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<PAGE 1>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 0-23732
WINSTON HOTELS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1624289
(State of incorporation) (I.R.S. Employer Identification No.)
2209 Century Drive
Raleigh, North Carolina 27612
(Address of principal executive offices)
(Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
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 registrant became subject to the filing requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934 on
May 24, 1994.
The number of shares of Common Stock, $.01 par value, outstanding
on April 30, 1998 was 16,298,980.
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<PAGE 2>
WINSTON HOTELS, INC.
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC.
--------------------
Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997 3
Unaudited Consolidated Statementss of Income for the
three months ended March 31, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
CAPSTAR WINSTON COMPANY, L.L.C.
-------------------------------
Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997 8
Unaudited Statement of Income for the three months
ended March 31, 1998 9
Unaudited Statement of Cash Flows for the three
months ended March 31, 1998 10
Note to Financial Statements 11
WINSTON HOSPITALITY, INC.
-------------------------
Unaudited Statement of Income for the three months
ended March 31, 1997 12
Unaudited Statement of Cash Flows for the three months
ended March 31, 1997 13
Note to Financial Statements 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Ooperations 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signature Page 20
<PAGE 3>
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)
ASSETS
March 31, 1998 December 31, 1997
--------------- ---------------
(unaudited)
Investment in hotel properties:
Land $ 31,993 $ 27,504
Buildings and improvements 259,571 224,535
Furniture and equipment 26,658 22,528
--------------- ---------------
Operating properties 318,222 274,567
Less accumulated depreciation (24,726) (21,572)
--------------- ---------------
293,496 252,995
Properties under development 21,377 26,490
--------------- ---------------
Net investment in hotel properties 314,873 279,485
Corporate FF&E, net 139 23
Cash and cash equivalents 1,041 164
Lease revenue receivable 6,910 5,682
Deferred expenses, net 1,596 1,403
Prepaid expenses and other assets 2,505 1,070
-------------- --------------
Total Assets $ 327,064 $ 287,827
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Due to banks $ 86,881 $ 44,081
Accounts payable and accrued expenses 1,700 3,527
Distributions payable 6,605 6,950
Minority interest in Partnership 15,259 15,779
------------- --------------
Total liabilities 110,445 70,337
------------- --------------
Shareholders'equity:
Preferred stock, $.01 par value, 10,000
shares authorized, 3,000 shares issued
and outstanding (liquidation preference of
$76,734 and $77,100) 30 30
Common stock, $.01 par value, 50,000 shares
authorized, 16,299 and 16,194 shares issued
and outstanding 163 162
Additional paid-in capital 224,598 223,427
Unearned compensation (391) (106)
Distributions in excess of earnings (7,781) (6,023)
------------- ---------------
Total shareholders' equity 216,619 217,490
------------- ---------------
Total liabilities and shareholders'
equity $ 327,064 $ 287,827
============= ===============
The accompanying notes are an integral part of the financial statements.
<PAGE 4>
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTSS OF INCOME
(in thousands, except per share amounts)
Three Months Three Months
Ended Ended
March 31, 1998 March 31,1997
-------------- --------------
Revenue:
Percentage lease revenue $ 10,073 $ 7,148
Interest and other income 49 30
-------------- ---------------
Total revenue 10,122 7,178
-------------- ---------------
Expenses:
Real estate taxes and property and
casualty insurance 979 565
General and administrative 599 370
Interest 625 815
Depreciation 3,158 2,222
Amortization 87 40
-------------- ---------------
Total expenses 5,448 4,012
-------------- ---------------
Income before allocation to
minority interest 4,674 3,166
Income allocation to minority interest 297 230
-------------- ---------------
Net income 4,377 2,936
Preferred stock distribution 1,734 --
-------------- ---------------
Net income applicable to common
shareholders $ 2,643 $ 2,936
============== ===============
Earnings per share:
Net income per common share $ 0.16 $ 0.19
============== ===============
Net income per common share assuming
dilution $ 0.16 $ 0.18
============== ===============
Weighted average number of common
shares 16,224 15,815
============== ===============
Weighted average number of common shares
assuming dilution 18,042 17,154
============== ===============
The accompanying notes are an integral part of the financial statements.
