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, 1998
Commission File Number: 0-25060
HUMPHREY HOSPITALITY TRUST, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1889548
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
12301 Old Columbia Pike, Silver Spring MD 20904 (301) 680-4343
(Address of principal executive offices) (Registrant's telephone number
(zip code) including area code)
N/A
----------------------------------------------------
(former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such short period that the Registrant was
required to file such report), and (ii) has been subject to such filing
requirements for the past 90 days.
YES __X___ NO _____
The number of shares of Common Stock, $.01 par value, outstanding on May 15,
1998 was 4,631,700.
Page 1 of 22
<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 March 31, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income and Changes in Accumulated
Deficit for the three months ended March 31, 1998 and 1997
(unaudited) 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and
1997 (unaudited) 5
Notes to Consolidated Financial Statements 6
HUMPHREY HOSPITALITY MANAGEMENT, INC.
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 11
Summary Statements of Operations and Changes in Retained Earnings for the three
months ended March 31, 1998 and 1997 (unaudited) 12
Statement of Cash Flows for the three months ended March 31, 1998 and 1997 (unaudited) 13
Notes to Financial Statements 14
Item 2. Management's Discussion and Analysis of Financial Condition 17
PART II. OTHER INFORMATION 20
None.
SIGNATURES 21
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
March December
31, 1998 31, 1997
-------- --------
(unaudited)
<S><C>
ASSETS
Investment in hotel properties, net of accumulated depreciation
of $3,141,251 and $2,635,787 $ 50,334,471 $ 50,475,642
Cash and cash equivalents 14,430 204,065
Accounts receivable from Lessee 1,215,101 1,857,024
Deferred expenses, net of accumulated amortization
of $254,092 and $207,295 856,742 903,539
Replacement reserve 32,614 148,966
Other assets 329,027 208,862
------------ ------------
Total assets $ 52,782,385 $ 53,798,098
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage notes and bonds payable $ 31,021,322 $ 31,721,321
Obligations under capital leases -- 34,184
Accounts payable and accrued expenses 402,112 262,708
Dividends payable 558,775 558,775
------------ ------------
31,982,209 32,576,988
------------ ------------
MINORITY INTEREST 3,302,936 3,369,798
------------ ------------
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 18,040,415 18,040,415
Distributions in excess of net earnings (577,992) (223,920)
------------ ------------
17,497,240 17,851,312
------------ ------------
Total liabilities and shareholders' equity $ 52,782,385 $ 53,798,098
============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN ACCUMULATED DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S><C>
Revenue
Percentage lease revenue $ 1,904,305 $ 963,576
Other revenue 3,526 73,723
----------- ----------
Total revenue 1,907,831 1,037,299
----------- ----------
Expenses
Interest 658,996 156,060
Land lease 15,705 --
Real estate and personal property taxes and insurance 138,363 55,222
General and administrative 125,278 41,853
Depreciation and amortization 552,261 205,407
----------- ----------
Total expenses 1,490,603 458,542
----------- ----------
Income before allocation to minority interest 417,228 578,757
Income allocated to minority interest 66,256 87,855
----------- ----------
Net income 350,972 490,902
Distributions in excess of net earnings, beginning of period (223,920) (91,793)
Dividends declared 705,044 661,523
----------- ----------
Distributions in excess of net earnings, end of period $ (577,992) $ (262,414)
=========== ==========
Basic earnings per common share outstanding $ 0.10 $ 0.14
=========== ==========
Diluted earnings per common share outstanding $ 0.10 $ 0.14
=========== ==========
Weighted average shares:
Basic 3,481,700 3,481,700
Diluted 4,139,073(2) 4,105,050(1)
</TABLE>
- ---------------------
(1) Includes 623,350 units, which are redeemable on a one-for-one basis for
shares of common stock at any time.
