UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File Number: 0-25060
HUMPHREY HOSPITALITY TRUST, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1889548
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
12301 Old Columbia Pike, Silver Spring MD 20904 (301) 680-4343
(Address of principal executive offices) (Registrant's telephone number
(zip code) including area code)
N/A
----------------------------------------------------
(former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such short period that the Registrant was
required to file such report), and (ii) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
The number of shares of Common Stock, $.01 par value, outstanding on November
12, 1997 was 3,481,700.
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
AMENDMENT TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Humphrey Hospitality Trust Inc. is restating its Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997. The Company is restating its net
income for the three and nine months ended September 30, 1997. Interest expense
was underaccrued for both periods by $15,792 and $148,393, respectively. Net
income, as previously reported, was overstated by this amount or $ .03 per share
for both periods.
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<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S><C>
PART I. FINANCIAL INFORMATION
Item 1. HUMPHREY HOSPITALITY TRUST, INC.
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 4
Consolidated Statements of Income and Changes in Accumulated Deficit for the three
and nine months ended September 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and
1996 (unaudited) 6
Notes to Consolidated Financial Statements 7
HUMPHREY HOSPITALITY MANAGEMENT, INC.
Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 12
Summary Statements of Operations and Changes in Retained Earnings for the three and nine
months ended September 30, 1997 and 1996 (unaudited) 13
Statement of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited) 14
Notes to Financial Statements 15
Item 2. Management's Discussion and Analysis of Financial Condition 18
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not Applicable
PART II. OTHER INFORMATION 23
Item 1. Legal Proceeding
None
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports in Form 8-K 23
SIGNATURES 24
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
September December
30, 1997 31, 1996
----------- --------
(unaudited)
<S><C>
ASSETS
Investment in hotel properties, net of accumulated depreciation $ 50,787,829 $ 21,405,005
Cash and cash equivalents 236,075 7,100,692
Accounts receivable from Lessee 1,687,994 1,066,995
Deferred expenses, net of accumulated amortization 947,796 373,466
Replacement reserve 109,784 68,466
Other assets 350,107 206,021
------------ ------------
Total assets $ 54,119,585 $ 30,220,645
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage notes and bond payable $ 31,766,000 $ 8,150,609
Obligations under capital leases 33,750 33,946
Accounts payable and accrued expenses 253,392 83,936
Distributions payable 786,424 561,459
------------ ------------
32,839,566 8,829,950
------------ ------------
Minority interest 3,378,563 3,247,108
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock. $.01 par value, 25,000,000 shares
authorized, 3,481,700 shares issued and outstanding 34,817 34,817
Additional paid-in capital 18,040,450 18,200,563
Accumulated Deficit (173,811) (91,793)
------------ ------------
17,901,456 18,143,587
------------ ------------
Total liabilities and shareholders' equity $ 54,119,585 $ 30,220,645
============ ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S><C>
Revenue
Percentage lease revenue $ 2,336,249 $ 1,068,894 $ 5,076,986 $ 2,941,743
Other revenue 6,081 6,452 94,009 19,080
----------- ------------ ------------ ------------
Total revenue 2,342,330 1,075,346 5,170,995 2,960,823
--------- --------- --------- ----------
Expenses
Interest 649,723 155,381 1,203,942 462,091
Real estate and personal property taxes and insurance 125,522 59,057 279,693 161,460
General and administrative 134,669 46,644 353,770 256,815
Depreciation and amortization 511,605 190,205 1,090,542 543,277
------- ------- --------- ---------
Total expenses 1,421,519 451,287 2,927,947 1,423,643
--------- ------- --------- -----------
Income before allocation to minority interest 920,811 624,059 2,243,048 1,537,180
Income allocated to minority interest 139,779 131,614 340,497 324,191
------- ------- ------- ----------
Net income 781,032 492,445 1,902,551 1,212,989
Accumulated (deficit) earnings, beginning of period (293,320) (163,101) (91,793) 2,401
Distributions declared (661,523) (443,023) (1,984,569) (1,329,069)
--------- -------- ----------- -----------
Accumulated deficit end of period $ (173,811) $ (113,679) $ (173,811) $ (113,679)
============ ============= ============= =============
Income per common share outstanding $ 0.22 $ 0.21 $ 0.55 $ 0.52
Weighted average shares outstanding 4,115,060(2) 2,955,050(1) 4,108,540(2) 2,955,050(1)
</TABLE>
- ---------------------
(1) Includes 623,350 units which are redeemable on a one-for-one basis for
shares of common stock at any time.