<PAGE 5>
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Three Months Three Months
Ended Ended
March 31, 1998 March 31,1997
-------------- --------------
Cash flows from operating activities:
Net income $ 4,377 $ 2,936
Adjustments to reconcile net income to
net cashprovided by operating activities:
Minority interest 297 230
Depreciation 3,158 2,222
Amortization of franchise fees 30 22
Amortization recorded as interest expense 91 112
Unearned compensation amortization 57 18
Changes in assets and liabilities:
Lease revenue receivable (1,228) (153)
Prepaid expenses and other assets 38 (219)
Current liabilities (1,827) (337)
-------------- --------------
Net cash provided by operating
activities 4,993 4,831
-------------- --------------
Cash flows from investing activities:
Deferred acquisition costs (100) (32)
Prepaid acquisition costs (1,548) --
Investment in hotel properties (39,250) (3,501)
Sale of land parcel 445 --
-------------- --------------
Net cash used in investing
activities (40,453) (3,533)
-------------- --------------
Cash flows from financing activities:
Fees paid to increase and extend line of
credit -- (6)
Net proceeds from issuance of stock 485 200
Payment of distributions to shareholders (6,478) (4,029)
Payment of distributions to minority interest (470) (323)
Increase in line of credit borrowing 42,800 2,931
-------------- --------------
Net cash provide by (used in) financing
activities 36,337 (1,227)
-------------- --------------
Net increase in cash and cash equivalents 877 71
Cash and cash equivalents at beginning of period 164 234
-------------- --------------
Cash and cash equivalents at end of period $ 1,041 $ 305
============== ==============
Supplemental disclosure:
Cash paid for interest $ 780 $ 384
============== ==============
Summary of non-cash investing and financing
activities:
Investment in hotel properties payable $ 8 $ 2,327
Distributions declared but not paid 6,605 4,613
Conversion of partnership units for
common shares 152 --
Deferred equity compensation 339 --
Minority interest payable adjustment due
to the exercise of stock options and
conversion of partnership units for
common shares 196 --
============== ==============
The accompanying notes are an integral part of the financial statements.
<PAGE 6>
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ amts in thousands, except per share amounts)
1. ORGANIZATION
------------
Winston Hotels, Inc. (the "Company") operates so as to qualify as
a real estate investment trust ("REIT") for federal income tax
purposes. The accompanying unaudited consolidated financial
statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial
statements. All such adjustments are of a normal and recurring
nature. Due to the seasonality of the hotel business, the
information for the three months ended March 31, 1998 and the
information for the three months ended March 31, 1997 are is
not necessarily indicative of the results for a full year.
2. ACQUISITIONS AND DEVELOPMENT
----------------------------
On March 3, 1998, the Company acquired the 168-suite Residence Inn
by Marriott in Phoenix, Arizona for $15,700 in cash. On March 17,
1998, the Company purchased the newly-built 164-room Hilton Garden
Inn in Alpharetta, Georgia for $13,500 in cash. In addition, on
March 10, 1998, the Company announced the opening of its first
internally-developed hotel, a 137-suite Homewood Suites hotel in
Raleigh, North Carolina. The cost of the hotel was approximately
$12,000.
