<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 September 30, 1998
Commission File Number: 0-25060
HUMPHREY HOSPITALITY TRUST, INC.
(Exact name of registrant as specified in its charter)
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<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
November 13, 1998 was 4,631,700.
Page 1 of 25
<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 September 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income and Changes in Accumulated Deficit for the three and nine
months ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and
1997 (unaudited) 5
Notes to Consolidated Financial Statements 7
HUMPHREY HOSPITALITY MANAGEMENT, INC.
-------------------------------------
Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 13
Summary Statements of Operations and Changes in Retained Earnings for the three and nine
months ended September 30, 1998 and 1997 (unaudited) 14
Statement of Cash Flows for the nine months ended September 30, 1998 and 1997 (unaudited) 15
Notes to Financial Statements 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- --------
(unaudited)
<S> <C> <C>
ASSETS
Investment in hotel properties, net of accumulated depreciation $ 72,542,232 $ 50,475,642
Cash and cash equivalents 86,070 204,065
Accounts receivable from Lessee 2,188,053 1,857,024
Deferred expenses, net of accumulated amortization 1,675,254 903,539
Replacement reserve 257,852 148,966
Other assets 350,278 208,862
----------- -----------
Total assets $ 77,099,739 $ 53,798,098
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage notes and bonds payable $ 42,780,142 $ 31,721,321
Obligations under capital leases -- 34,184
Dividends payable 412,510 558,775
Accounts payable and accrued expenses 1,099,774 262,708
----------- -----------
44,292,426 32,576,988
----------- -----------
Minority interest 5,180,238 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 28,281,279 18,040,415
Distributions in excess of net earnings (700,521) (223,920)
----------- -----------
27,627,075 17,851,312
----------- -----------
Total liabilities and shareholders' equity $ 77,099,739 $ 53,798,098
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
CHANGES IN ACCUMULATED DEFICIT
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Percentage lease revenue $3,011,329 $2,336,249 $7,270,055 $5,076,986
Other revenue 13,526 6,081 20,883 94,009
---------- ---------- ---------- ---------
Total revenue 3,024,855 2,342,330 7,290,938 5,170,995
--------- --------- --------- ----------
Expenses
Interest 789,847 628,833 1,935,726 1,169,799
Land lease 21,080 20,890 55,840 34,143
Real estate and personal property
taxes and insurance 207,078 125,522 483,831 279,693
General and administrative 198,180 134,669 482,313 353,770
Depreciation and amortization 734,902 511,605 1,850,453 1,090,542
------- ------- --------- ---------
Total expenses 1,951,087 1,421,519 4,808,163 2,927,947
--------- --------- --------- ---------
Income before gain on sale of asset 1,073,768 920,811 2,482,775 2,243,048
Gain on sale of asset (15,804) -- 179,197 --
Income allocated to minority interest 154,674 139,779 384,000 340,497
------- ------- ------- ----------
Net income 903,290 781,032 2,277,973 1,902,551
Accumulated deficit beginning of period (561,677) (293,320) (223,920) (91,793)
Distributions declared (1,042,134) (661,523) (2,754,573) (1,984,569)
----------- --------- ----------- -----------
Accumulated deficit end of period (700,521) (173,811) (700,521) (173,811)
========= ========= ========= =========
Basic earnings per common share $ 0.20 $ 0.22 $ 0.55 $ 0.55
Diluted earnings per common share $ 0.19 $ 0.22 $ 0.53 $ 0.54
Weighted average shares:
Basic 4,631,700 3,481,700 4,143,055 3,481,700
Diluted 5,500,004 (2) 4,139,073 (1) 5,011,359 (2) 4,139,073 (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 868,304 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
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<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $2,277,973 $1,902,551
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,850,453 1,090,542
Income allocated to minority interest 384,000 340,497
Gain on sale of asset (179,197) --
Changes in assets and liabilities
Increase in accounts receivable (331,029) (620,999)
Increase in other assets (136,917) (144,089)
Franchise costs paid (249,500) (369,000)
Write-off of loan costs (8,327) --
Increase in accounts payable
and accrued expenses 837,066 169,456
------- -----------
Net cash provided by operating activities 4,444,522 2,368,958
--------- ---------
Cash flows from investing activities
Investment in hotel properties (23,845,039) (29,268,796)
Net proceeds from sale of hotel 1,441,799 --
Deposit to replacement reserve (914,050) (617,912)
Interest earned on replacement reserve -- (919)
Withdrawals from replacement reserve 805,164 577,513
------- -------
Net cash used in investing activities (22,512,126) (29,310,114)
------------ ------------
Cash flows from financing activities
Net proceeds from issuance of stock 10,945,680 --
Proceeds from lines of credit 25,519,084 22,440,391
Paydown on line of credit (15,055,862) --
Financing costs paid -- (189,900)
Principal payments on long-term debt (55,318) (45,000)
Stock issuance costs -- (7,378)
Dividends paid (3,369,791) (2,121,377)
Increase in capital lease obligations -- 22,178
Principal payments on capital leases (34,184) (22,375)
------------ ------------
Net cash provided by financing activities 17,949,609 20,076,539
---------- ----------
Net decrease in cash and cash equivalents (117,995) (6,864,617)
Cash and cash equivalents, beginning of period 204,065 7,100,692
------- ---------
Cash and cash equivalents, end of period $ 86,070 $ 236,075
======= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $1,853,198 $ 1,055,549
========= ============
</TABLE>
-5-
<PAGE> 6
HUMPHREY HOSPITALITY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
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. A total of 27,094 of
these units were re-assigned to employees of the Humphrey Affiliates.