(2) Includes 657,373 units which are redeemable on a one-for-one basis for
shares of common stock, 623,350 at any time and 34,023 redeemable any time
after March 3, 1998. The weighted average shares calculation reflects the
limited partnership units issued on September 2, 1997.
See notes to consolidated financial statements.
-5-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S><C>
Cash flows from operating activities
Net income $ 1,902,551 $ 1,212,989
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,090,542 543,277
Income allocated to minority interest 340,497 324,191
Changes in assets and liabilities
(Increase) decrease in accounts receivable (620,999) 243,678
Increase in other assets (144,089) (79,723)
Franchise costs paid (369,000) --
Increase in accounts payable
and accrued expenses 169,456 60,583
------------- -------------
Net cash provided by operating activities 2,368,958 2,304,995
---------- -------------
Cash flows from investing activities
Investment in hotel properties (29,268,796) (1,231,737)
Deposit to replacement reserve (617,912) (387,228)
Interest earned on replacement reserve (919) (3,039)
Withdrawals from replacement reserve 577,513 626,937
------------- -------
Net cash used in investing activities (29,310,114) (995,067)
--------------- ---------
Cash flows from financing activities
Proceeds from Credit Facility 22,440,391 660,213
Stock issuance costs (7,378) --
Financing costs paid (189,900) --
Distributions paid (2,121,377) (1,684,377)
Principal payments on long-term debt (45,000) (56,391)
Increase in capital lease obligations 22,178 --
Principal payments on capital leases (22,375) (16,881)
--------------- --------------
Net cash provided by (used in) financing activities 20,076,539 (1,097,436)
------------- --------------
Net (decrease) increase in cash and cash equivalents (6,864,617) 212,492
Cash and cash equivalents, beginning of period 7,100,692 168,636
------------- -------------
Cash and cash equivalents, ending of period $ 236,075 $ 381,128
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,055,549 $ 462,091
============= =============
</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.
On September 2, 1997, the Partnership issued units of limited partnership
interest to Humphrey-Key Largo Associates, L.P. with a value of
approximately $370,000 based on an average price of $10.875 per share of
common stock for the ten trading days prior to September 2, 1997.
See notes to consolidated financial statements.
-6-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Note 1. Organization and Summary of Significant Accounting Policies
Humphrey Hospitality Trust, Inc. (the "Company") was incorporated on
August 23, 1994, to acquire equity interests in eight existing hotel properties.
The Company is a self-administered, Virginia corporation that qualifies as a
real estate investment trust (a "REIT") for federal income tax purposes. During
the fourth quarter of 1994, the Company completed an initial public offering
(the "IPO") of 1,321,700 shares of $.01 par value common stock ("Common Stock").
Upon completion of the IPO, the Company contributed substantially all of
the net proceeds of the offering to Humphrey Hospitality Limited Partnership
(the "Partnership") in exchange for a general partnership interest in the
Partnership. The Partnership used the proceeds from the Company to acquire an
equity interest in seven existing hotel properties and a general partnership
interest in Solomons Beacon Inn Limited Partnership (the "Subsidiary
Partnership") (such interests, collectively, the "Initial Hotels") and to retire
certain indebtedness relating to the Initial Hotels.
On December 6, 1996, the Company completed a third public offering (the
"Third Stock Offering") of 1,150,000 shares of common stock. The gross proceeds
were $9,487,500 based on the offering price of $8.25 per share. Net of
underwriters' discount and offering expenses, the Company received net proceeds
of approximately $8,645,000. The Company used the proceeds (i) to repay
approximately $660,000 of outstanding debt under a credit agreement dated April
10, 1996 with Mercantile Safe Deposit and Trust Company (the "Credit Facility"),
secured by six of the hotels and the Comfort Suites hotel in Dover, Delaware
(the "New Development"), (ii) to repay the costs associated with the development
of the New Development which were approximately $1.6 million at December 31,
1996; and (iii) to establish a fund for future acquisitions and development.
Upon completion of the Third Stock Offering, the Company owned an 84.82%
partnership interest, and the Limited Partners owned a 15.18% interest in the
Partnership.
On January 22, 1997, the New Development, the 64 room Comfort Suites
hotel located in Dover, Delaware, opened for business. The hotel is leased by
Humphrey Hospitality Management, Inc. (the "Lessee") which is wholly-owned by
Mr. Humphrey, for a fixed lease payment of $378,840 (the "Fixed Lease") a year,
payable in equal monthly installments and prorated for any partial month.
On February 26, 1997, the Company closed on the purchase of the 49 room
Comfort Inn hotel located in Culpeper, Virginia. The Company assumed
approximately $1,220,000 in taxable and tax exempt bond financing and utilized
approximately $680,000 in cash for the purchase. The hotel is leased by the
Lessee pursuant to a Percentage Lease (defined herein) which provides for rent
based, in part, on the room revenues from the hotel.