3. PRO FORMA FINANCIAL INFORMATION
-------------------------------
This unaudited pro forma condensed statement of income of the
Company is presented as if the September 1997 Preferred Stock
offering had occurred January 1, 1997 and the Company had acquired
all 41 of the hotels owned as of March 31, 1998 on the later of
January 1, 1997, or the hotel opening date for the two newly
developed hotels which opened in March 1998. This unaudited pro
forma condensed statement of income is not necessarily indicative
of what actual results of operations of the Company would have
been assuming such transactions had been completed as of the dates
described above, nor does it purport to represent the results of
operations for future periods:
Pro Forma for the
Quarter Ended March 31,
-----------------------
1998 1997
---- ----
Percentage lease and other revenue $ 10,695 $ 10,250
-------------- --------------
Expenses:
Real estate taxes and property and casualty
insurance 1,001 830
General and administrative 601 390
Depreciation 3,243 2,863
Amortization 87 50
Interest expense 786 729
-------------- --------------
Total expense 5,718 4,862
-------------- --------------
Income before allocation to
minority interest 4,977 5,388
-------------- --------------
Income allocation to minority interest 319 441
Preferred stock distribution 1,734 1,734
-------------- --------------
Net income applicable to common
shareholders $ 2,924 $ 3,213
-------------- --------------
Net income per common share $ 0.18 $ 0.20
============== ==============
Net income per common share assuming
dilution $ 0.18 $ 0.20
============== ==============
Weighted average number of common shares 16,224 15,815
============== ==============
Weighted average number of common shares
assuming dilution 18,042 17,969
============== ==============
<PAGE 7>
WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ amts in thousands, except per share amounts)
4. EARNINGS PER SHARE
------------------
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share," on December 31, 1997. SFAS
No. 128 requires the Company to change its method of computing,
presenting and disclosing earnings per share information. All
prior period data presented has been restated to conform to the
provisions of SFAS No. 128.
The following is a reconciliation of the net income applicable to
common shareholders used in the net income per common share
calculation to the income before allocation to minority interest
used in the net income per common share - assuming dilution:
Quarter ended March 31,
---------------------------
1998 1997
------------ ------------
Net income $ 4,377 $ 2,936
Less: preferred shares distribution 1,734 --
------------ ------------
Net income applicable to common
shareholders 2,643 2,936
Plus: income allocation to minority
interest 297 230
------------ ------------
Net income assuming dilution $ 2,940 $ 3,166
============ ============
The following is a reconciliation of the weighted average shares
used in net income per common share to the weighted average shares
used in the net income per common share - assuming dilution:
Quarter ended March 31,
---------------------------
1998 1997
------------ ------------
Weighted average number of common
shares 16,224 15,815
Units with redemption rights 1,769 1,265
Stock options 49 73
------------ ------------
Weighted average number of common shares
assuming dilution 18,042 17,154
============ ============
5. SUBSEQUENT EVENTS:
-----------------
On April 21, 1998, the Company purchased the 171-room Holiday Inn
in Tinton Falls, New Jersey for approximately $5,700 in cash. On
May 5, 1998, the Company opened the 112-suite Homewood Suites
hotel in Lake Mary, Florida which represents an investment of
approximately $10,000. On May 8, 1998, the Company purchased the
155-room Hilton Garden Inn hotel in Albany, New York for
approximately $12,800 in cash.
6. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS:
-----------------------------------------
The Company adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130") effective
January 1, 1998. SFAS 130 requires the Company to display an
amount representing the total comprehensive income for the period
in a financial statement which is displayed with the same
prominence as other financial statements. The Company does not
have any items representing comprehensive income and therefore has
not presented a Statement of Comprehensive Income in the
accompanying financial statements.
The Company will adopt Statement of Financial Accounting Standards
No. 131 "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131") effective December 31, 1998. SFAS 131
requires the Company to report selected information about
operating segments in its financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. This statement is not expected to have a
material impact on the Company's financial statements.
<PAGE 8>
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEET
($ in thousands)
ASSETS
March 31, 1998 December 31, 1997
--------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 6,198 $ 3,393
Accounts receivable 2,527 1,614
Due from Winston Hospitality, Inc. 526 1,636
Due from CapStar Management Company, L.P. 456 385
Deposits and other assets 206 197
--------------- -----------------
Total current assets 9,913 7,225
--------------- -----------------
Furniture, fixtures and equipment, net of
accumulated depreciation of $17 and $5 289 241
Intangible assets, net of accumulated
amortization of $321 and $93 33,915 34,088
Deferred franchise costs, net of
accumulated amortization of $24 and $7 585 601
--------------- -----------------
$ 44,702 $ 42,155
=============== =================
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,688 $ 1,459
Accrued expenses 3,196 2,920
Percentage lease payable to
Winston Hotels, Inc. 6,910 5,682
Advance deposits 174 135
--------------- -----------------
Total current liabilities 11,968 10,196
--------------- -----------------
Members' capital 32,734 31,959
--------------- -----------------
$ 44,702 $ 42,155
=============== =================
See accompanying notes to financial statements.
