<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number: 0-25060
HUMPHREY HOSPITALITY TRUST, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
N/A
---------------------------------------------------
(former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant: (1) 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 shorter period that the
Registrant was required to file such reports), and (2) 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 per share, outstanding on
August 14, 1998 was 4,631,700.
Page 1 of 21
<PAGE> 2
HUMPHREY HOSPITALITY TRUST, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. HUMPHREY HOSPITALITY TRUST, INC.
--------------------------------
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income and Changes in Accumulated Deficit for the three and six
months ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and
1997 (unaudited) 5
Notes to Consolidated Financial Statements 7
HUMPHREY HOSPITALITY MANAGEMENT, INC.
-------------------------------------
Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 12
Summary Statements of Operations and Changes in Retained Earnings for the three and six
months ended June 30, 1998 and 1997 (unaudited) 13
Statement of Cash Flows for the six months ended June 30, 1998 and 1997 (unaudited) 14
Notes to Financial Statements 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 24
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June December
30, 1998 31, 1997
--------- --------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net of accumulated depreciation $ 59,998,560 $ 50,475,642
Cash and cash equivalents 1,508,398 204,065
Accounts receivable from Lessee 1,736,034 1,857,024
Deferred expenses, net of accumulated amortization 742 903,539
Replacement reserve 1,107,168 148,966
Other assets 217,499 208,862
---------- -----------
Total assets $ 64,568,401 $ 53,798,098
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage notes and bonds payable $ 31,526,379 $ 31,721,321
Obligations under capital leases -- 34,184
Dividends payable 800,011 558,775
Accounts payable and accrued expenses 482,479 262,708
------------ -------------
32,808,869 32,576,988
------------ -------------
Minority interest 4,404,515 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, 4,631,700 and 3,481,700 shares, respectively,
issued and outstanding 46,317 34,817
Additional paid-in capital 27,870,377 18,040,415
Distributions in excess of net earnings (561,677) (223,920)
------------ ------------
27,355,017 17,851,312
------------ ------------
Total liabilities and shareholders' equity $ 64,568,401 $ 53,798,098
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 4
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN ACCUMULATED DEFICIT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Percentage lease revenue $2,354,422 $1,777,161 $4,258,727 $2,740,737
Other revenue 3,831 14,205 7,357 87,928
--------- ---------- --------- ----------
Total revenue 2,358,253 1,791,366 4,266,084 2,828,665
--------- --------- --------- ----------
Expenses
Interest 486,884 384,904 1,145,880 540,964
Land lease 19,056 13,253 34,760 13,253
Real estate and personal property taxes and insurance 138,387 98,949 276,752 154,171
General and administrative 158,855 177,253 284,132 219,106
Depreciation and amortization 563,291 373,530 1,115,551 578,937
------- ------- --------- --------
Total expenses 1,366,473 1,047,889 2,857,075 1,506,431
--------- --------- --------- ----------
Income before gain on sale of asset 991,780 743,477 1,409,009 1,322,234
Gain on sale of asset 195,001 -- 195,001 --
Income allocated to minority interest 163,071 112,860 229,327 200,715
------- ------- ------- ---------
Net income 1,023,710 630,617 1,374,683 1,121,519
Accumulated deficit beginning of period (577,992) (262,414) (223,920) (91,793)
Distributions declared (1,007,395) (661,523) (1,712,440) (1,323,046)
----------- --------- ----------- -----------
Accumulated deficit end of period (561,677) (293,320) (561,677) (293,320)
========= ========= ========= =========
Basic earnings per common share $ 0.24 $ 0.18 $ 0.35 $ 0.32
Diluted earnings per common share $ 0.24 $ 0.18 $ 0.35 $ 0.32
Weighted average shares :
Basic 4,303,129 3,481,700 3,894,683 3,481,700
Diluted 5,049,172 (2) 4,105,050 (1) 4,640,726 (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 746,043 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> 5
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,374,683 $ 1,121,519
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,115,551 578,937
Income allocated to minority interest 229,327 200,715
Gain on sale of asset (195,001) --
Changes in assets and liabilities
Decrease (Increase) in accounts receivable 120,990 (460,556)
(Increase) Decrease in other assets (8,639) 24,209
Franchise costs paid (204,500) (301,746)
Write-off of loan costs (8,327) --
Increase in accounts payable
and accrued expenses 219,770 168,868
------- ----------
Net cash provided by operating activities 2,643,854 1,331,946
--------- ---------
Cash flows from investing activities
Investment in hotel properties (11,791,873) (26,240,700)
Proceeds from sale of hotel 1,457,603 (261,673)
Deposit to replacement reserve (480,061) (919)
Withdrawals from replacement reserve 628,285 285,743