(2) Includes 657,373 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 STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S><C>
Cash flows from operating activities
Net income $ 350,972 $ 490,902
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 552,261 205,407
Income allocated to minority interest 66,256 87,855
Changes in assets and liabilities
Decrease in accounts receivable 699,511 425,854
Increase in other assets (112,357) (115,033)
Increase (decrease) in accounts payable
and accrued expenses 131,595 (47,509)
------------ ------------
Net cash provided by operating activities 1,688,238 1,047,476
------------ ------------
Cash flows from investing activities
Investment in hotel properties (364,293) (4,930,798)
Deposit to replacement reserve (229,916) (71,695)
Withdrawals from replacement reserve 346,270 136,256
------------ ------------
Net cash used in investing activities (247,939) (4,866,237)
------------ ------------
Cash flows from financing activities
Draw on line of credit 300,000 --
Paydown on line of credit (1,000,000) --
Stock issuance costs (57,588) (425)
Financing costs paid -- (153,959)
Dividends paid (838,162) (561,459)
Principal payments on capital leases (34,184) (6,016)
------------ ------------
Net cash (used in) provided by financing activities (1,629,934) (721,859)
------------ ------------
Net decrease in cash and cash equivalents (189,635) (4,540,620)
Cash and cash equivalents, beginning of period 204,065 7,100,692
------------ ------------
Cash and cash equivalents, end of period $ 14,430 $ 2,560,072
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 658,996 $ 156,060
========== ============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
During 1997, the Company acquired the Culpeper Comfort Inn hotel for
$1,900,000 of which $1,220,000 represented debt assumed.
See notes to consolidated financial statements.
-5-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Trust, Inc. was incorporated on August 23, 1994.
The Company is a self-administered real estate investment trust (REIT) for
Federal income tax purposes. Humphrey Hospitality Trust, Inc., through its
wholly-owned subsidiary Humphrey Hospitality REIT Trust (collectively, the
Company) owns a controlling partnership interest in Humphrey Hospitality Limited
Partnership (the Partnership) and through the Partnership owns interests in
twenty existing limited - service Hotels (including ten hotel properties
acquired during 1997) as of March 31, 1998. The Partnership owns a 99% general
partnership interest and the Company owns a 1% limited partnership interest in
Solomons Beacon Inn Limited Partnership (the Subsidiary Partnership). As of
March 31, 1998, the Company owns a 84.12% interest in the Partnership. The
Company began operations on November 29, 1994.
Since inception, the Partnership has leased all of its hotel facilities
to Humphrey Hospitality Management, Inc. (the Lessee), a corporation wholly
owned by James I. Humphrey, Jr., the President and Chairman of the Board of the
Company. The Lessee operates and leases the hotel properties pursuant to
separate percentage and fixed lease agreements (the Percentage Leases and the
Fixed Lease) which provide for both fixed rents and percentage rents based on
the revenues of the hotels.
As of March 31, 1998, James I. Humphrey, Jr., Humphrey Associates,
Inc., Farmville Lodging Associates, LLC and Humphrey-Key Largo Associates, L.P.
(collectively, the Humphrey Affiliates) own a combined total of 657,373 units of
limited partnership interests, representing a 15.88% interest in the
Partnership.
On April 24, 1998, the Company completed a fourth public offering (the
"Fourth Stock Offering") of 1,150,000 shares of common stock. The gross proceeds
were $12,075,000 based on the offering price of $10.50 per share. Net of
underwriters' discount and offering expenses, the Company received net proceeds
of approximately $10,915,000. The Company used the proceeds to repay certain
amounts under the Credit Facility, which amounts had been borrowed over the past
year principally to purchase certain of the Hotels. Upon completion of the
Fourth Stock Offering, the Company owned an 87.57% partnership interest, and the
Limited Partners owned a 12.43% interest in the Partnership.
The Company has completed the following public offerings since its inception:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Offering price Shares sold Net proceeds
Offering Date completed per share (in thousands)
--------------------------------------------------------------------------------------------------------------
<S><C>
Initial public offering November 29, 1994 $ 6.00 1,321,700 $ 6,950
--------------------------------------------------------------------------------------------------------------
Second offering July 21, 1995 $ 7.75 1,010,000 $ 6,957
--------------------------------------------------------------------------------------------------------------
Third offering December 6, 1996 $ 8.25 1,150,000 $ 8,645
--------------------------------------------------------------------------------------------------------------
Fourth offering April 24, 1998 $ 10.50 1,150,000 $ 10,915
--------------------------------------------------------------------------------------------------------------
</TABLE>
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, the Partnership and the Subsidiary Partnership. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
-6-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
Investment in Hotel Properties
The hotel properties are recorded at cost. Depreciation is computed
using the straight-line method over estimated useful lives of the assets which
range from 31 to 40 years for buildings and 5 to 12 years for furniture and
equipment. Maintenance and repairs are generally the responsibility of the
Lessee and are charged to the Lessees operations as incurred; major
replacements, renewals and improvements are capitalized. Upon disposition, both
the asset and accumulated depreciation accounts are relieved and the related
gain or loss is credited or charged to the statement of income.