<PAGE 9>
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENT OF OPERATIONS
For the quarter ended March 31, 1998
($ in thousands)
Revenue:
Rooms $ 22,573
Food and beverage 901
Telephone and other operating departments 1,170
-----------
Total revenue 24,644
-----------
Operating costs and expenses:
Rooms 4,904
Food and beverage 683
Telephone and other operating departments 473
Undistributed expenses:
Lease expense 10,073
Administrative and general 2,482
Sales and marketing 826
Franchise fees 1,608
Repairs and maintenance 1,222
Energy 895
Other 446
Depreciation and amortization 257
-----------
Total expenses 23,869
-----------
Net income $ 775
===========
See accompanying notes to financial statements.
<PAGE 10>
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENT OF CASH FLOWS
For the quarter ended March 31, 1998
($ in thousands)
Cash flows from operating activities:
Net income $ 775
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 257
Increase in accounts receivable (913)
Decrease in due from Winston Hospitality, Inc. 1,110
Increase in due from CapStar Management Company, L.P. (71)
Increase in deposits and other assets (9)
Increase in accounts payable and accrued expenses 505
Increase in percentage lease payable to Winston
Hotels, Inc. 1,228
Increase in advance deposits 39
-----------
Net cash provided by operating activities 2,921
-----------
Cash flows from investing activities:
Additions of furniture, fixtures and equipment (76)
Proceeds from sale of fixed assets 16
Additions to intangible assets (56)
-----------
Net cash used in investing activities (116)
-----------
Net increase in cash and cash equivalents 2,805
Cash and cash equivalents at beginning of period 3,393
-----------
Cash and cash equivalents at end of period $ 6,198
===========
See accompanying notes to financial statements.
<PAGE 11>
CAPSTAR WINSTON COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements reflect, in the
opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature.
During November 1997, CapStar Management Company ("CMC") and
CapStar Hotel Company purchased substantially all of the assets
and assumed certain liabilities of Winston Hospitality, Inc.,
including 38 hotel leases, certain operating assets and
liabilities, and goodwill and other intangible assets. Concurrent
with the purchase, CMC contributed/assigned the assets purchased
and liabilities assumed in the transaction to CapStar Winston
Company, L.L.C. (the "Lessee" ).
<PAGE 12>
WINSTON HOSPITALITY, INC.
UNAUDITED STATEMENT OF INCOME
($ in thousands)
Three Months
Ended
March 31, 1997
--------------
Revenue:
Room revenue $ 16,325
Food and beverage revenue 631
Other revenue, net 304
Interest income 22
-----------
Total revenue 17,282
-----------
Expenses:
Property and operating expenses 6,218
Property maintenance and repairs 868
Food and beverage expense 455
General and administrative 594
Franchise costs 1,458
Management fees 297
Percentage lease payments 7,148
-----------
Total expenses 17,038
-----------
Net income $ 244
===========
The accompanying note is an integral part of the financial statements.
<PAGE 13>
WINSTON HOSPITALITY, INC.
UNAUDITED STATEMENT OF CASH FLOWS
($ in thousands)
Three Months
Ended
March 31, 1997
--------------
Cash flows from operating activities:
Net income $ 244
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 27
Changes in assets and liabilities:
Accounts receivable - trade 194)
Prepaid expenses and other assets 35
Accounts payable - trade (14)
Percentage lease payable to Lessor 153
Accrued expenses and other liabilities 240
-----------
Net cash provided by operating activities 491
-----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (38)
Advances to lessor, affiliates and shareholders (1,068)
-----------
Net cash used in investing activities (1,106)
-----------
Net decrease in cash and cash equivalents (615)
Cash and cash equivalents at beginning of the period 5,463
-----------
Cash and cash equivalents at end of period $ 4,848
===========
The accompanying note is an integral part of the financial statements.
<PAGE 14>
WINSTON HOSPITALITY, INC.
NOTE TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements reflect, in the
opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. All such
adjustments are of a normal and recurring nature.