On August 19, 1998, the Company issued 122,261 units of limited partnership
interests to the sellers as part of the purchase price for the Hampton Inn
in Jackson, TN. The total of 122,261 units are redeemable for shares of
common stock on a one-for-one basis and are valued at approximately
$1,202,074 based on an average price of $9.83 per share.
See notes to consolidated financial statements.
-6-
<PAGE> 7
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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-six existing
limited-service hotels (including three hotel properties acquired in June 1998
three hotels acquired in August 1998 and one hotel acquired in September 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 September 30, 1998, the Company owns a 84.21%
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.
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 $10,945,000. 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.
The Company has completed the following public offerings since its inception:
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<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Offering price per Shares sold Net proceeds
Offering Date completed 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 $ 10,945
- --------------------------------------------------------------------------------------------------------------
</TABLE>
During the summer of 1998, the Company, in its attempts to continue
its steady growth, initiated a proposed 5th public offering. Unfortunately,
because of unstable conditions in the stock market, the proposed offering was
postponed until more stability occurred in the equity marketplace. The Company
has expensed the costs incurred in connection with the proposed offering
resulting in a $138,596 charge to current earnings which is included in general
and administrative expense.
On June 25, 1998, the Company closed on the purchase of the 73-room
Best Western hotel in Ellenton, FL and the 63-room Shoney's Inn hotel in
Ellenton, FL. The company paid $5.4 million collectively for both hotels.
On June 26, 1998, the Company closed on the purchase of the 80-room
Hampton Inn in Brandon, FL. The Company paid $5.4 million for the hotel.
The Company closed on the sale of the Comfort Inn, Elizabethton, TN
hotel on June 30, 1998 for $1.55 million.
On August 5, 1998, the Company closed on a mortgage financing of the
Hampton Inn in Brandon, FL, with Regions Bank in the amount of $3,000,000. The
loan is a fixed rate mortgage for twenty years at an initial rate of 8%.
On August 18, 1998 the Company obtained a $35 million credit
facility from BankBoston (the "BankBoston Credit Facility"). The term of the
BankBoston Credit Facility is for three years and bears interest at LIBOR plus
between 165 and 215 basis points, presently 7.74% which will remain fixed for
the term of the BankBoston Credit Facility. The line is cross-
-7-
<PAGE> 8
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998
collaterized by the Company hotels located in Jackson, TN; Ellenton, FL (2
hotels); Shelby, NC; Cleveland, TN; Dahlgren, VA; Princeton, WV; and Dover, DE.
On August 19, 1998 the Company closed on the purchase of the 61-room
Hampton Inn in Cleveland, TN, the 120-room Hampton Inn in Jackson, TN and the
78-room Hampton Inn in Shelby, NC. The Company paid $5.7 million collectively
for the Hampton Inns in Cleveland, TN and Shelby, NC. The Company paid $4.5
million for the Hampton Inn in Jackson, TN. The Company issued 122,261 units of
limited partnership interests to the sellers as part of the purchase price for
the Hampton Inn in Jackson, TN. The total of 122,261 units are redeemable for
shares of common stock on a one-for-one basis and are valued at approximately
$1,202,074 based on an average price of $9.83 per share.
On September 3, 1998 the Company closed on the purchase of the
61-room Comfort Inn in Rocky Mount, VA. The Company paid $2.6 million for 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.