The Company reviews the carrying value of each hotel property in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121 to
determine if circumstances exist indicating an impairment in the carrying value
of the investment in the hotel property or that depreciation periods should be
modified. If facts or circumstances support the possibility of impairment, the
Company will prepare a projection of the undiscounted future cash flows of the
specific hotel property and determine if the investment in the hotel property is
recoverable based on the undiscounted future cash flows. If impairment is
indicated, an adjustment will be made to the carrying value of the hotel
property based on the discounted future cash flows. The Company does not believe
that there are any current facts or circumstances indicating impairment of any
of its investment in hotel properties.
Revenue Recognition
Lease income is recognized when earned from the Lessee under the lease
agreements from the date of acquisition of each hotel property.
Earnings Per Common Share
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share. Basic and diluted earnings per share have
been calculated in accordance herewith.
Distributions
The Company intends to pay regular monthly dividends which are
dependent upon the receipt of distributions from the Partnership.
Minority Interest
Minority interest in the Partnership represents the limited partners
proportionate share of the equity of the Partnership. The limited partnership
interests are owned by the Humphrey Affiliates as of March 31, 1998. Income is
allocated to minority interest based on weighted average percentage ownership
throughout the year.
Income Taxes
The Company intends to continue to qualify as a REIT under Sections 856
and 860 of the Internal Revenue Code effective with its taxable period ended
December 31, 1994. Accordingly, no provision for Federal income taxes has been
reflected in the financial statements.
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, 1998, and the
results of operations for the three months ended March 31, 1998 and 1997. The
results of operations for the three months ended March 31, 1998 are not
-7-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. 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,
1997.
Note 2. Distributions
On January 9, 1998 and January 30, 1998 the Company paid a $.0675 per
share distribution on each share of Common Stock outstanding (including the
distribution to minority interest) to shareholders of record as of November 28,
1997 and December 31, 1997 respectively.
On March 12, 1998 the Company paid a .0675 per share distribution on each
share of Common Stock outstanding (including the distribution to minority
interest) to shareholders of record as of January 30, 1998. The distribution
declared for shareholders of record as of February 27, 1998 and March 30, 1998
was paid on April 10, 1998 and May 8, 1998 respectively.
Note 3. Commitments and Contingencies
Pursuant to the Humphrey Hospitality Limited Partnership Agreement, the
Limited Partners have certain 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. At March
31, 1998, the aggregate number of shares of Common Stock issuable to the Limited
Partners upon exercise of the Redemption Rights is 657,373. 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, that otherwise would have the effect of diluting the ownership
interests of the Limited Partners or the shareholders of the Company.
The Company is the sole general partner in the Partnership, which is the
sole 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 nineteen of
its twenty Hotels and a fixed lease relating to the Comfort Suites, Dover, DE,
with Humphrey Hospitality Management, Inc. (the "Lessee"). Each such lease (the
"Percentage Leases" and the "Fixed Lease") 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. Pursuant to the terms of the Fixed Lease, the Lessee is required to
pay a fixed rent and certain other additional charges and is entitled to all
profits from the operations of the Hotel after the payment of certain specified
operating expenses. Also pursuant to the terms of the Percentage Lease and the
Fixed Lease, the Company is obligated to make available to the Lessee an amount
equal to 4% of room revenue on a quarterly, cumulative basis for capital
improvements and refurbishments.
Although the Company believes that 4% of room revenue is generally an
appropriate capital reserve to maintain the condition and viability of its
Hotels, the Company increased its capital reserves set-aside from 4% to 6% of
room revenue upon completion of the Fourth Stock Offering. The additional 2% of
room revenue will be held in a special reserve fund (the "Additional Reserve
Fund") that will be deployed at the Hotels primarily to enhance their
competitive position. To ensure that the Company receives additional annual
income that is at least equal to 12% of the amount of funds invested by the
Company from the Additional Reserve Fund, the Company and the Lessee have agreed
to amend the Leases for the Hotels that receive capital from the Additional
Reserve Fund to provide that each such Hotel will increase its annual Base Rent
payment by 7% per annum of the capital received from the Additional Reserve
Fund. The Company expects that it will receive additional amounts under the
terms of the Percentage Leases equal to at least 5% per annum of the amount
invested from the Additional Reserve Fund through its participation in increased
room revenue resulting from such additional investments. The Company has future
lease commitments from the Lessee through August, 2007. Minimum future rental
income under these noncancelable operating leases at December 31, 1997 is as
follows:
-8-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 1998
Year (in thousands)
---- --------------
1998 4,082
1999 4,082
2000 4,082
2001 4,082
2002 4,082
Thereafter 13,693
------
$34,103
=======
For the three months ended March 31, 1998, the Company earned base rents
of $1,020,486 and percentage rents of $883,819 as compared to base rents of
$514,196 and percentage rents of $449,380 for the three months ended March 31,
1997. As of March 31, 1998, $1,215,101 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 ten to 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.
