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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, 2001 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.)
2626 Glenwood Avenue
Raleigh, North Carolina 27608
(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 number of shares of Common Stock, $.01 par value, outstanding on
April 30, 2001 was 16,926,678.
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WINSTON HOTELS, INC.
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. WINSTON HOTELS, INC.
Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000 3
Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2000 4
Unaudited Consolidated Statement of Shareholders' Equity
for the three months ended March 31, 2001 5
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
CAPSTAR WINSTON COMPANY, L.L.C. (1)
Note to Financial Statements 10
Balance Sheets as of March 31, 2001 (unaudited) and
December 31, 2000 11
Unaudited Statements of Operations for the three months
ended March 31, 2001 and 2000 12
Unaudited Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
(1) The financial statements of CapStar Winston Company, L.L.C. ("CapStar
Winston") are included in this report as they contain material
information with respect to Winston Hotels, Inc.'s (the "Company")
investment in hotel properties. As of March 31, 2001, CapStar Winston
served as the lessee of 47 of the Company's 49 hotels. CapStar Winston
also leases an operating hotel co-owned 51% by Marsh Landing
Investment, L.L.C. and 49% by the Company. CapStar Winston is not
affiliated with the Company other than through its lessee relationship.
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WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)
March 31, 2001 December 31, 2000
-------------- -----------------
(unaudited)
ASSETS
Land $ 41,452 $ 41,948
Buildings and improvements 361,644 361,768
Furniture and equipment 41,437 40,539
--------- ---------
Operating properties 444,533 444,255
Less accumulated depreciation 82,746 77,609
--------- ---------
361,787 366,646
Properties under development 335 236
--------- ---------
Net investment in hotel properties 362,122 366,882
Corporate FF&E, net 1,229 1,285
Cash 210 167
Lease revenue receivable 8,800 7,127
Notes receivable 3,516 1,080
Investment in joint ventures 8,725 8,700
Deferred expenses, net 3,085 3,375
Prepaid expenses and other assets 5,502 5,694
--------- ---------
Total assets $ 393,189 $ 394,310
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 68,583 $ 68,872
Due to banks 108,300 103,800
Deferred percentage lease revenue 5,707 499
Accounts payable and accrued expenses 5,436 6,220
Distributions payable 6,838 6,829
Minority interest in Partnership 8,663 9,374
--------- ---------
Total liabilities 203,527 195,594
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,000,000 shares issued and outstanding (liquidation preference
of $76,734) 30 30
Common stock, $.01 par value, 50,000,000 shares authorized,
16,926,678 and 16,897,028 shares issued and outstanding 169 169
Additional paid-in capital 230,094 229,796
Unearned compensation (848) (771)
Accumulated other comprehensive income (loss) (1,104) --
Distributions in excess of earnings (38,679) (30,508)
--------- ---------
Total shareholders' equity 189,662 198,716
--------- ---------
Total liabilities and shareholders' equity $ 393,189 $ 394,310
========= =========
The accompanying notes are an integral part of the financial statements.
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WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Three Months
Ended Ended
March 31, 2001 March 31, 2000
-------------- --------------
Revenue:
Percentage lease revenue $ 9,695 $ 9,650
Interest, joint venture and other income 459 158
-------- --------
Total revenue 10,154 9,808
Expenses:
Real estate taxes and property and casualty insurance 1,977 2,083
General and administrative 1,391 1,136
Interest 3,219 3,270
Depreciation 5,291 5,261
Amortization 236 227
-------- --------
Total expenses 12,114 11,977
Loss before loss on sale of property, allocation to minority
interest, and cumulative effect of change in accounting
principle
(1,960) (2,169)
Loss on sale of property -- (262)
-------- --------
Loss before allocation to minority interest and
cumulative effect of change in accounting principle (1,960) (2,431)
Loss allocation to minority interest (263) (297)
-------- --------
Loss before cumulative effect of change in accounting
principle (1,697) (2,134)
-------- --------
Cumulative effect of change in accounting principle - gross -- (720)
Cumulative effect of change in accounting principle - allocation to
minority interest -- (52)
-------- --------
Cumulative effect of change in accounting principle - net -- (668)
-------- --------
Net loss (1,697) (2,802)
Preferred stock distribution (1,734) (1,734)
-------- --------
Net loss applicable to common shareholders $ (3,431) $ (4,536)
======== ========
Earnings per share:
Loss before cumulative effect of change in accounting
principle per common share $ (0.20) $ (0.23)
======== ========
Loss before cumulative effect of change in accounting
principle per common share assuming dilution $ (0.20) $ (0.23)
======== ========
Net loss per common share $ (0.20) $ (0.27)
======== ========
Net loss per common share assuming dilution $ (0.20) $ (0.27)
======== ========
Weighted average number of common shares 16,926 16,869
Weighted average number of common shares assuming dilution 18,225 18,168
The accompanying notes are an integral part of the financial statements.