On March 17, 1997, the Company closed on the purchase of the 79 room
Comfort Inn hotel located in New Castle, Pennsylvania. The Company paid $3
million in cash for the site. The hotel is leased by the Lessee pursuant to a
Percentage Lease which provides for rent based, in part, on the room revenues
from the hotel.
On April 17, 1997, the Company closed on the purchase of the 63 room Best
Western Hotel in Harlan, Kentucky. The Company paid $2.6 million in cash of
which $875,000 was borrowed from the Credit Facility. The hotel is leased by the
Lessee pursuant to a Percentage Lease which provides for rent based, in part, on
the room revenues from the hotel.
On April 23, 1997, the Company closed on the purchase of the 62 room
Holiday Inn Express in Danville, Kentucky and the 56 room Comfort Inn located in
Murphy, North Carolina. The Company paid $4.7 million collectively for both
hotels with borrowings from the Credit Facility. The hotels are leased by the
Lessee pursuant to a Percentage Lease which provides for rent based, in part, on
the room revenues from the hotels.
-7-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997
On May 22, 1997 the Company closed on the purchase of the 81 room Comfort
Inn in Gettysburg, PA and the 51 room Holiday Inn Express hotel in Gettysburg,
PA. The Company paid $7.05 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 May 29, 1997 the Company closed on the purchase of the 65 room Comfort
Inn in Chambersburg, PA. The Company paid $2.6 million for the site 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 hotels.
On June 10, 1997 the Company closed on the purchase of the 83 room
Holiday Inn Express in Allentown, PA. The Company paid $3.75 million for the
site 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 hotels.
In August 1997, the Company increased its Credit Facility from $23.0
million to $25.5 million. The term and rate remain unchanged. The Credit
Facility was increased to accommodate the purchase of a 40-unit Best Western
Suites located in Key Largo, FL. The hotel will serve as additional collateral
for the Credit Facility.
On July 18, 1997 Humphrey-Key Largo Associates, L.P. (the "Affiliate"), a
partnership substantially owned by Mr. Humphrey, executed a purchase agreement
to purchase the Best Western Suites in Key Largo, Florida and subsequently
assigned the agreement to Humphrey Hospitality Limited Partnership. Pursuant to
the assignment of the purchase contract the Affiliate received as compensation
34,023 units of limited partnership interest in the Partnership, valued at
$370,000 based on an average price of $10.875 per share of common stock for the
ten trading days prior to September 2, 1997. The Company acquired the hotel
through the Partnership, and paid $2.96 million for the site, $2.76 million of
which came from borrowings on the Credit Facility. The acquisition of the hotel
has been recorded by the Company at the affiliate's historical cost; which
historical cost excludes the value of the units issued to the affiliate and is
less than or equal to net realizable value. The acquisition of the hotel
resulted in a reduction in paid-in capital and a corresponding increase in
minority interest to reflect the issuance of the Units to the Affiliate. 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 hotels.
The Company closed on the purchase of the 40-room Best Western Suites in
Key Largo, Florida on September 3, 1997.
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. The
financial statements for the three and nine months ended September 30, 1997 have
been restated to reflect previously underaccrued interest expense in the amounts
of $15,792 and $148,393, respectively. In the opinion of management, the
adjusted information presented reflects all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's financial position as of September 30, 1997, and the results of
operations for the three and nine months ended September 30, 1997 and 1996. The
results of operations for the three and nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. The unaudited consolidated financial statements should
be read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
1996.
-8-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997
Note 2. Distributions
On January 31, 1997, the Company paid a $.19 per share distribution on
each share of Common Stock outstanding (including the distribution to minority
interest) to shareholders of record as of December 1, 1996. On March 10, 1997,
the Company declared a $.19 per share distribution for each share of Common
Stock outstanding on March 24, 1997. The distribution was paid on May 5, 1997.
On June 20, 1997, the Company declared a $.19 per share distribution on each
share of Common Stock outstanding on July 8, 1997. The distribution was paid on
August 4, 1997. On September 10, 1997, the Company declared a $.19 per share
distribution on each share of Common Stock outstanding on September 24, 1997.
The distribution was paid on November 3, 1997.
Effective October 1, 1997, the Company increased the dividend rate and
changed its dividend payment schedule from a quarterly to a monthly schedule.
The new dividend will be paid at the rate of $.0675 per share which represents
an annualized rate of $.81 per share, an increase of approximately 6.5% from the
previous annual dividend of $.76 per share.