The Company entered into an agreement on April 14, 1998 for the sale of
the Comfort Inn, Elizabethton, TN.
Note 4. Mortgages and Bonds Payable
Since February 1997 the Company has increased the maximum amount that it
may borrow under the terms of its Credit Facility from $6.5 million to $25.5
million.. The term of the Credit Facility extends through April 1999, with two
one year extensions at the option of the bank. The Credit Facility bears
interest at the prime rate plus 25 basis points (8.75% at March 31, 1998.) The
Credit Facility is secured by 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; Murphy, NC;
Chambersburg, PA; Allentown, PA, Gettysburg, PA (2 hotels) and Key Largo, FL.
Note 5. Pro Forma Financial Information (Unaudited)
The following pro forma information is presented for informational
purposes as if the acquisition of the Hotels, described in Note 1, occurred on
January 1, 1997. 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,
1997, nor does it purport to represent the results of operations for future
periods.
-9-
<PAGE>
Humphrey Hospitality Trust, Inc.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1998 March 31, 1997
(Historical) (Proforma)
------------------ ------------------
<S><C>
Revenue
Percentage lease revenue $1,904,305 $1,891,195
Other revenue 3,526 73,723
---------- ----------
Total revenue 1,907,831 1,964,918
---------- ----------
Expenses
Interest 658,996 670,202
Land lease 15,705 --
Real estate and personal property taxes
and insurance 138,363 130,851
General and administrative 125,278 69,134
Depreciation and amortization 552,261 477,847
---------- ----------
Total expenses 1,490,063 1,348,034
---------- ----------
Income before allocation to minority interest 417,228 616,884
Income allocated to minority interest 66,256 97,961
---------- ----------
Net income $ 350,972 $ 518,923
========== ==========
Basic earnings per common share outstanding $ 0.10 $ 0.15
========== ==========
Diluted earnings per common share outstanding $ 0.10 $ 0.15
========== ==========
Weighted average shares:
Basic 3,481,700 3,481,700
Diluted 4,139,073(1) 4,139,073(1)
</TABLE>
- --------------
(1) Includes 657,373 units which are redeemable for shares of common stock at
any time.
-10-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(unaudited)
<S><C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,656,426 $ 2,483,403
Accounts receivable 269,657 224,201
Prepaid expenses 32,266 66,862
Other assets 43,204 60,377
----------- -----------
Total current assets $ 2,001,553 $ 2,834,843
=========== ===========
LIABILITIES AND SHAREHOLDER'S (DEFICIT)/EQUITY
CURRENT LIABILITIES
Accounts payable $ 401,415 $ 402,188
Accrued expenses 256,328 346,744
Advance deposit 79,703 12,031
Prepaid slip rentals - Marina 56,374 31,914
Note Payable to Stockholder(1) 200,000 --
Due to affiliates 1,222,728 1,857,021
----------- ------------
Total current liabilities 2,216,548 2,649,898
----------- ------------
COMMITMENTS -- --
SHAREHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding 1 1
(Accumulated deficit) Retained earnings (214,996) 184,944
----------- ------------
Total shareholder's (deficit)/equity (214,995) 184,945
----------- ------------
Total liabilities and shareholder's (deficit)/equity $ 2,001,553 $ 2,834,843
=========== ============
</TABLE>
- --------------------
(1) The note was repaid to Mr. Humphrey in April 1998. The note was unsecured
and bore interest at prime plus a quarter percent (8.75%).
See notes to financial statements.