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.
-8-
<PAGE> 9
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998
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. 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.
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 September 30, 1998, and
the results of operations for the three and nine months ended September 30, 1998
and 1997. The results of operations for the three and nine months ended
September 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 September 30, 1998, the Company paid a $.075 per share
distribution on each share of Common Stock outstanding (including the
distribution to minority interest) to shareholders of record as of August 30,
1998. The distribution declared for shareholders of record as of September 30,
1998 was paid on October 30, 1998, 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
September 30, 1998, the aggregate number of shares of Common Stock issuable to
the Limited Partners upon exercise of the Redemption Rights is 868,304. 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
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<PAGE> 10
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998
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, DE 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 September 2008.
Minimum future rental income under these noncancelable operating leases at
December 31, 1997 is as follows:
Year (in thousands)
---- --------------
1999 5,635
2000 5,635
2001 5,635
2002 5,635
2003 5,635
Thereafter 17,175
------
$45,350
=======
For the three and nine months ended September 30, 1998, the Company
earned base rents of $1,285,661 and $3,338,846, respectively, as compared to
base rents of $981,396 and $2,281,604 for three and nine months ended September
30, 1997. For the three and nine months ended September 30, 1998, the Company
earned percentage rents of $1,725,668 and $3,931,209, respectively, as compared
to percentage rents of $1,354,853 and $2,795,382 for the three and nine months
ended September 30, 1997. As of September 30, 1998, $2,188,053 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 an eight 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.
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, DE, 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, DE hotel and received as compensation,
17,734 limited partnership units of the Partnership. These units were then
re-assigned by Mr. Humphrey to Randy P. Smith, President of Humphrey Hospitality
Management, Inc. 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.
-10-
<PAGE> 11
HUMPHREY HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998
Note 4. Mortgages and Bonds Payable
The Company has a Credit Facility of $25.5 million with Mercantile
Safe Deposit and Trust. 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 (8.25% at
September 30, 1998). The Credit Facility is secured by the Company's hotels
located in Solomons, MD; Farmville, VA (2 hotels); Culpeper, VA; New Castle, PA;
Harlan, KY; Danville, KY; Murphy, NC; Chambersburg, PA; Allentown, PA,
Gettysburg, PA (2 hotels) and Key Largo, FL.
On August 5, 1998, the Company obtained a $3,000,000 twenty year,
eight percent mortgage on the Hampton Inn located in Brandon, FL.
On August 18, 1998 the Company obtained a $35 million credit
facility from BankBoston (the "BankBoston Credit Facility"). The term of the
credit facility is for three years and bears interest at LIBOR plus between 165
and 215 basis points, presently 7.74%, which will remain fixed for the term of
the BankBoston Credit Facility. The line is cross-collaterized by the Company
hotels located in Jackson, TN; Ellenton, FL (2 hotels); Shelby, NC; Cleveland,
TN; Dahlgren, VA, Princeton, WV and Dover, DE
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.
-11-
<PAGE> 12
Humphrey Hospitality Trust, Inc.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenue
Percentage lease revenue $9,255,033 $8,974,245
Other revenue 20,883 94,009
---------- ---------
Total revenue 9,275,916 9,068,254
--------- ---------
Expenses
Interest 2,585,506 2,817,671
Land lease 55,840 34,143
Real estate and personal property taxes
and insurance 648,499 626,795
General and administrative 343,717 393,392
Depreciation and amortization 2,435,550 2,224,002
--------- ----------
Total expenses 6,069,112 6,096,003
--------- ---------
Income before allocation to minority interest 3,206,804 2,972,251
Income allocated to minority interest 506,354 451,188
------- -------
Net income $2,700,450 $2,521,063
========== ==========
Basic earnings per common share outstanding $ 0.65 $ 0.72
========== ==========
Diluted earnings per common share outstanding $ 0.64 $ 0.72
========== ==========
</TABLE>
-12-
<PAGE> 13
HUMPHREY HOSPITALITY MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $3,274,776 $2,483,403
Accounts receivable 666,299 224,201
Prepaid expenses 71,672 66,862
Other assets 54,463 60,377
--------- ---------
Total current assets $4,067,210 $2,834,843
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $571,020 $434,102
Accrued expenses 499,833 346,744
Advance deposit 17,393 12,031
Due to affiliates 2,188,053 1,857,021
--------- ---------
Total current liabilities 3,276,299 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 790,910 184,944
---------- ----------
Total shareholder's equity 790,911 184,945
---------- ----------
Total liabilities and shareholder's equity $4,067,210 $2,834,843
========= =========
</TABLE>
- --------------------
See notes to financial statements.