Note 3. Director's Fees
The Board of Directors unanimously agreed on September 11, 1997 to
utilize their directors fees to purchase Company Stock on the open market
effective immediately. Presently, members of the Board of Directors own
approximately 24% of the Company's outstanding shares of stock.
Note 4. 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 excluding
Humphrey-Key Largo Associates, L.P. at any time, Humphrey-Key Largo Associates,
L.P. may redeem their units any time after March 3, 1998. At September 30, 1997,
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 New Development, 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 required to make available to the Lessee an amount
equal to 4% of room revenue on a quarterly, cumulative basis for capital
improvements and refurbishments. The Company has future lease commitments from
the Lessee through August, 2007. Minimum future rental income under these
noncancelable operating leases at December 31, 1996 is as follows:
-9-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997
Year
----
1997 $ 4,081,933
1998 4,081,933
1999 4,081,933
2000 4,081,933
2001 4,081,933
Thereafter 23,130,952
-----------
$43,540,617
===========
For the three and nine months ended September 30, 1997, the Company
earned base rents of $981,396 and $2,281,604, and percentage rents of $1,354,853
and $2,795,382 respectively. As of September 30, 1997, $1,687,994 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.
Note 5. Mortgages and Bonds Payable
As of September 30, 1997 the Company increased its Credit Facility 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 September 30, 1997.)
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 6. 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, 1996. This unaudited pro forma condensed statement of operations is
not necessarily indicative of what actual results of operations of the Company
would have been assuming such transactions had been completed as of January 1,
1996, nor does it purport to represent the results of operations for future
periods.
-10-
<PAGE>
Humphrey Hospitality Trust, Inc.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S><C>
Revenue
Percentage lease revenue $ 6,577,757 $ 6,271,050
Other revenue 94,009 19,080
------------ ------------
Total revenue 6,671,766 6,290,130
------------ ------------
Expenses
Interest 2,048,421 2,060,798
Real estate and personal property taxes
and insurance 395,649 388,346
General and administrative 363,687 283,761
Depreciation and amortization 1,496,396 1,359,470
------------ ------------
Total expenses 4,304,155 4,092,375
------------ ------------
Income before allocation to minority interest 2,367,613 2,197,755
Income allocated to minority interest 359,404 335,197
------------ ------------
Net income $ 2,008,209 $ 1,862,558
============ ============
Income per common share outstanding $ 0.58 $ 0.55
Weighted average shares outstanding (1) 4,108,540 4,108,540
</TABLE>
- --------------------------------
(1) Includes 657,373 units, 623,350 of which are currently redeemable, and
34,023 of which are redeemable after March 3, 1998 on a one-for-one basis
for shares of common stock.
-11-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S><C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,229,313 $ 1,127,573
Accounts receivable 297,971 89,060
Prepaid expenses 102,269 36,282
Other assets 42,303 818
Accounts receivable - shareholder -- 51,250
----------- -----------
Total current assets $ 3,671,856 $ 1,304,983
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 701,794 $ 107,845
Accrued expenses 247,583 67,328
Advance deposit 21,159 1,730
Prepaid slip rentals - Marina 57,236 31,203
Due to affiliates 1,687,994 1,066,996
----------- -----------
Total current liabilities 2,715,766 1,275,102
----------- -----------
COMMITMENTS -- --
SHAREHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding 1 1
Retained earnings 956,089 29,880
----------- ------------
Total shareholder's equity 956,090 29,881
----------- ------------
Total liabilities and shareholder's equity $ 3,671,856 $ 1,304,983
=========== ============
</TABLE>
See notes to financial statements.
-12-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
SUMMARY STATEMENTS OF OPERATIONS AND
CHANGES IN RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S><C>
Revenue
Room revenue $ 5,625,011 $ 2,390,268 $11,425,301 $ 6,157,769
Telephone revenue 93,367 45,550 201,415 135,374
Slip revenue 61,662 65,905 191,457 191,558
Other revenue 97,978 66,603 241,479 169,443
------ ------ ------- -------
Total revenue 5,878,018 2,568,326 12,059,652 6,654,144
--------- --------- ---------- ---------
Expenses
Salaries and wages 1,200,428 561,436 2,608,727 1,573,438
Room expense 343,959 118,304 669,467 323,041
Telephone 68,521 45,981 172,646 124,491
Marina expense 9,637 8,505 27,114 30,153
General and administrative 203,072 109,102 507,960 318,334
Marketing and promotion 211,207 75,820 425,624 186,927
Utilities 250,718 113,314 532,377 325,609
Repairs and maintenance 111,828 56,320 249,080 178,099
Taxes and insurance 69,248 34,178 163,527 107,406
Franchise fees 314,211 124,989 594,935 313,799
Lease payments 2,336,249 1,068,894 5,076,986 2,941,743
--------- --------- --------- ---------
Total expenses 5,119,078 2,316,843 11,028,443 6,423,040
--------- --------- ---------- ---------
Net income 758,940 251,483 1,031,209 231,104
Retained earnings (deficit),
beginning of period 197,149 (56,583) 29,880 48,796
Distributions paid -- (16,250) (105,000) (101,250)
------------ -------- --------- ---------
Retained earnings,
end of period $ 956,089 $ 178,650 $ 956,089 $ 178,650
============= ============= ============= ============
</TABLE>
See notes to financial statements.