During November 1997, CapStar Management Company ("CMC") and
CapStar Hotel Company purchased substantially all of the assets
and assumed certain liabilities of Winston Hospitality, Inc.,
including 38 hotel leases, certain operating assets and
liabilities, and goodwill and other intangible assets. Concurrent
with the purchase, CMC contributed/assigned the assets purchased
and liabilities assumed in the transaction to CapStar Winston
Company, L.L.C. (the "Lessee" ).
<PAGE 15>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ amounts in thousands)
OVERVIEW
Winston Hotels, Inc. (the "Company"), which consummated an
underwritten initial public offering ("IPO") in June 1994, follow-
on Common Stock offerings in May 1995 and in June 1996, and a
Preferred Stock offering in September 1997, operates as a REIT to
invest in hotel properties. The Company owned 41 hotels (the
"Current Hotels") as of March 31, 1998. The Company owned 16
hotels as of December 31, 1994 (the "1994 Hotels"), purchased five
hotels in May 1995 (the "1995 Acquired Hotels"), acquired 10
hotels in 1996 (the "1996 Acquired Hotels"), acquired seven hotels
in 1997 (the "1997 Acquired Hotels") and acquired two hotels and
opened one internally developed hotel in the first quarter of 1998
(the "1998 Hotels"). It currently leases all 41 Current Hotels to
CapStar Winston Company, L.L.C. (the "Lessee") under Percentage
Leases through which it receives its principal source of revenue.
The Company acquired one additional full-service hotel in April
1998, on additional extended-stay hotel in May 1998 and one
additional full-service hotel in May 1998.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998 and the comparable
period for 1997, the differences in operating results are
primarily attributable to the fact that the Company owned more
hotels in 1998 than it did in 1997. The table below outlines the
Company's investment in hotel properties for the periods ended
March 31, 1998 and 1997.
First Quarter 1998
--------------------
Acquisitions Properties
during owned at
Type of Hotel the quarter March 31
- ------------- ----------- -----------
Limited-service hotels -- 35
Extended-stay hotels 2 4
Full-service hotels 1 2
-- --
Total 3 41
== ==
First Quarter 1997
--------------------
Acquisitions Properties
during owned at
Type of Hotel the quarter March 31
- ------------- ----------- -----------
Limited-service hotels -- 28
Extended-stay hotels -- 2
Full-service hotels -- 1
-- --
Total -- 31
== ==
In order to present a more meaningful comparison of operations, in
addition to the comparison of actual results of the Company and
the Lessee for the three months ended March 31, 1998 versus actual
results for the three months ended March 31, 1997, below also is
an analysis of the pro forma results of the Company for the three
months ended March 31, 1998 versus pro forma results for the three
months ended March 31, 1997 as if the 1997 Preferred Stock
offering and the 1997 and 1998 acquisitions had occurred on the
later of January 1, 1997, or the hotel opening date for the two
newly developed hotels which opened in March 1998.
THE COMPANY
ACTUAL - THREE MONTHS ENDED MARCH 31, 1998 VS ACTUAL - THREE
MONTHS ENDED MARCH 31, 1997
The Company had revenues of $10,122 in 1998, consisting of $10,073
of Percentage Lease revenues and $49 of interest and other income.
Percentage Lease revenues increased by $2,925 to $10,073 in 1998
from $7,148 in 1997. This increase was comprised of: (i) $483 due
to the 1998 Hotels, (ii) $2,245 due to the 1997 Acquired Hotels
owned for the entire three-month period in 1998, and (iii) an
increase of $197 in lease revenues generated from hotels acquired
prior to 1997.
Real estate taxes and property insurance costs incurred in 1998
were $979, an increase of $414 from $565 in 1997. This increase
was primarily attributable to the 1997 Acquired Hotels that were
not owned in the first quarter of 1997, the 1998 Hotels, as well
as increased property tax assessments and tax rates from 1997 to
1998. General and administrative expenses increased $229 to $599
in 1998 from $370 in 1997. The increase was attributable to the
increase in size and activities of the Company in 1998. Interest
expense decreased by $190 to $625 in 1998 from $815 in 1997.