-13-
<PAGE> 14
HUMPHREY HOSPITALITY MANAGEMENT, INC.
STATEMENTS OF OPERATIONS AND
CHANGES IN RETAINED EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Room revenue $6,966,561 $5,625,011 $16,042,206 $11,425,301
Telephone revenue 105,481 93,367 263,114 201,415
Slip revenue 81,771 61,662 244,017 191,457
Interest revenue 22,877 12,088 48,001 24,115
Other revenue 112,293 85,890 347,222 217,364
------- ------ ------- -------
Total revenue 7,288,983 5,878,018 16,944,560 12,059,652
--------- --------- ---------- ----------
Expenses
Salaries and wages 1,595,471 1,200,428 3,968,474 2,608,727
Room expense 408,401 343,959 919,553 669,467
Telephone 91,494 68,521 242,856 172,646
Marina expense 10,739 9,637 26,435 27,114
General and administrative 355,147 203,072 844,934 507,960
Marketing and promotion 266,948 211,207 631,195 425,624
Utilities 332,943 250,718 798,841 532,377
Repairs and maintenance 156,141 111,828 396,247 249,080
Taxes and insurance 113,434 69,248 271,445 163,527
Franchise fees 416,949 314,211 878,559 594,935
Lease payments 3,011,329 2,336,249 7,270,055 5,076,986
--------- --------- --------- ---------
Total expenses 6,758,996 5,119,078 16,248,594 11,028,443
--------- --------- ---------- ----------
Net income 529,987 758,940 695,966 1,031,209
Retained earnings,
beginning of period 260,923 197,149 184,944 29,880
Distributions paid -- -- (90,000) (105,000)
-- -- -------- ---------
Retained earnings,
end of period $ 790,910 $ 956,089 $ 790,910 $ 956,089
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
-14-
<PAGE> 15
HUMPHREY HOSPITALITY MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net Income $ 695,966 $ 1,031,209
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Changes in assets and liabilities
Increase in accounts receivable (442,098) (182878)
Increase in prepaid expenses (4,810) (65,987)
(Decrease) Increase in other assets 5,914 (41,485)
Increase in accounts payable 136,918 593,949
(Decrease) increase in due to affiliates 331,032 620,998
Increase in accrued expenses 153,089 180,255
Increase in advance deposits 5,362 19,429
---------- -----------
Net cash provided by
operating activities 881,373 2,155,490
------- ---------
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 increase in cash and
cash equivalents 791,373 2,101,740
Cash and cash equivalents, beginning of period 2,483,403 1,127,573
--------- ---------
Cash and cash equivalents, end of period $3,274,776 $3,229,313
========= =========
</TABLE>
- ---------------------
See notes to financial statements.
-15-
<PAGE> 16
HUMPHREY HOSPITALITY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1998, and the results of operations for the three
and nine months ended September 30, 1998 and 1997. The results of operations for
the three and nine months ended September 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 September 30,
1998, $19,817 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 September 2008. Minimum future lease payments due
under these noncancellable operating leases are as follows:
-16-
<PAGE> 17
HUMPHREY HOSPITALITY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1998
Year (in thousands)
---- --------------
1999 5,635
2000 5,635
2001 5,635
2002 5,635
2003 5,635
Thereafter 17,175
------
$45,350
=======
For the three and nine months ended September 30, 1998, the Lessee
incurred base rents of $1,285,661 and $3,338,846, respectively, as compared to
base rents of $981,396 and $2,281,604, respectively, for three and nine months
ended September 30, 1997. For the three and nine months ended September 30,
1998, the Lessee incurred percentage rents of $1,725,668 and $3,931,209,
respectively, as compared to percentage rents of $1,354,853 and $2,795,382,
respectively, for the three and nine months ended September 30, 1997. As of
September 30, 1998, the amount due the Partnership and the Subsidiary
Partnership for lease payments were $2,188,053 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 all 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 statements 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.