-13-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1997 1996
---- ----
<S><C>
Cash flows from operating activities
Net income $ 1,031,209 $ 231,104
Adjustments to reconcile net income to net cash
used in operating activities
Changes in assets and liabilities
Increase in accounts receivable (208,911) (67,114)
Increase in prepaid expenses (65,987) (39,221)
Increase in other assets (41,485) --
Increase (decrease) in accounts payable 593,949 (35,562)
Increase in prepaid slip rentals 26,033 19,398
Increase (decrease) in due to affiliates 620,998 (303,514)
Increase in accrued expenses 180,255 --
Increase in advanced deposits 19,429 --
----------- -----------
Net cash provided by (used in)
operating activities 2,155,490 (194,909)
----------- -----------
Cash flows from financing activities
Distributions paid (105,000) (101,250)
Repayments of advance to shareholder 51,250(1) --
---------- -----------
Net cash used in financing activities (53,750) (101,250)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 2,101,740 (296,159)
Cash and cash equivalents, beginning of period 1,127,573 1,253,229
----------- -----------
Cash and cash equivalents, ending of period $ 3,229,313 $ 957,070
=========== ===========
</TABLE>
- ---------------------
(1) Mr. Humphrey repaid a $51,250 unsecured and non-interest bearing
advance from the Lessee in January 1997. The advance was made during 1996.
See notes to financial statements.
-14-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
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 September 30, 1997, and the results of operations for the three and nine
months ended September 30, 1997 and 1996. The results of operations for the
three and nine months ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997. The
unaudited financial statements should be read in conjunction with the financial
statements and footnotes thereto included in Humphrey Hospitality Trust, Inc.'s
Form 10-K for the year ended December 31, 1996.
Accounts Receivable
The Lessee considers accounts receivable to be fully 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.
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 New Development (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:
-15-
<PAGE>
HUMPHREY HOSPITALITY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997
Year
----
1997 $ 4,081,933
1998 4,081,933
1999 4,081,933
2000 4,081,933
2001 4,081,933
Thereafter 23,130,952
-----------
$43,540,617
===========
For the three and nine months ended September 30, 1997, the Lessee has
incurred base rents of $981,396 and $2,281,604, and percentage rents of
$1,354,853 and $2,795,382. As of September 30, 1997, the amount due the
Partnership and Solomons Beacon Inn Limited Partnership for lease payments were
$1,687,994 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, 1996.
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, 1996, nor does it
purport to represent the results of operations for future periods.
-16-
<PAGE>
Humphrey Hospitality Management, Inc.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S><C>
Revenue from hotel operations
Room revenue $14,544,824 $13,804,990
Telephone revenue 252,750 251,409
Slip revenue 191,457 191,558
Other revenue 315,880 308,894
----------- -----------
Total revenue 15,304,911 14,556,851
----------- -----------
Expenses
Salaries and wages 3,454,743 3,229,711
Room expense 881,768 772,488
Telephone 209,940 211,134
Marina expense 27,114 30,153
General and administrative 674,007 624,288
Marketing and promotion 577,693 522,850
Utilities 752,907 740,690
Repairs and maintenance 362,229 403,575
Taxes and insurance 211,323 220,047
Franchise fees 763,422 763,911
Lease payments 6,577,756 6,271,050
----------- -----------
Total expenses 14,492,902 13,789,897
----------- -----------
NET INCOME $ 812,009 $ 766,954
=========== ===========
</TABLE>
-17-
<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
owned a 84.12% interest in the Partnership at September 30, 1997. As of
September 30, 1997, 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 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 September 30, 1997
The Company's total revenues for the three month period ended September
30, 1997, substantially consisted of Percentage Lease revenue. The Company's
revenue during the three month period ended September 30, 1997 was $2,342,330 an
increase of $1,266,984, or 117.8%, as compared to Company revenue of $1,075,346
for the same period of 1996. Net income increased by $288,587 to $781,032, or
59% for the three months ended September 30, 1997 as compared to net income of
$492,445 for the same period of 1996. The improvement in revenues and net income
is attributed to the additional Lease revenue derived from the increase in the
number of company owned hotels from nine in 1996 to twenty in 1997. Interest
expense increased as a result of increased borrowings from the Company's Credit
Facility. Funds from the Credit Facility were utilized to acquire a hotel in Key
Largo, Florida (see "Liquidity and Capital Resources"). General and
administrative expenses increased as the result of fees incurred from auditing
the financial performance of the hotels acquired during the second and third
quarter and from the payment of state franchise taxes that were paid for both
1996 and 1997.