Although the weighted average outstanding debt balance increased
from 1997 to 1998, from $45,023 to $58,682, capitalized interest
costs related to development and renovation projects increased
from $174 to $640, resulting in a lower interest expense in 1998.
Interest rates remained constant between the two quarters.
Depreciation increased $936 to $3,158 in 1998 from $2,222 in 1997,
primarily due to depreciation related to the 1997 Acquired Hotels,
the 1998 Hotels and renovations completed during 1997 and 1998.
<PAGE 16>
PRO FORMA - THREE MONTHS ENDED MARCH 31, 1998 VS PRO FORMA -
THREE MONTHS ENDED MARCH 31, 1997
The Company had revenues of $10,695 for the three months ended
March 31, 1998, consisting of $10,646 of Percentage Lease revenues
and $49 of interest and other income. Percentage Lease revenues
increased by $470 to $10,646 in 1998 from $10,176 in 1997. Of
this increase, $305 was primarily attributable to an increase in
room rates in 1998 from 1997 and $165 was attributable to the
opening of two hotels in 1998.
Real estate taxes and property insurance costs incurred in 1998
were $1,001, an increase of $171 from $830 in 1997. The increase
was due primarily to increased property tax assessments and tax
rates from 1997 to 1998 as well as additional taxes paid due to
the opening of two hotels in 1998. General and administrative
expenses increased $211 to $601 in 1998 from $390 in 1997. The
increase was primarily attributable to payroll costs associated
with the increase in headcount from 1997 to 1998. Interest
expense increased by $57 to $786 in 1998 from $729 in 1997. The
increase was attributable to $561 of additional interest expense
related primarily to borrowings under the line of credit to fund
acquisitions of the 1997 Acquired Hotels and 1998 Hotels, offset
by both the capitalization of additional interest costs, totaling
$467, in connection with the development and certain renovation
projects during the respective periods, as well as a reduction in
line of credit fees totaling $37. Depreciation increased $380 to
$3,243 in 1998 from $2,863 in 1997 primarily due to renovations
and other capital expenditures during 1997 and 1998.
THE LESSEE
ACTUAL - THREE MONTHS ENDED MARCH 31, 1998 VS ACTUAL - THREE
MONTHS ENDED MARCH 31, 1997
The following table sets forth certain historical financial
information for the Current Hotels for the periods indicated:
Three Months Ended
March 31, 1998
------------------
Revenue:
Rooms $ 22,573 91.6%
Food and beverage 901 3.7%
Telephone and other operating departments 1,170 4.7%
----------- ------
Total revenue 24,644 100.0%
----------- ------
Operating costs and expenses:
Rooms 4,904 19.9%
Food and beverage 682 2.8%
Telephone and other operating departments 473 1.9%
Undistributed expenses:
Lease 10,073 40.9%
Administrative and general 2,482 10.1%
Sales and marketing 826 3.4%
Franchise fees 1,609 6.5%
Repairs and maintenance 1,222 5.0%
Energy 895 3.6%
Other 446 1.8%
Depreciation and amortization 257 1.0%
----------- ------
Total expenses 23,869 96.9%
----------- ------
Net income $ 775 3.1%
=========== ======
Three Months Ended
March 31, 1997
------------------
Revenue:
Rooms $ 16,325 92.3%
Food and beverage 624 3.5%
Telephone and other operating departments 742 4.2%
----------- ------
Total revenue 17,691 100.0%
----------- ------
Operating costs and expenses:
Rooms 3,431 19.4%
Food and beverage 445 2.5%
Telephone and other operating departments 404 2.3%
Undistributed expenses:
Lease 7,148 40.4%
Administrative and general 2,234 12.6%
Sales and marketing 662 3.7%
Franchise fees 1,118 6.3%
Repairs and maintenance 915 5.2%
Energy 695 3.9%
Other 368 2.1%
Depreciation and amortization 27 0.2%
----------- ------
Total expenses 17,447 98.6%
----------- ------
Net income $ 244 1.4%
=========== ======
During November 1997, CapStar Management Company ("CMC") and
CapStar Hotel Company purchased substantially all of the assets
and assumed certain liabilities of Winston Hospitality, Inc.,
including 38 hotel leases, certain operating assets and
liabilities, and goodwill and other intangible assets. Concurrent
with the purchase, CMC contributed/assigned the assets purchased
and liabilities assumed in the transaction to CapStar Winston
Company, L.L.C. (the "Lessee").