-11-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
SUMMARY STATEMENTS OF OPERATIONS AND
CHANGES IN RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S><C>
Revenue from hotel properties
Room revenue $ 3,661,980 $ 1,720,234
Telephone revenue 74,412 38,622
Slip revenue 71,718 56,414
Interest revenue 9,896 --
Other revenue 89,699 38,738
------------ -------------
Total revenue 3,907,705 1,854,008
------------ -------------
Expenses
Salaries and wages 1,120,814 538,198
Room expense 215,572 110,014
Telephone 77,818 40,258
Marina expense 7,281 8,829
General and administrative 215,074 107,446
Marketing and promotion 173,559 72,605
Utilities 234,319 117,671
Repairs and maintenance 97,357 35,655
Taxes and insurance 72,363 50,208
Franchise fees 189,183 93,395
Lease payments 1,904,305 963,576
------------ -------------
Total expenses 4,307,645 2,137,855
------------ -------------
Net income (399,940) (283,847)
Retained earnings,
beginning of period 184,944 29,880
------------ -------------
Accumulated deficit,
end of period $ (214,996) $ (253,967)
============ ============
</TABLE>
See notes to financial statements.
-12-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S><C>
Cash flows from operating activities
Net loss $ (399,940) $ (283,847)
Adjustments to reconcile net income to net cash
used in operating activities
Changes in assets and liabilities
Increase in accounts receivable (45,456) (26,195)
Decrease in prepaid expenses 34,596 19,213
Decrease (increase) in other assets 17,173 (255)
(Decrease) increase in accounts payable (773) 86,334
Increase in prepaid slip rentals 24,460 10,491
Decrease in due to affiliates (634,293) (422,669)
(Decrease) increase in accrued expenses (90,416) 34,227
Increase in advanced deposits 67,672 5,038
------------ -----------
Net cash used in
operating activities (1,026,997) (577,663)
------------ -----------
Cash flows from financing activities
Repayment of advance to shareholder -- 51,250
Advance from Shareholder 200,000 --
------------ -----------
Net cash provided by financing activities 200,000 51,250
------------ -----------
Net decrease in cash and
cash equivalents (826,977) (526,413)
Cash and cash equivalents, beginning of period 2,483,403 1,127,573
------------ -----------
Cash and cash equivalents, end of period $ 1,656,426 $ 601,160
=========== ===========
</TABLE>
- ---------------------
See notes to financial statements.
-13-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
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 hotel properties from Humphrey Hospitality Limited Partnership
(the "Partnership"). 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 March 31, 1998, and the results of operations for the three months ended
March 31, 1998 and 1997. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. 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, 1997.
Accounts Receivable
The Lessee considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, 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,
1998, $7,627 was due to afffiliates for such allocated expenses.
Note 3. Commitments
The Lessee has entered into percentage leases with the Partnership
relating to nineteen of its Hotels (including ten hotels acquired in 1997) and a
fixed lease relating to the Comfort Suites Dover, DE (collectively, the Acquired
Hotels). Each such lease (the "Percentage Leases" and the "Fixed Lease") has a
term of 10 years. 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. Pursuant to the terms of the Fixed Lease, the Lessee is required to pay
a fixed rent and certain other additional charges. The Lessee has future lease
commitments through August 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, 1998
Year (in thousands)
---- --------------
1998 4,082
1999 4,082
2000 4,082
2001 4,082
2002 4,082
Thereafter 13,693
------
$34,103
=======
For the three months ended March 31, 1998, the Lessee has incurred base
rents of $1,020,486, and percentage rents of $883,819 as compared to base rents
of $514,196 and percentage rents of $449,380 for the three months ended March
31, 1997. As of March 31, 1998, the amount due the Partnership and Solomons
Beacon Inn Limited Partnership for lease payments were $1,215,101 collectively,
and is included in due to affiliates on the balance sheet.
Note 4. Pro Forma Financial Information (Unaudited)
The following pro forma information is presented for informational
purposes as if the acquisition of the acquired hotels by the Partnership and the
commencement of the percentage and fixed leases had occurred on January 1, 1997.
This unaudited pro forma condensed statement of operations 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, 1997, nor does it
purport to represent the results of operations for future periods.