The Lessee's room revenues from the Hotels increased by $3,234,743, or
135.3%, to $5,625,011 for the three months ended September 30, 1997, as compared
to $2,390,268 of room revenue for the same period of 1996. Occupancy (on a pro
forma basis) for the Hotels decreased as the result of new competition built
near the Company hotels located in Princeton, West Virginia and Wytheville,
Virginia from 82.2% for the three month period ended September 30, 1996, to
80.1% for the same period in 1997. The pro forma average daily rate of the
Hotels increased to $60.31 for the three months ended September 30, 1997, up
3.9% as compared to $58.02 for the same period of 1996. Pro forma revenue per
-18-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
available room ("Revpar") was $48.31 for the three months ended September 30,
1997 as compared to $47.71 for the same period of 1996. Lessee operating
expenses increased by $2,802,235, as the result of the opening of the hotel in
Dover, Delaware and the acquisition of ten other hotels, to $5,119,078 for the
three months ended September 30, 1997, as compared to $2,316,843 for the same
period of 1996.
Nine months ended September 30, 1997
The Company's total revenues for the nine month period ended September
30, 1997, substantially consisted of Percentage Lease revenue. The Company's
revenue was $5,170,995 an increase of $2,210,172, or 74.6%, during the nine
month period ended September 30, 1997 as compared to Company revenue of
$2,960,823 for the same period of 1996. Net income increased by $689,562 to
$1,902,551, or 57% for the nine months ended September 30, 1997 as compared to
net income of $1,212,989 for the same period of 1996. The improvement in
revenues and net income is attributed to the additional Lease revenue derived
from the increase in the number of company owned hotels from nine in 1996 to
twenty in 1997. Interest expense increased as a result of increased borrowings
from the Company's Credit Facility. Funds from the Credit Facility were utilized
to acquire several hotels (see "Liquidity and Capital Resources").
The Lessee's room revenues from the Hotels increased by $5,267,532, or
85.5%, to $11,425,301 for the nine months ended September 30, 1997, as compared
to $6,157,769 of room revenue for the same period of 1996. The increase is due
to the opening of the hotel in Dover, Delaware and the acquisition of ten other
hotels. Occupancy (on a pro forma basis) for the Hotels decreased as the result
of new competition built near the Company hotels located in Princeton, West
Virginia and Wytheville, Virginia from 72.5% for the nine month period ended
September 30, 1996, to 70.7% for the same period in 1997. The pro forma average
daily rate of the Hotels increased to $57.74 for the nine months ended September
30, 1997, up 3.6% as compared to $55.73 for the same period of 1996. Pro forma
revenue per available room ("Revpar") was $40.81 for the nine months ended
September 30, 1997, up 1.0% as compared to $40.44 for the same period of 1996.
Lessee operating expenses increased by $4,605,403, as the result of the opening
of the hotel in Dover, Delaware and the acquisition of the ten other hotels, to
$11,028,443 for the nine months ended September 30, 1997, as compared to
$6,423,040 for the same period of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its share of the Partnership's cash
flow. The Partnership's principal source of revenue is rent payments under the
Fixed and Percentage Leases. The Lessee's obligations under the Fixed and
Percentage Leases are unsecured. The Lessee's ability to make rent payments, and
the Company's liquidity, including its ability to make distributions to common
shareholders, is dependent on the Lessee's ability to generate sufficient cash
flow from the operation of the Hotels.
The hotel business is seasonal, with hotel revenue generally greater in
the second and third quarters than in the first and fourth quarters 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 September 30, 1997, the Company's cash and current
accounts receivable balances exceed the current obligations by $1,032,646.
-19-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
The Company's Funds from Operations (net income plus minority interest and
depreciation and amortization) ("FFO") was $1,432,416 in the three months ended
September 30, 1997 which is an increase of $618,152, or 75.9% over the FFO in
the comparable period in 1996, which was $814,264. For the nine months ended
September 30, 1997 the Company's FFO was $3,333,590, which is an increase of
$1,253,133, or 60.3% over the comparable period in 1996, which was $2,080,457.