------- -------
Net cash used in investing activities (10,186,046) (26,217,549)
------------ ------------
Cash flows from financing activities
Net proceeds from issuance of stock 10,929,599 --
Draw on line of credit 11,810,000 19,519,773
Paydown on line of credit (11,954,942) --
Principal payments on long-term debt (50,000) (45,000)
Stock issuance costs -- (7,378)
Financing costs paid (100,000) (85,368)
Dividends paid (1,753,948) (1,341,418)
Increase in capital lease obligations -- 16,147
Principal payments on capital leases (34,184) (13,818)
------------- ------------
Net cash provided by financing activities 8,846,525 18,042,938
--------- -----------
Net increase (decrease) in cash and cash equivalents 1,304,333 (6,842,665)
Cash and cash equivalents, beginning of period 204,065 7,100,692
------- ---------
Cash and cash equivalents, end of period $ 1,508,398 $ 258,027
=============== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,234,328 $ 421,616
============ ==========
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
On June 1, 1998, the Company issued, as compensation 70,936 units of
limited partnership interest to Humphrey Development, Inc., and 17,734
units to Humphrey Hospitality Management, Inc. The total of 88,670 units
are redeemable for shares of common stock on a one-for-one basis and are
valued at approximately $900,000 based on an average price of $10.15 per
share. The recording of the increase in minority interest resulted in a
$452,315 reduction in additional paid in capital.
-5-
<PAGE> 6
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
At June 30, 1998, $800,011 of dividends to shareholders and limited
partners had been declared but not paid. The dividends were paid on July
15, 1998 and August 14, 1998. At December 31, 1997, $558,775 of dividends
to shareholders and limited partners had been declared but not paid.
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.
-6-
<PAGE> 7
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 under the laws of the Commonwealth of Virginia.
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-two existing
limited-service hotels (including three hotel properties acquired in June 1998)
as of June 30, 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 June 30, 1998, the
Company owns a 86.13% 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 lease agreements (the "Percentage
Leases") which provide for both fixed rents and percentage rents based on the
revenues of the hotels.
As of June 30, 1998, James I. Humphrey, Jr., Humphrey Associates,
Inc., Farmville Lodging Associates, LLC, Humphrey-Key Largo Associates, L.P.,
Humphrey Development, Inc. and Humphrey Hospitality Management, Inc.
(collectively, the "Humphrey Affiliates") own a combined total of 746,043 units
of limited partnership interests, representing a 13.87% 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 $10,929,000. The Company used the proceeds to repay
certain amounts under its Credit Facility with Mercantile Safe Deposit and
Trust Company (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> <C> <C> <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 $ 10,929
- ----------------------- -------------------- ------------------ -------------- ----------------
</TABLE>
On June 25, 1998, the Company closed on the purchase of the 73-room
Best Western hotel in Ellenton, Florida and the 63-room Shoney's Inn hotel in
Ellenton, Florida. The company paid $5.4 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.
On June 26, 1998, the Company closed on the purchase of the 80-room
Hampton Inn in Brandon, Florida. The Company paid $5.4 million for the hotel
with borrowings 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.
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.
-7-
<PAGE> 8
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998
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.
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 Lessee's 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 therewith. The adoption of SFAS No. 128 did
not have a material effect on prior years.
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. All of the limited
partnership interests are owned by Humphrey Affiliates as of June 30, 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. Accordingly, no provision for
Federal income taxes has been reflected in the financial statements.
-8-
<PAGE> 9
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and, accordingly, do not include
all of the disclosures normally required by generally accepted accounting
principles or those made in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission. The financial information has been
prepared in accordance with the Company's customary accounting practices. In
the opinion of management, the information presented reflects all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the Company's financial position as of June 30, 1998, and the
results of operations for the three and six months ended June 30, 1998 and
1997. The results of operations for the three and six months ended June 30,
1998 are not 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 Annual Report on Form 10-K for the
year ended December 31, 1997.