-15-
<PAGE>
Humphrey Hospitality Management, Inc.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1998 March 31, 1997
(Historical) (Proforma)
------------------ ------------------
<S><C>
Revenue from hotel operations
Room revenue 3,661,980 $3,491,672
Telephone revenue 74,412 74,463
Slip revenue 71,718 56,414
Interest revenue 9,896 --
Other revenue 89,699 81,530
----------- ----------
Total revenue 3,907,705 3,704,079
----------- ----------
Expenses
Salaries and wages 1,120,814 1,071,034
Room expense 215,572 238,482
Telephone 77,818 62,833
Marina expense 7,281 8,829
General and administrative 215,074 192,158
Marketing and promotion 173,559 167,105
Utilities 234,319 246,919
Repairs and maintenance 97,357 108,403
Taxes and insurance 72,363 83,921
Franchise fees 189,183 189,282
Lease payments 1,904,305 1,895,225
----------- ----------
Total expenses 4,307,645 4,264,191
----------- ----------
NET INCOME $ (399,940) $ (560,112)
============ ===========
</TABLE>
-16-
<PAGE>
Item 2.
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
This Form 10-Q may include forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are identified by phrases such as the
Company "expects" or "anticipates" and words of similar effect. The Company's
actual results may differ materially from those projected. Factors that could
cause such a difference include difficulties in integrating and operating
acquired properties; termination of franchise agreements; default of the Lessee
under operating leases; and general risks associated with investments in real
estate, including the effect of changes in economic, competitive and other
market conditions in the markets where the Company's properties are
concentrated, inability to relet vacated space at adequate rates, the inability
of properties to generate adequate cash flow to fund debt service and operating
expenses, financing and refinancing risks related to the Company's floating rate
debt and new debt necessary to support growth. The Company cautions readers not
to place undue reliance on any such forward-looking statements, which statement
are made pursuant to the Private Securities Litigation Reform Act of 1995 and,
as such, speak only as of the date made.
Humphrey Hospitality Trust, Inc. (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 sole general
partner of Humphrey Hospitality Limited Partnership (the "Partnership") and owns
a 84.12% interest in the Partnership at March 31, 1998. As of March 31, 1998,
the Partnership owned directly or indirectly twenty 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 1997 and ten hotels were acquired between February 1997
and September 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 pursuant to leases ("Leases") to Humphrey Hospitality
Management, Inc. (the "Lessee") which is wholly owned by James I. Humphrey, a
limited partner in the Partnership and Chairman of the Board of Directors and
President of the Company. The Partnership's, and therefore the Company's,
principal source of revenue is lease payments by the Lessee under the Percentage
Leases and the Fixed Lease. The Lessee's ability to make payments to the
Partnership under the Percentage Leases and the Fixed Lease is dependent on its
ability to generate cash flow from the operation of the Hotels.
RESULTS OF OPERATIONS
Three months ended March 31, 1998
The Company's total revenues for the three month period ended March 31,
1998, substantially consisted of Lease revenue recognized pursuant to the
Leases. The Company's revenue during the three month period ended March 31, 1998
was $1,907,831 an increase of $870,532, or 83.9%, as compared to Company revenue
of $1,037,299 for the same period of 1997. The improvement in revenues is
attributed to the additional Lease revenue derived from the increase in the
number of Hotels. Net income decreased by $139,930 to $350,972, or 28.5% for the
three months ended March 31, 1998 as compared to net income of $490,902 for the
same period of 1997. The decrease is the result of increased interest expense
from borrowings for the acquisitions, and full depreciation of the properties
acquired in 1997. These full expense items are reflected in what is
traditionally a slow quarter for the hotels in the Company's portfolio.
The Lessee's room revenues from the Hotels increased by $1,941,746, or
112.9%, to $3,661,980 for the three months ended March 31, 1998, as compared to
$1,720,234 of room revenue for the same period of 1997. The pro forma average
daily rate of the Hotels increased to $55.58 for the three months ended March
31, 1998, up 4.7% as compared to $53.10 for the same period of 1997. Pro forma
revenue per available room ("Revpar") was $31.01 for the three months ended
March 31, 1998 as compared to $29.11 for the same period of 1997. Lessee
operating expenses increased by $2,169,790, as the result of the opening of the
hotel in Dover, Delaware and the acquisition of ten other hotels, to $4,307,645
for the three months ended March 31, 1998, as compared to $2,137,855 for the
same period of 1997. The net loss for the three months ended March 31, 1998
increased $118,772 to $402,619 from $283,847 in 1997. The increase is the result
of having more hotels in a traditionally slow quarter for the portfolio.