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. Because of recent changes in the definition of FFO adopted by
NAREIT, FFO may not be comparable to similarly titled measure of operating
performance disclosed by other REITs.
The computation of historical FFO is as follows:
<TABLE>
<CAPTION>
Historical Three Historical Three
Month Period Ended Month Period Ended
September 30, 1997 September 30, 1996
================== ==================
<S><C>
Net income applicable to
common shares $ 781,032 $ 492,445
Add:
Minority interest 139,779 131,614
Depreciation and amortization 511,605 190,205
----------- --------
Total $ 1,432,416 $ 814,264
=========== =============
</TABLE>
<TABLE>
<CAPTION>
Historical Nine Historical Nine
Month Period Ended Month Period Ended
September 30, 1997 September 30, 1996
================== ==================
<S><C>
Net income applicable to
common shares $ 1,902,551 $ 1,212,989
Add:
Minority interest 340,497 324,191
Depreciation and amortization 1,090,542 543,277
----------- -----------
Total $ 3,333,590 $ 2,080,457
=========== ===========
</TABLE>
-20-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
In August 1997 the Company increased its Credit Facility from $23.0
million to $25.5 million. The term and rate remain unchanged. The Best Western
Suites in Key Largo, FL will serve as additional collateral for the Credit
Facility.
Long-term debt as of September 30, 1997, of approximately $31.8 million
consisted of:
Approximately $24.2 million, from the Credit Facility which is secured by
and cross-collateralized and cross-defaulted on the Hotels located in
Solomons, MD; Farmville, VA (2 hotels); Elizabethton, TN; Dahlgren, VA;
Princeton, WV; Dover, DE; Culpeper, VA; New Castle, PA; Harlan, KY;
Danville, KY; 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 $4.0 million, secured by a first deed of trust on the
Hotels located in Wytheville, Virginia, and Morgantown, West Virginia.
Interest accrues at the rate necessary to remarket bonds at a price equal
to 100% of the outstanding principal balance. The interest rate is
approximately half of the prime rate, which is adjusted weekly and is not
to exceed 15% and 11.3636% for Wytheville and Morgantown, respectively.
At September 30, 1997, the interest rate was approximately 4.0% for both.
In addition, letter of credit fees, trustee fees and financing fees
increased the effective rate on the bonds.
Approximately $1.2 million, secured by a first and second deed of
trust on the Hotel located in Culpeper, Virginia. The first deed of
trust bears a variable interest rate, currently 7.5%, with annual
increases to a maximum interest rate of 8.125% at maturity in the year
2007. The interest rate on the second deed of trust is to be adjusted on
November 1, 1997 to equal the then current yield on five year Treasury
bonds plus 4%, rounded up to the nearest 1/8 of 1% with a minimum
interest rate of 10% and a maximum interest rate of 14%. The current
interest rate is 10%. The second deed of trust expires in the year 2002.
The $1.2 million in long-term debt was paid off in full on November 1,
1997 with borrowings from the Credit Facility.
Approximately $2.4 million, is secured by a first deed of trust on the
Comfort Inn-Dublin, Virginia. The outstanding balance bears interest at a
rate equal to 7.75% per annum with additional Underwriters' fees
increasing the interest rate to 8%.
In the second quarter of 1997, the Company acquired seven hotels for
approximately $1.75 million in cash and approximately $19 million of proceeds
from the Credit Facility. In the third quarter the Company acquired a hotel for
approximately $2.96 million with borrowings from the Credit Facility, cash and
the issuance of units. Presently the Company has approximately $31.8 million of
outstanding indebtedness or 54.8% of the aggregate amount paid by the Company
for the Hotels.
Effective April 3, 1997, the Company's Board of Directors adopted a
resolution increasing the Company's limit on consolidated indebtedness from 50%
to 55% of the aggregate purchase prices of the hotels in which it has invested.
The aggregate total purchase price paid by the Company for the Hotels as of
September 30, 1997 is approximately $58 million. As of September 30, 1997, the
Company's total outstanding indebtedness represents approximately 54.8% 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
-21-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
acquisition or development by the Company, and therefore, there can be no
assurances that increases in insurance rates, real estate or personal property
tax rates or FFE Reserves, which are based on room revenues, will not decrease
the Company's annual return on its investments in any hotel property to a level
below that set out in the Investment Policy.