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WINSTON HOTELS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 2001
(in thousands, except per share amounts)
Accumu-
Distri- Other lated
Addi- butions Compre- Total
Preferred Stock Common Stock tional in Excess hensive Share-
--------------- -------------- Paid-in Unearned of Income holders'
Shares Dollars Shares Dollars Capital Compensation Earnings (Loss) Equity
------ ------- ------ ------- -------- ------------ --------- ------- ---------
Balances at December 31, 2000 3,000 $ 30 16,897 $ 169 $229,796 $ (771) $(30,508) $ -- $ 198,716
Issuance of shares -- -- 30 -- 214 (214) -- -- --
Distributions ($0.28 per common share) -- -- -- -- -- -- (4,740) -- (4,740)
Distributions ($0.578 per preferred share) -- -- -- -- -- -- (1,734) -- (1,734)
Unearned compensation amortization -- -- -- -- -- 137 -- -- 137
Minority interest equity adjustment -- -- -- -- 84 -- -- -- 84
Comprehensive income (loss):
Net loss -- -- -- -- -- -- (1,697)
Cumulative effect of change in
accounting principle -- -- -- -- -- -- -- (245)
Effective portion of derivative
instruments -- -- -- -- -- -- -- (859)
Total comprehensive income (loss) -- -- -- -- -- -- -- -- (2,801)
------ ------- ------ ------- -------- ------------ --------- ------- ---------
Balances at March 31, 2001 3,000 $ 30 16,927 $ 169 $230,094 $ (848) $(38,679) $(1,104) $ 189,662
====== ======= ====== ======= ======== ============ ========= ======= =========
The accompanying notes are an integral part of the financial statements.
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WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Three Months
Ended Ended
March 31, 2001 March 31, 2000
-------------- --------------
Cash flows from operating activities:
Net loss $(1,697) (2,802)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest (263) (349)
Adjustment to market value of derivative instruments 17 --
Depreciation 5,291 5,261
Amortization 236 227
Loss on sale of hotel properties -- 262
Unearned compensation amortization 137 206
Changes in assets and liabilities:
Lease revenue receivable (1,673) (1,312)
Deferred lease revenue 5,208 5,983
Prepaid expenses and other assets 192 (562)
Accounts payable and accrued expenses (1,888) 282
------- -------
Net cash provided by operating activities 5,560 7,196
------- -------
Cash flows from investing activities:
Prepaid acquisition costs 65 --
Deferred disposition costs 8 (25)
Investment in hotel properties (983) (1,869)
Investment in joint ventures (25) 32
Sale of hotel properties 508 2,497
------- -------
Net cash provided by/(used in) investing activities (427) 635
------- -------
Cash flows from financing activities:
Issuance of mezzanine loans (2,436) --
Fees paid in connection with financing facilities (25) (34)
Purchase of interest rate swap agreement (11) --
Fees paid to register additional shares -- (32)
Payment of distributions to shareholders (6,465) (6,442)
Payment of distributions to minority interest (364) (364)
Net increase/(decrease) due to banks 4,500 (500)
Decrease in long-term debt (289) (268)
------- -------
Net cash used in financing activities (5,090) (7,640)
------- -------
Net increase in cash 43 191
Cash at beginning of period 167 28
------- -------
Cash at end of period $ 210 $ 219
======= =======
Supplemental disclosure:
Cash paid for interest $ 3,254 $ 2,048
======= =======
Summary of non-cash investing and financing activities:
Contribution of land parcel to joint venture $ -- $ 1,517
Distributions to shareholders declared but not paid 6,474 6,465
Distributions to minority interest declared but not paid 364 364
Deferred equity compensation 214 699
Fair market value adjustment of derivative instruments (1,104) --
Minority interest payable adjustment due to the issuance of common
shares and accumulated other comprehensive income (loss) (84) 34
The accompanying notes are an integral part of the financial statements.
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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 and the revenue recognition requirements of Staff
Accounting Bulletin No. 101, the information for the three months ended
March 31, 2001 and 2000 is not necessarily indicative of the results
for a full year. This Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31,
2000.
2. ADOPTION OF SFAS 133
Significant Accounting Policies: Derivative/Financial Instruments
In the normal course of business, the Company uses a variety of
derivative financial instruments to manage, or hedge, interest rate
risk. The Company requires that hedging derivative instruments are
effective in reducing the interest rate risk exposure that they are
designated to hedge. Instruments that meet these hedging criteria are
formally designated as hedges at the inception of the derivative
contract. When the terms of an underlying transaction are modified, or
when the underlying hedged item ceases to exist, all changes in the
fair value of the instrument are marked-to-market with changes in value
included in net income each period until the instrument matures. Any
derivative instrument used for risk management that does not meet the
hedging criteria is marked-to-market each period.
To determine the fair values of derivative instruments, the Company
uses a variety of methods and assumptions that are based on market
conditions and risks existing at each balance sheet date. For the
majority of financial instruments including most derivatives, long-term
investments and long-term debt, standard market conventions and
techniques such as discounted cash flow analysis, option pricing
models, replacement cost, and termination cost are used to determine
fair value. All methods of assessing fair value result in a general
approximation of value, and such value may never actually be realized.