-17-
<PAGE> 18
Humphrey Hospitality Management, Inc.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenue from hotel operations
Room revenue $20,692,449 $19,952,417
Telephone revenue 370,210 367,378
Other revenue 692,206 570,607
----------- -------------
Total revenue 21,754,865 20,890,402
---------- ----------
Expenses
Salaries and wages 4,946,133 4,733,284
Room expense 1,211,275 1,260,768
Telephone 318,342 295,854
Marina expense 26,435 27,114
General and administrative 1,097,682 974,040
Marketing and promotion 810,395 747,561
Utilities 1,011,080 1,021,973
Repairs and maintenance 537,467 539,141
Taxes and insurance 346,563 308,460
Franchise fees 1,107,227 1,051,246
Lease payments 9,255,023 8,974,245
---------- ----------
Total expenses 20,667,622 19,933,686
---------- ----------
NET INCOME $ 1,087,243 $ 956,716
============== =============
</TABLE>
-18-
<PAGE> 19
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 84.21% interest in the Partnership at September 30,
1998. As of September 30, 1998, the Partnership owned directly or indirectly
twenty-six 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 seven hotels were acquired
between June 1998 and September 1998. One hotel was sold 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 September 30, 1998
The Company's total revenues for the three month period ended
September 30, 1998, substantially consisted of Lease revenue recognized pursuant
to the Leases. The Company's revenue during the three month period ended
September 30, 1998 was $3,024,855 an increase of $682,525, or 29.1%, as compared
to Company revenue of $2,342,330 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
$122,258 to $903,290, 15.7% for the three months ended September 30, 1998 as
compared to net income of $781,032 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.
The Lessee's room revenues from the Hotels increased by $1,341,550,
or 23.8%, to $6,966,561 for the three months ended September 30, 1998, as
compared to $5,625,011 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 $60.31
for the three months ended September 30, 1998, up 2.7% as compared to $58.75 for
the same period of 1997. Pro forma revenue per available room ("Revpar") was
$46.33 for the three months ended September 30, 1998 as compared to $46.18 for
the same period of 1997. Lessee operating expenses increased by $1,639,918,
primarily as the result of the increased number of Hotels under management, to
$6,758,996 for the three months ended September 30, 1998, as compared to
$5,119,078 for the same period of 1997. The net income for the three months
ended September 30, 1998 decreased $228,953 to $529,987 from $758,940 in 1997.
This decrease is the result of additional lease payments, coupled with, on the
Florida properties, the down cycle of occupancy.
-19-
<PAGE> 20
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
Nine months ended September 30, 1998
The Company's total revenues for the nine month period ended September
30, 1998, substantially consisted of Lease revenue recognized pursuant to the
Leases. The Company's revenue during the nine month period ended September 30,
1998 was $7,290,938 an increase of $2,119,943, or 40.9%, as compared to Company
revenue of $5,170,995 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 $375,422 to $2,277,973, or 19.7% for
the nine months ended September 30, 1998 as compared to net income of $1,902,551
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, TN.
The Lessee's room revenues from the Hotels increased by $4,616,905, or
40.4%, to $16,042,206 for the nine months ended September 30, 1998, as compared
to $11,425,301 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 $59.11 for the nine
months ended September 30, 1998, up .5% as compared to $58.81 for the same
period of 1997. Pro forma REVPAR was $41.98 for the nine months ended September
30, 1998 as compared to $40.24 for the same period of 1997. Lessee operating
expenses increased by $5,220,151, mainly as the result of the addition of hotels
in 1997 and 1998, to $16,248,594 for the nine months ended September 30, 1998,
as compared to $11,028,443 for the same period of 1997. The net income for the
nine months ended September 30, 1998 decreased $335,243 to $695,966 from
$1,031,209 in 1997, again reflecting the increased lease payments and the
purchase of the Florida properties in their down occupancy cycle.
The following table shows certain other pro forma information for the
periods indicated.
<TABLE>
<CAPTION>
Pro-forma Pro-forma
Three Months ended Nine Months ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Occupancy rate 76.81% 78.60% 71.01% 68.42%
ADR $60.31 $58.75 $59.11 $58.81
REVPAR $46.33 $46.18 $41.98 $40.24
Room revenue $7,627,926 $7,600,316 $20,692,449 $19,952,417
Room nights available 164,649 164,588 488,458 482,593
Room nights occupied 126,473 133,065 346,587 330,183
Rooms available 1,789 1,789 1,789 1,789
</TABLE>
The Company has utilized the 2% special reserve fund to enhance the
value of four of the hotels. In the future, the monies spent from the 2% special
reserve fund for these properties will be generating an additional 7% of this
expenditure in the form of fixed lease payments.
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. These 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
September 30, 1998, the Company's cash and current accounts receivable balances
exceed its current obligations by $761,838.