<PAGE 17>
Since the Lessee was not operating prior to the purchase
transaction, no comparative data is available for the period
January 1, 1997 through March 31, 1997. However, for purposes of
this management discussion and analysis, the financial information
of the Lessee for the three months ended March 31, 1998 will be
compared with the financial information of Winston Hospitality,
Inc. for the three months ended March 31, 1997. The Winston
Hospitality financial information for the three months ended March
31, 1997 contained in the table above has been reclassified and
grouped according to the Lessee format in order to facilitate an
accurate comparison of the data.
The Lessee had room revenues of $22,573 in 1998, up $6,248 from
$16,325 in 1997. The increase in room revenues was due to an
increase in room revenues of (i) $490 for the 1994 Hotels, the
1995 Acquired Hotels and the 1996 Acquired Hotels, (ii) $5,102 for
the 1997 Acquired Hotels, and (iii) $656 for the 1998 Hotels.
Food and beverage revenue increased $277, to $901 in 1998 from
$624 in 1997, primarily due to the 1997 Acquired Hotels and 1998
Hotels. Telephone and other operating departments revenue
increased $428 to $1,170 in 1998 from $742 in 1997, primarily due
to an increase in revenue associated with long distance phone
calls and in-room movies.
The Lessee had total expenses in 1998 of $23,869, up $6,422 from
$17,447 in 1997. The increase, as shown above, in all expense
categories except depreciation and amortization expense, were
primarily attributable to the operation of a greater number of
hotels for the three months ended March 31, 1998 as compared with
the same period of 1997. Although administrative and general
expenses increased in 1998 from 1997, these expenses decreased as
a percentage of total revenue from 1997 to 1998 as a result of
efficiencies developed within the management company, making the
incremental cost per hotel less expensive. Depreciation and
amortization expense increased due to amortization being charged
in 1998 as a result of goodwill and other intangible assets
arising out of the purchase of Winston Hospitality, Inc. by CMC
and CapStar Hotel Company.
Liquidity and Capital Resources
The Company finances its operations from operating cash flow,
which is principally derived from Percentage Leases. For the
quarter ended March 31, 1998, cash flow provided by operating
activities was $4,993 and funds from operation, which is equal to
net income before minority interest plus depreciation, less
preferred dividends, was $6,098. Under Federal income tax law
provisions applicable to REITs, the Company is required to
distribute at least 95% of its taxable income to maintain its tax
status as a REIT. In the quarter ended March 31, 1998, the
Company declared distributions of $6,605 to its shareholders.
Because the Company's cash flow from operating activities is
expected to exceed its taxable income due to depreciation and
amortization expenses, the Company expects to be able to meet its
distribution requirements out of cash flow from operating
activities.
The Company's net cash used in investing activities for the three
months ended March 31, 1998 totaled $40,453, including $29,232
related to the acquisition of the 1998 Hotels, $2,877 for hotel
renovations and $7,141 for the development of six new extended-
stay hotels and one limited-service hotel, which are expected to
cost approximately $71,000. The total cost of the 1998 Hotels was
$40,898, including $11,666 related to the development of the
Homewood Suites hotel in Raleigh, N.C.
The Company plans to spend approximately $7,000 to renovate
certain of its Current Hotels during the next twelve months.
These expenditures are in addition to the reserve of 5% of room
revenues for its limited-service hotels and 7% of room revenues
and food and beverage revenues from its full-service hotels which
the Company is required to set aside under its Percentage Leases
for periodic capital improvements and the refurbishment and
replacement of furniture, fixtures and equipment at its Current
Hotels. In the three months ended March 31, 1998, the Company set
aside $1,190 for such reserves. These reserves are in addition to
amounts spent on normal repairs and maintenance which have
approximated 5.4% and 5.3% of room revenues for the three months
ended March 31, 1998 and 1997, respectively, and are paid by the
Lessee.