Note 2. Distributions
On June 16, 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 April 30, 1998. The distribution
declared for shareholders of record as of June 18, 1998 and June 25, 1998 was
paid on July 15, 1998 and August 14, 1998, respectively, at a rate of $.075 per
share.
Note 3. Commitments and Contingencies
Pursuant to the Humphrey Hospitality Limited Partnership Agreement, the
Limited Partners have certain redemption rights, (the "Redemption Rights"),
which 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
June 30, 1998, the aggregate number of shares of Common Stock issuable to the
Limited Partners upon exercise of the Redemption Rights is 746,043. 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 each of the
hotels with 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 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. The lease agreement relating to the Comfort
Suites, Dover, Delaware hotel, was amended in June 1998 from a fixed lease to a
Percentage Lease.
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
-9-
<PAGE> 10
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998
leases at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Year (in thousands)
---- --------------
<S> <C>
1998 4,082
1999 4,082
2000 4,082
2001 4,082
2002 4,082
Thereafter 13,693
------
$34,103
=======
</TABLE>
For the three and six months ended June 30, 1998, the Company earned base
rents of $1,032,702 and $2,053,185, respectively, as compared to base rents of
$786,566 and $1,300,762 for three and six months ended June 30, 1997. For the
three and six months ended June 30, 1998, the Company earned percentage rents
of $1,321,720 and $2,205,542, respectively, as compared to percentage rents of
$990,595 and $1,439,975 for the three and six months ended June 30, 1997. As
of June 30, 1998, $1,736,034 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 closed on the sale of the Comfort Inn, Elizabethton,
Tennessee hotel on June 30, 1998 for $1.55 million.
On June 1, 1998, the Company cancelled the Development Services Option
Agreement (the "Option Agreement") with Humphrey Development, Inc., an
affiliate substantially owned by Mr. Humphrey. The Option Agreement had
provided Humphrey Development, Inc. with the option to purchase the Comfort
Suites hotel located in Dover, Delaware, within 90 days before the sixth
anniversary date of the Hotel's certificate of occupancy, for a price of
$2,795,910. Humphrey Development, Inc. received as compensation 70,936 units
of limited partnership interest in the Partnership. The Lessee entered into a
new lease with the Partnership for the Comfort Suites Dover, Delaware hotel and
received as compensation, 17,734 limited partnership units of the Partnership.
The total of 88,670 units is valued at $900,000 based on an average price of
$10.15 per share of common stock for the ten trading days prior to May 29,
1998.
Note 4. Mortgages and Bonds Payable
Since February 1997, the Company has increased the maximum amount that
it may borrow under the terms of the 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 June 30, 1998.) The
Credit Facility is secured by the Company's hotels located in Solomons, MD;
Farmville, VA (2 hotels); 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, 1998 and 1997, respectively. 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, 1998 and 1997, respectively, nor does it purport to
represent the results of operations for future periods.
-10-
<PAGE> 11
HUMPHREY HOSPITALITY TRUST, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Revenue
Percentage lease revenue $ 5,115,292 $ 5,010,137
Other revenue 7,357 87,928
--------- ---------
Total revenue 5,122,649 5,098,065
--------- ---------
Expenses
Interest 1,379,171 1,571,792
Land lease 34,760 13,253
Real estate and personal property taxes
and insurance 385,751 370,599
General and administrative 284,132 258,605
Depreciation and amortization 1,307,739 1,164,248
--------- -----------
Total expenses 3,391,553 3,378,497
--------- ---------
Income before gain on sale of asset 1,731,096 1,719,568
Gain on sale of asset 195,001 --
Income allocated to minority interest 377,383 261,030
------- -------
Net income $ 1,548,714 $ 1,458,538
============ ============
Basic earnings per common share outstanding $ 0.40 $ 0.15
========= =========
Diluted earnings per common share outstanding $ 0.42 $ 0.15
========= =========
Weighted average shares:
Basic 3,894,683 3,481,700
Diluted 4,640,726 (2) 4,105,050 (1)
</TABLE>
- --------------------------------
(1) Includes 623,350 units, on a one-for-one basis for shares of common stock
which are redeemable at any time.