-17-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
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
Leases. The Lessee's obligations under the 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 with the
exception of the Hotel that the Company acquired in Key Largo, Florida. The Key
Largo hotel is busiest in the first and fourth quarters of the year. To the
extent that cash flow from operating activities is insufficient to provide all
of the estimated monthly 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, 1998, the Company's cash and current accounts
receivable balances exceed its current obligations by $268,644.
The Company's Funds from Operations (net income plus minority interest and
depreciation and amortization) ("FFO") was $936,997 in the three months ended
March 31, 1998 which is an increase of $170,790, or 22.3% over the FFO in the
comparable period in 1997, which was $766,207. Most of the improvements in FFO
can be attributed to the completion and opening of the Comfort Suites hotel in
Dover, Delaware, and the acquisition of ten hotels between February 1997 and
September 1997. Management considers FFO 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"), FFO 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, FFO represents cash flow from operating
activities. FFO 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. FFO does not reflect working
capital changes, cash expenditures for capital improvements or debt service with
respect to the hotel properties.
The computation of historical FFO is as follows:
<TABLE>
<CAPTION>
Historical Three Historical Three
Month Period Ended Month Period Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S><C>
Net income applicable to
common shares $ 350,972 $ 490,902
Add:
Minority interest 66,256 87,855
Amortization of franchise costs 14,305 375
Depreciation 505,464 187,075
--------- -------------
Funds From Operations (new method) $ 936,997 $ 766,207
--------- -------------
Amortization of loan costs 32,492 17,957
Funds From Operations (old method) $ 969,489 $ 784,164
--------- -------------
</TABLE>
-18-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
Long-term debt as of March 31, 1998, of approximately $31 million consisted of:
Approximately $24.8 million, from the credit facility with Mercantile
Safe Deposit and Trust Company (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; Murphy, NC; Chambersburg, PA; Allentown, PA , Gettysburg,
PA (2 hotels) and Key Largo, FL. The interest rate on the Credit Facility
is variable at 25 basis points above the prime rate, presently at a rate
of 8.75% per annum.
Approximately $3.9 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, 1998, the interest rate was approximately 3.7% and 3.8% for
Wytheville and Morgantown, respectively. In addition, letter of credit
fees, trustee fees and financing fees increased the effective rate on the
bonds.
Approximately $2.4 million, is secured by a first deed of trust on the
Comfort Inn-Dublin, VA. The outstanding balance bears interest at a rate
equal to 7.75% per annum with additional Underwriters' fees increasing
the interest rate to 8%.
The Company's debt policy provides that it may not carry consolidated
indebtedness in excess of 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, 1998 is approximately $58 million. As of March
31, 1998, the Company's total outstanding indebtedness represents approximately
53.45% 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 assurance 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.
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 require-ments. 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
-19-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
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 with the
exception of the hotel that the Company acquired in Key Largo, Florida. The Key
Largo hotel is busiest in the first and fourth quarters of the year. 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.
YEAR 2000
In response to the year 2000 issue, the Company modified its existing
information systems in order to make them year 2000 compliant. The Company
believes that it has made all necessary modifications to its existing systems
and does not expect that additional costs associated with year 2000 compliance,
if any, will be material to the Company's results of operations or financial
position.
OTHER INFORMATION
The Company adopted the provisions of Financial Accounting Standard Board
Statement No. 128 "Earnings Per Share" during 1997.
Item 6. Exhibits and Reports on Form 8-K
Exhibits -
Exhibit 27.1 Financial Data Schedule
PART II
OTHER INFORMATION.
None.
-20-
<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: /s/ James I Humphrey, Jr
____________________________
James I. Humphrey, Jr.
President and Secretary
Date: 05/14/98
__________________________
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,430
<SECURITIES> 0
<RECEIVABLES> 1,215,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,218,383
<PP&E> 53,475,722
<DEPRECIATION> (3,141,251)
<TOTAL-ASSETS> 52,782,385
<CURRENT-LIABILITIES> 960,887
<BONDS> 31,021,322
0
0
<COMMON> 34,817
<OTHER-SE> 17,462,423
<TOTAL-LIABILITY-AND-EQUITY> 49,479,449
<SALES> 0
<TOTAL-REVENUES> 1,907,831
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,490,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 417,228
<INCOME-TAX> 0
<INCOME-CONTINUING> 350,972
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 350,972
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