The Company's net cash provided by financing activities during the
quarter ended March 31, 1998 totaled $36,337, including an
increase of $42,800 in the line of credit borrowings and $485 of
net proceeds from the issuance of common stock related to the
exercise of stock options, offset by the payment of distributions
to shareholders of $6,478 and the payment of distributions to
minority interest holders of $470.
The Company has collateralized a portion of its $125,000 line of
credit with 28 of its Current Hotels amounting to $96,401 as of
March 31, 1998. This amount is calculated quarterly, and
increases if cash flow attributable to the collateral hotels
increases and/or the Company adds additional hotels as collateral.
The total additional, non-collateralized line availablity
accessible to the Company as of March 31, 1998 was $28,599. The
Company's Articles of Incorporation limit its total
<PAGE 18>
amount of indebtedness to 45% of the purchase prices paid by the
Company for its investments in hotel properties, as defined. As
of March 31, 1998, the Company had additional borrowing capacity
under the debt limitation of approximately $126,000 assuming it
invests all borrowings in additional hotels.
Under an arrangement with Promus Hotels, Inc. ("Promus") the
Company has an agreement to acquire a 123-suite Homewood Suites
hotel being developed by Promus in Richmond, Virginia. The Company
expects to acquire this hotel upon its completion, which Promus
estimates will occur during the second quarter of 1998, for a
purchase price approximating Promus' development cost, estimated
to be $8,600. Conditions to the Company's obligation to purchase
include its approval of the building specifications and Promus'
completion of construction within certain cost limitations and by
a specified delivery date. Pursuant to the arrangement, Promus
has agreed to invest $1,845 in the Company's Common Stock (at the
then-current market price per share), in connection with the
purchase of this hotel.
The Company intends to acquire and develop additional hotel
properties, including those described above, that meet its
investment criteria and is continually evaluating acquisition
opportunities. It is expected that future hotel acquisitions will
be financed, in whole or in part, from additional follow-on
offerings, from borrowings under the line of credit, from joint
venture agreements, and/or from the issuance of other debt or
equity securities. There can be no assurances that the Company
will acquire any additional hotels, or that any hotel development
will be undertaken, or if commenced, that it will be completed on
schedule or on budget. Further, there can be no assurances that
the Company will be able to obtain any additional financing.
Seasonality
The hotels' operations historically have been seasonal in nature,
reflecting higher REVPAR during the second and third quarters.
This seasonality and the structure of the Percentage Leases,
which provide for a higher percentage of room revenues above the
minimum equal quarterly levels to be paid as Percentage Rent, can
be expected to cause fluctuations in the Company's quarterly lease
revenue under the Percentage Leases.
Forward Looking Statements
This report contains certain "forward looking" statements within
the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended, including, but not limited to, those paragraphs
relating to development and acquisition of hotels in this section.
These statements represent the Company's judgment and are subject
to risks and uncertainties that could cause actual operating
results to differ materially from those expressed or implied in
the forward looking statements. Important factors that could
cause actual results to differ include, but are not limited to the
following (i) risk associated with the Company's acquisition of
hotels with little or no operating history, including the risk
that such hotels will not achieve the level of revenue assumed by
the Company in calculating the respective Percentage Rent formula;
(ii) development risk, including risk of construction delay, cost
overruns, receipt of zoning, occupancy and other required
governmental permits and authorizations and the incurrence of
development costs in connection with projects that are not pursued
through completion; and (iii) factors identified in the Company's
filings with the Securities and Exchange Commission, including the
factors listed in the Company's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on August 1,
1997.
<PAGE 19>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
quarter ended March 31, 1998.
<PAGE 20>
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.
WINSTON HOTELS, INC.
Date May 15, 1998 /s/ James D. Rosenberg
---------------------- ----------------------------
James D. Rosenberg
Chief Financial Officer and
Chief Operating Officer
(Authorized officer and Principal
Financial Officer)
<PAGE 21>
WINSTON HOTELS, INC.
FORM 10-Q for the quarter ended March 31, 1998
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -------- ----------------------
27. Financial Data Schedule (For SEC use only).