(2) Includes 746,043 units, which are redeemable on a one-for-one basis for
shares of common stock at any time.
-11-
<PAGE> 12
HUMPHREY HOSPITALITY MANAGEMENT, INC.
BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,312,512 $ 2,483,403
Accounts receivable 472,552 224,201
Prepaid expenses 10,946 66,862
Other assets 63,552 60,377
----------- -----------
Total current assets $ 2,859,562 $ 2,834,843
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 400,684 $ 402,188
Accrued expenses 344,589 346,744
Advance deposit 26,574 12,031
Prepaid slip rentals - marina 75,224 31,914
Due to affiliates 1,751,568 1,857,021
---------- ----------
Total current liabilities 2,598,639 2,649,898
---------- ----------
COMMITMENTS -- --
SHAREHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding 1 1
Retained earnings 260,922 184,944
---------- ------------
Total shareholder's equity 260,923 184,945
---------- ------------
Total liabilities and shareholder's equity $ 2,859,562 $ 2,834,843
=========== ============
</TABLE>
- --------------------
See notes to financial statements.
-12-
<PAGE> 13
HUMPHREY HOSPITALITY MANAGEMENT, INC.
SUMMARY STATEMENTS OF OPERATIONS AND
CHANGES IN RETAINED EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Room revenue $5,413,665 $4,080,057 $9,075,645 $5,800,291
Telephone revenue 83,221 69,426 157,633 108,048
Slip revenue 90,528 73,381 162,246 129,795
Interest revenue 15,229 7,755 25,124 12,026
Other revenue 145,231 97,011 234,931 131,478
------- ------ ------- -------
Total revenue 5,747,874 4,327,630 9,655,579 6,181,638
--------- --------- --------- ---------
Expenses
Salaries and wages 1,252,186 869,649 2,373,000 1,407,847
Room expense 295,581 215,494 511,153 325,508
Telephone 73,544 63,867 151,362 104,125
Marina expense 8,415 8,648 15,696 17,477
General and administrative 274,711 197,443 489,785 304,889
Marketing and promotion 190,688 141,812 364,246 214,417
Utilities 231,578 163,988 465,891 281,659
Repairs and maintenance 142,755 101,599 240,119 137,254
Taxes and insurance 85,648 44,525 158,010 94,733
Franchise fees 272,427 187,328 461,611 280,723
Lease payments 2,354,422 1,777,161 4,258,727 2,740,737
--------- --------- --------- ---------
Total expenses 5,181,955 3,771,514 9,489,600 5,909,369
--------- --------- --------- ---------
Net income $ 565,919 $ 556,116 $ 165,979 $ 272,269
---------- ---------- ---------- ----------
(Accumulated deficit) Retained
earnings, beginning of period (214,996) (253,967) 184,944 29,880
Distributions paid (90,000) (105,000) (90,000) (105,000)
-------- --------- -------- ---------
Retained earnings,
end of period $ 260,923 $ 197,149 $ 260,923 $ 197,149
========== =========== =========== ===========
</TABLE>
See notes to financial statements.
-13-
<PAGE> 14
HUMPHREY HOSPITALITY MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net Income $ 165,979 $ 272,269
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Changes in assets and liabilities
Increase in accounts receivable (248,351) (157,943)
Decrease (increase) in prepaid expenses 55,916 (1,488)
Increase in other assets (3,175) (18,215)
(Decrease) increase in accounts payable (1,505) 429,416
Increase in prepaid restaurant rentals -- 445
Increase in prepaid slip rentals 43,310 38,449
(Decrease) increase in due to affiliates (105,453) 460,555
(Decrease) increase in accrued expenses (2,155) 240,267
Increase in advance deposits 14,543 20,820
----------- -----------
Net cash (used in) provided by
operating activities (80,891) 1,284,575
-------- ----------
Cash flows from financing activities
Advance from shareholder 200,000 --
Distributions paid (90,000) (105,000)
Repayments of advance from shareholder (200,000) 51,250
--------- -------------
Net cash used in financing activities (90,000) (53,750)
---------- ----------
Net (decrease) increase in cash and
cash equivalents (170,891) 1,230,825
Cash and cash equivalents, beginning of period 2,483,403 1,127,573
--------- ----------
Cash and cash equivalents, end of period $ 2,312,512 $ 2,358,398
========== ==========
</TABLE>
- ---------------------
See notes to financial statements.
