31, 1997, the
Company's total outstanding indebtedness represents approximately 28.1% 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 rates, real estate or personal property tax 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
Companys 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
proposed to the Lessee and the Lessee has signed 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
-19-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
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 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 has not adopted the provisions of Financial Accounting
Standard Board Statement No. 128 "Earnings Per Share" on the financial
statements for this quarter. The Company intends to adopt this standard on
December 15, 1997.
-20-
<PAGE>
Humphrey Hospitality Trust, Inc.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibits - None
Reports
(a) On March 12, 1997, the Company filed a Report on Form 8-K, as amended by
Reports on Form 8 K/A filed on March 28, 1997 and April 10, 1997,
reporting the acquisition of the Comfort Inn hotel in Culpeper,
Virginia. Audited financial information was filed on May 9, 1997.
(b) On March 28, 1997, the Company filed a Report on Form 8-K reporting the
acquisition of the Comfort Inn hotel in New Castle, Pennsylvania.
Audited financial information was filed on May 9, 1997.
(c) On April 25, 1997, the Company filed a Report on Form 8-K reporting the
acquisition of the Best Western hotel in Harlan, Kentucky, the Holiday
Inn Express hotel in Danville, Kentucky, and the Comfort Inn hotel in
Murphy, North Carolina. Audited financial information was filed on May
9, 1997.
(d) On May 9, 1997, the Company filed a Report on Form 8-K reporting the
audited financial information for the Comfort Inn hotel in Culpeper,
Virginia; the Comfort Inn hotel in New Castle, Pennsylvania; the Best
Western at Harlan, Kentucky; the Holiday Inn Express in Danville,
Kentucky; and the Comfort Inn hotel in Murphy, North Carolina.
OTHER INFORMATION.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HUMPHREY HOSPITALITY TRUST, INC.
By: ______________________________
James I. Humphrey, Jr.
President and Secretary
Date:______________________________
-21-
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<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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