-20-
<PAGE> 21
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
The Company's Funds From Operations (net income before gain on sale
of asset plus minority interest and depreciation and amortization) ("FFO") was
$1,897,912 in the three months ended September 30, 1998, which is an increase of
$498,104, or 35.6% over FFO in the comparable period in 1997, which was
$1,399,808. For the nine months ended September 30, 1998 the Company's FFO was
$4,357,465, which is an increase of $1,097,254, or 33.7% over the comparable
period in 1997, which was $3,260,214. The improvements in FFO can be attributed
to the addition of eleven hotels purchased during 1997 and the seven hotels
purchased during 1998. 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.
During the summer of 1998, the Company, in its attempts to continue
its steady growth, initiated a proposed 5th public offering. Unfortunately,
because of unstable conditions in the stock market, the proposed offering was
postponed until more stability occurred in the equity marketplace. The Company
has expensed the costs incurred in connection with the proposed offering
resulting in a $138,596 charge to current earnings, but does not believe that
these costs affect Funds From Operations. The following table computes FFO:
<TABLE>
<CAPTION>
Historical Three Historical Three
Month Period Ended Month Period Ended
September 30, 1998 Per Share September 30, 1997 Per Share
------------------ --------- ------------------ ---------
<S> <C> <C> <C> <C>
Net income applicable to
common shares $903,290 $ 781,032
Add:
Minority interest 154,674 139,779
Amortization of franchise costs 17,574 6,375
Depreciation 667,974 472,622
Offering Costs 138,596 --
Less:
Gain on sale of asset 15,804 --
------- ---------
Funds From Operations 1,897,912 $ .35 $1,399,808 $ .34
========= ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Historical Nine Historical Nine
Month Period Ended Month Period Ended
September 30, 1998 Per Share September 30, 1997 Per share
------------------ --------- ------------------ ---------
<S> <C> <C> <C> <C>
Net income applicable to
common shares $2,277,973 $1,902,551
Add:
Minority interest 384,000 340,497
Amortization of franchise costs 45,111 10,533
Depreciation 1,690,982 1,006,633
Extraordinary item 138,596 --
Less:
Gain on sale of asset (179,197) --
--------- ---------
Funds From Operations 4,357,465 $ .90 3,260,214 $ .79
========= ===== ========= =====
</TABLE>
-21-
<PAGE> 22
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
Long-term debt as of September 30, 1998, of approximately $42.8 million
consisted of:
Approximately $9.7 million, from the BankBoston Credit Facility, which
is secured and cross-collateralized by the Company hotels located in
Jackson, TN; Ellenton, FL (2 hotels): Shelby, NC; Cleveland, TN;
Dahlgren, VA; Princeton, WV and Dover, DE. The interest rate on the
BankBoston Credit Facility is LIBOR plus between 165 and 215 basis
points, presently 7.74%, which will remain fixed for the length of the
BankBoston Credit Facility.
Approximately $23.9 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 Company
hotels located in Solomons, MD; Farmville, VA (2 hotels); 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 8.25% per annum.
Approximately $3.9 million, secured by a first deed of trust on the
hotels located in Wytheville, VA, and Morgantown, WV. 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, 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 approximately 8%.
Approximately $3.0 million, secured by a first deed of trust on the
Hampton Inn located in Brandon, FL. The balance outstanding bears
interest at a rate of 8% per annum.
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 September 30, 1998 is approximately $81.8
million. As of September 30, 1998, the Company's total outstanding indebtedness
represents approximately 52.3% 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 expenditures ("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.
-22-
<PAGE> 23
HUMPHREY HOSPITALITY TRUST, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
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 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.
Because of the interdependence of information systems today, Year
2000 compliant companies may be affected by the Year 2000 readiness of their
material suppliers, customers and other third parties. Although management has
not yet determined the risk associated with the failure of any such party to
become Year 2000 compliant, such failure could have a material adverse effect
on the Company's results of operation and financial condition. To date, no such
parties have informed the Company that they do not expect to be Year 2000
compliant in the timeframe that would expose the Company to material business
risks.
OTHER INFORMATION
The Company adopted the provisions of Financial Accounting Standard
Board Statement No. 128 "Earnings Per Share" during 1997.
-23-
<PAGE> 24
HUMPHREY HOSPITALITY TRUST, INC.
PART II. OTHER INFORMATION
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.
-24-
<PAGE> 25
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: 11/13/98
----------------------------
-25-
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