-14-
<PAGE> 15
HUMPHREY HOSPITALITY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1998, and the results of operations for the three and six months
ended June 30, 1998 and 1997. The results of operations for the three and six
months ended June 30, 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 Annual Report
on 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 June 30,
1998, $15,534 was due to affiliates for such allocated expenses.
Note 3. Commitments
The Lessee has entered into percentage leases with the Partnership
relating to each of its hotels (collectively, the "Acquired Hotels"). Each
such lease (the "Percentage Leases") 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. The Lessee has
future lease commitments through August 2007. Minimum future lease payments
due under these noncancellable operating leases are as follows:
-15-
<PAGE> 16
HUMPHREY HOSPITALITY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998
<TABLE>
<CAPTION>
Year (in thousands)
---- --------------
<S> <C>
1998 4,082
1999 4,082
2000 4,082
2001 4,082
2002 4,082
Thereafter 13,693
------
$34,103
=======
</TABLE>
For the three and six months ended June 30, 1998, the Lessee incurred
base rents of $1,032,702 and $2,053,185, respectively, as compared to base
rents of $786,566 and $1,300,762, respectively, for three and six months ended
June 30, 1997. For the three and six months ended June 30, 1998, the Lessee
incurred percentage rents of $1,321,720 and $2,205,542, respectively, as
compared to percentage rents of $990,595 and $1,439,975, respectively, for the
three and six months ended June 30, 1997. As of June 30, 1998, the amount due
the Partnership and the Subsidiary Partnership for lease payments were
$1,736,034 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 Leases had occurred on January 1, 1998 and
1997, respectively. The 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,
1998 and 1997, respectively, nor does it purport to represent the results of
operations for future periods.
-16-
<PAGE> 17
HUMPHREY HOSPITALITY MANAGEMENT, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Revenue from hotel operations
Room revenue $11,007,947 $10,440,059
Telephone revenue 191,006 189,808
Slip revenue 162,246 129,795
Interest revenue 25,124 12,026
Other revenue 251,734 213,325
---------- ----------
Total revenue 11,638,057 10,985,013
---------- ----------
Expenses
Salaries and wages 2,723,376 2,521,789
Room expense 593,355 601,273
Telephone 176,076 162,151
Marina expense 15,696 17,477
General and administrative 554,101 510,079
Marketing and promotion 426,478 418,013
Utilities 570,069 577,968
Repairs and maintenance 289,308 291,028
Taxes and insurance 203,928 183,569
Franchise fees 559,537 540,418
Lease payments 5,115,284 4,933,149
---------- ----------
Total expenses 11,227,208 10,756,914
---------- ----------
NET INCOME $ 410,849 $ 228,099
=========== ===========
</TABLE>
-17-
<PAGE> 18
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 differences 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, 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 statements 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 ( a "REIT") under
the Internal Revenue Code of 1986, as amended (the "Code"). The Company,
through Humphrey Hospitality REIT Trust, the Company's wholly-owned subsidiary,
is the sole general partner of Humphrey Hospitality Limited Partnership (the
"Partnership") and owns a 86.13% interest in the Partnership at June 30, 1998.
As of June 30, 1998, the Partnership owned directly or indirectly twenty-two
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, ten hotels were
acquired between February 1997 and September 1997 and three hotels were
acquired in June 1998.
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. 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 June 30, 1998
The Company's total revenues for the three month period ended June 30,
1998, substantially consisted of Lease revenue recognized pursuant to the
Leases. The Company's revenue during the three month period ended June 30,
1998 was $2,358,253 an increase of $566,887, or 31.6%, as compared to Company
revenue of $1,791,366 for the same period during 1997. The improvement in
revenues is primarily attributable to additional Lease revenue derived from the
increase in the number of Hotels. Net income increased by $393,093 to
$1,023,710, or 62.3% for the three months ended June 30, 1998 as compared to
net income of $630,617 for the same period during 1997. The improvement in net
income is primarily attributable to additional Lease revenue derived from the
increase in the number of Hotels, offset in part by additional expenses
associated with the additional hotels, and the gain from sale of the Comfort
Inn hotel in Elizabethton, Tennessee.