Because a development project has no prior revenues on which the
Company's Investment Policy can be tested, the Company intends to invest only in
developments where it reasonably believes it will receive an annual return on
its investment that are consistent with the Investment Policy. The Company
proposed to the Lessee and the Lessee has signed a lease agreement (the "Fixed
Lease" and together with Percentage Leases, the "Leases") pursuant to which the
Lessee would lease the New Development for an annual fixed rent payment which
will be payable in equal monthly installments. The annual rent payment under the
Fixed Lease (net of insurance paid by the Company, FFE Reserves and real estate
and personal property taxes) represents an approximately 12% return on the
Company's expected total investment in the New Development.
Pursuant to the Leases, the Partnership is required to make available to
the Lessee 4% of room revenue per quarter, on a cumulative basis, for capital
improvements and periodic replacement or refurbishment of furniture, fixtures
and equipment at each of the Hotels. The Company believes that a 4% set-aside
represents a prudent estimate of future expenditure requirements for such items.
The Company intends to cause the Partnership to spend amounts in excess of the
obligated amounts if necessary to comply with the reasonable requirements of any
franchise license and otherwise to the extent that the Company deems such
expenditures to be in the best interests of the Company. The Partnership is
obligated to fund the cost of certain capital improvements to the operations and
any furniture, fixture and equipment requirements in excess of the above.
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended, commencing with its
initial taxable year ending December 31, 1994, as such the Company will not be
subject to a federal income tax on its net income. REITs are subject to a number
of organizational and operational requirements. For example, a REIT, and
therefore the Company, is required to pay dividends to its shareholders of at
least 95% of its taxable income for federal income tax purposes. The Company
intends to pay these dividends from operating cash flows. The Company intends to
retain as a reserve such amounts as it considers necessary for the acquisition,
expansion and renovation of hotel properties consistent with continuing to
distribute to its shareholders amounts sufficient to maintain the Company's
qualification as a REIT.
The Company expects to meet its short-term liquidity requirements
generally through net cash provided by operations and existing cash balances.
The Company believes that its net cash provided by operations will be adequate
to fund both operating requirements and payment of dividends by the Company in
accordance with REIT requirements.
The Company expects to meet its long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through long-term secured
and unsecured borrowings, the issuance of additional equity securities of the
Company, or, in connection with acquisitions of hotel properties, issuance of
units of limited partnership interest in the Partnership.
INFLATION
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit the Lessee's ability to raise
room rates in the face of inflation.
SEASONALITY OF HOTEL BUSINESS AND THE HOTELS
The hotel industry is seasonal in nature. Generally, hotel revenues for
hotels operating in the geographic areas in which the Hotels operate are greater
in the second and third quarters than in the first and fourth quarters with the
exception
-22-
<PAGE>
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION - CONTINUED
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.
OTHER INFORMATION
The Company has not adopted the provisions of Financial Accounting
Standard Board Statement No. 128 "Earnings Per Share" on the financial
statements for this quarter. The Company intends to adopt this standard on
December 15, 1997.
Item 6. Exhibits and Reports on Form 8-K
Exhibits - None
Reports
(a) On July 28, 1997, the Company filed a Report on Form 8-K reporting the
audited financial information for the Comfort Inn hotel in Gettysburg,
PA, the Comfort Inn hotel in Chambersburg, PA, the Holiday Inn Express in
Gettysburg, PA and the Holiday Inn Express in Allentown, PA.
PART II
OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 2, 1997, the Partnership issued 34,023 units of limited
partnership interest valued at $370,000, in exchange for the assignment of the
purchase agreement to purchase the Best Western Suites in Key Largo, Florida.
The value assigned of $370,000 was based on an average price of $10.875 per
share of common stock for the ten trading days prior to September 2, 1997.
The offering and sale of the units did not involve a public offering and
were therefore exempt from registration under Section 4(2) of the Securities Act
of 1933. The units were issued to Humphrey Key Largo Associates, L.P. (the
"Affiliate") a partnership substantially owned by Mr. Humphrey. The units are
redeemable on a one-for-one basis for shares of common stock or, at the
Company's option, cash at any time after March 3, 1998.
-23-
<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: 03/24/98
___________________________
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 236,075
<SECURITIES> 0
<RECEIVABLES> 1,687,994
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,407,687
<PP&E> 52,928,024
<DEPRECIATION> 2,140,195
<TOTAL-ASSETS> 54,119,585
<CURRENT-LIABILITIES> 925,173
<BONDS> 31,766,000
0
0
<COMMON> 34,817
<OTHER-SE> 17,990,895
<TOTAL-LIABILITY-AND-EQUITY> 54,119,585
<SALES> 0
<TOTAL-REVENUES> 2,342,330
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 771,796
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 649,723
<INCOME-PRETAX> 781,032
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 781,032
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