The Lessee's room revenues from the Hotels increased by $1,333,608, or
32.69%, to $5,413,665 for the three months ended June 30, 1998, as compared to
$4,080,057 of room revenue for the same period of 1997. The improvement in
revenues is primarily attributable to the increase in the number of Hotels.
The pro forma average daily rate of the Hotels increased to $59.29 for the
three months ended June 30, 1998, up 1.9% as compared to $58.18 for the same
period of 1997. Pro forma revenue per available room ("Revpar") was $42.76 for
the three months ended June 30, 1998 as compared to $42.51 for the same period
of 1997. Lessee operating expenses increased by $1,410,441, primarily as the
result of the increased number of Hotels under management, to $5,181,955 for
the three months ended June 30, 1998, as compared to $3,771,514 for the same
period of 1997. The net income for the three months ended June 30, 1998
increased $9,803 to $565,919 from $556,116 in 1997.
-18-
<PAGE> 19
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
Six months ended June 30, 1998
The Company's total revenues for the six month period ended June 30,
1998, substantially consisted of Lease revenue recognized pursuant to the
Leases. The Company's revenue during the six month period ended June 30, 1998
was $4,266,084 an increase of $1,437,419, or 50.8%, as compared to Company
revenue of $2,828,665 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 increased by $253,164 to $1,374,683, or 22.57%
for the six months ended June 30, 1998 as compared to net income of $1,121,519
for the same period of 1997. The improvement in net income is attributed to
the additional Lease revenue derived from the increase in the number of Hotels,
offset in part by additional expenses associated with the additional hotels,
and the gain from sale of the Comfort Inn hotel in Elizabethton, Tennessee.
The Lessee's room revenues from the Hotels increased by $3,275,354, or
56.46%, to $9,075,645 for the six months ended June 30, 1998, as compared to
$5,800,291 of room revenue for the same period of 1997. The improvement in
revenues is primarily attributable to the increase in the number of Hotels.
The pro forma average daily rate of the Hotels increased to $58.66 for the six
months ended June 30, 1998, up 2.26% as compared to $57.36 for the same period
of 1997. Pro forma REVPAR was $38.43 for the six months ended June 30, 1998 as
compared to $36.66 for the same period of 1997. Lessee operating expenses
increased by $3,580,231, mainly as the result of the addition of eleven hotels
in 1997, to $9,489,600 for the six months ended June 30, 1998, as compared to
$5,909,369 for the same period of 1997. The net income for the six months
ended June 30, 1998 decreased $106,290 to $165,979 from $272,269 in 1997.
The following table shows certain other pro forma information for the
periods indicated.
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Occupancy rate 72.11% 73.06% 65.52% 63.90%
ADR $59.29 $58.18 $58.66 $57.36
REVPAR $42.76 $42.51 $38.43 $36.66
Room Revenues $6,124,332 $6,088,705 $10,948,624 $10,442,923
Room nights available 143,234 143,234 284,894 284,894
Room nights occupied 103,289 104,651 186,649 182,050
Operating Hotels (at period end) 22 19 22 19
Rooms available (at period end) 1,470 1,272 1,470 1,272
</TABLE>
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 Company's Hotels in Florida. The hotels are 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
June 30, 1998, the Company's cash and current accounts receivable balances
exceed its current obligations by $1,961,942.
The Company's Funds From Operations (net income before gain on sale of
asset plus minority interest and depreciation and amortization) ("FFO") was
$1,522,555 in the three months ended June 30, 1998, which is an increase of
$428,359, or 39.15% over FFO in the comparable period in 1997, which was
$1,094,196. For the six months ended June
-19-
<PAGE> 20
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
30, 1998 the Company's FFO was $2,459,553, which is an increase of $599,150, or
32.2% over the comparable period in 1997, which was $1,860,403. Much of the
improvements in FFO can be attributed to the addition of eleven hotels in 1997
to the Company's portfolio. 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. All REITs do not
calculate FFO in the same manner, therefore, the Company's calculation may not
be the same as the calculation of FFO for similar REITs. Beginning with the
year ended December 31, 1997, the Company changed the way it computes FFO. The
Company believes that its new method of computing FFO is more consistent with
the guidelines established by NAREIT for calculating FFO. FFO, as defined
under the NAREIT standard, consists of net income, computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains or losses
from debt restructuring and sales of properties, plus depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The following table computes FFO under both the new method and the
method formerly utilized by the Company:
<TABLE>
<CAPTION>
Historical Three Historical Three
Month Period Ended Month Period Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net income applicable to
common shares $ 1,023,710 $ 630,617
Add:
Minority interest 163,071 112,860
Amortization of franchise costs 13,231 3,783
Depreciation 517,544 346,936
Less:
Gain on sale of asset (195,001) --
----------- -------------
Funds From Operations (new method) $ 1,522,555 $ 1,094,196
Amortization of loan costs 32,516 22,811
----------- --------------
Funds From Operations (old method) $ 1,555,071 $ 1,117,007
=========== ==============
</TABLE>
<TABLE>
<CAPTION>
Historical Six Historical Six
Month Period Ended Month Period Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net income applicable to
common shares $ 1,374,683 $ 1,121,519
Add:
Minority interest 229,327 200,715
Amortization of franchise costs 27,536 4,158
Depreciation 1,023,008 534,011
Less:
Gain on sale of asset (195,001) --
-------------- ------------
Funds From Operations (new method) $ 2,459,553 $ 1,860,403
Amortization of loan costs 32,492 40,768
----------- --------------
Funds From Operations (old method) $ 2,492,045 $ 1,901,171
=========== ==============
</TABLE>
-20-
<PAGE> 21
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
Long-term debt as of June 30, 1998, of approximately $31.5 million consisted
of:
Approximately $25.3 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); 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 June 30, 1998, the interest rate was approximately 3.5% for both the
Wytheville and Morgantown Hotels. In addition, letter of credit fees,
trustee fees and financing fees increased the effective rate on the
bonds.
Approximately $2.3 million, secured by a first deed of trust on the
Comfort Inn located in 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 June 30, 1998 is approximately $68.8 million. As of June
30, 1998, the Company's total outstanding indebtedness represents approximately
45.8% 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. So long as the Company
continues to qualify as a REIT, 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.
-21-
<PAGE> 22
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
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 Company's Hotels in Florida. The Florida Hotels are
busiest in the first and fourth quarters of the year. The Hotels' 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 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.
-22-
<PAGE> 23
HUMPHREY HOSPITALITY TRUST, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders.
The Company held its Annual Meting of Shareholders on May 21,
1998. The following proposals were submitted to the
shareholders .
1. To elect directors to serve on the Board of Directors until
the annual meeting of shareholders in 1999 or until their
successors have been duly elected and qualified; and
2. To transact such other business as may properly come before
the Annual Meeting and any adjournments thereof.
Shareholders elected all nominess for director. The number of
votes with respect to the above matters was as follows:
<TABLE>
<CAPTION>
Withheld
--------
For Against Authority Abstain
--- ------- --------- -------
<S> <C> <C> <C> <C>
James I. Humphrey, Jr 1,801,902 1,000 -- 900
George R. Whittemore 1,801,902 1,000 -- 900
Jeffrey Zwerdling 1,801,902 1,000 -- 900
Margaret Allen 1,801,902 1,000 1,556 900
Dr. Leah T. Robinson 1,801,902 1,000 300 900
Andrew A. Mayer, M.D. 1,801,902 1,000 -- 900
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
Exhibits -
Exhibit 27.1 Financial Data Schedule
Reports on Form 8-K -
(a) On June 25, 1998, the Company filed a Report on Form 8-K reporting the
acquisition of the Best Western hotel in Ellenton, Florida; the Shoney's
Inn hotel in Ellenton, Florida; and the Hampton Inn hotel in Brandon,
Florida.
(b) On August 6, 1998, the Company filed a Report on Form 8-K\A reporting the
unaudited pro forma financial information for the Best Western hotel in
Ellenton, Florida; the Shoney's Inn hotel in Ellenton, FL; and the
Hampton Inn hotel in Brandon, Florida.
-23-
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this 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: 8/14/98
------------------------
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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