Accounting Changes: Standards Implemented and Transition Adjustment
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments. Specifically, SFAS No.
133 requires an entity to recognize all derivatives as either assets or
liabilities on the balance sheet and to measure those instruments at
fair value. Additionally, the fair value adjustments will affect either
shareholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes and, if so, the
nature of the hedging activity.
As of January 1, 2001, the adoption of the new standard resulted in
derivative instruments reported on the Company's Consolidated Balance
Sheets of $1 in assets and $245 in liabilities; an adjustment of $245
to "Accumulated other comprehensive income (loss)," which are gains and
losses not affecting retained earnings in the Consolidated Statements
of Shareholders' Equity; and a loss of $17 recorded in "General and
administrative" expense in the Consolidated Statements of Operations.
Financial Instruments: Derivatives and Hedging
In the normal course of business, the Company is exposed to the effect
of interest rate changes. The Company limits these risks by following
established risk management policies and procedures including the use
of
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derivatives. Derivatives are used primarily to fix the rate on debt
based on floating-rate indices and manage the cost of borrowing
obligations.
The Company does not use derivatives for trading or speculative
purposes. Further, the Company has a policy of only entering into
contracts with major financial institutions based upon their credit
ratings and other factors. When viewed in conjunction with the
underlying and offsetting exposure that the derivatives are designed to
hedge, the Company has not sustained a material loss from those
instruments nor does it anticipate any material adverse effect on its
net income or financial position in the future from the use of
derivatives.
The Company's financing facilities consist of a $140,000 variable rate
line of credit and a $71,000 fixed rate loan with a ten-year maturity
and a twenty-five-year amortization period. To reduce overall interest
cost, the Company uses interest rate instruments, currently an interest
rate cap agreement and an interest rate swap agreement, to convert a
portion of its variable-rate debt to fixed-rate debt. Interest rate
differentials that arise under these agreements are recognized in
interest expense over the life of the contracts. The resulting cost of
funds is usually lower than that which would have been available if
debt with matching characteristics was issued directly.
The following table summarizes the notional values and fair values of
the Company's derivative financial instruments. The notional value at
March 31, 2001 provides an indication of the extent of the Company's
involvement in these instruments at that time, but does not represent
exposure to credit, interest rate or market risks.
Notional Interest
At March 31, 2001 Value Rate Maturity Fair Value
----------------- ----- ---- -------- ----------
Interest Rate Swap $ 50,000 5.915% 12/2002 $ (1,104)
Interest Rate Cap $ 25,000 7.500% 3/2002 --
The derivative financial instruments listed in the table above convert
variable payments to fixed payments and are, therefore, characterized
as cash flow hedges. Cash flow hedges address the risk associated with
future cash flows of debt transactions. On March 31, 2001, the
derivative instruments were reported at their fair values of $(1,104)
and included in "Accounts payable and accrued expenses" on the
Consolidated Balance Sheets. Offsetting adjustments are represented as
deferred gains or losses in "Accumulated other comprehensive income
(loss)".
Over time, the unrealized gains and losses held in "Accumulated other
comprehensive income (loss)" will be reclassified into earnings in the
same periods in which the hedged interest payments affect earnings.
Within the next twelve months, due to the projected differences between
the fixed interest rate under the Company's swap agreement and the
variable interest rate under the $140,000 line of credit, the Company
estimates that approximately $650 of the current balance held in
"Accumulated other comprehensive income (loss)" will be reclassified
into earnings.
3. SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES
During 1999 and 2000, the Company entered into three joint venture
agreements to develop and own hotel properties, two with Regent
Partners, Inc. and one with Marsh Landing Investment, L.L.C. The
Company owns a 49% interest in each of the three joint ventures. As of
March 31, 2001, the joint ventures had completed construction of a
Hilton Garden Inn in Windsor, CT and a Hampton Inn in Ponte Vedra, FL.
Both hotels are fully operating. A Hilton Garden Inn in Evanston, IL is
currently under construction and is scheduled to open in July, 2001.
As of March 31, 2001, total assets of the three joint ventures were
$37,220, total liabilities were $21,355, and total equity was $15,865.
For the quarter ended March 31, 2001, total revenue of the three joint
ventures was $625, total expenses were $705, resulting in a net loss of
$80. Per the requirements of Staff Accounting Bulletin No. 101, $140 of
total revenue was deferred in the first quarter of 2001, all of which
will be recognized in subsequent quarters during 2001.
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4. EARNINGS PER SHARE
The following is a reconciliation of the net loss applicable to common
shareholders used in the net loss per common share calculation to the
net loss assuming dilution used in the net loss per common share -
assuming dilution calculation.
Three Months
Ended March 31,
2001 2000
-------- --------
Net loss $ (1,697) $ (2,802)
Less: preferred stock distribution 1,734 1,734
-------- --------
Net loss applicable to common shareholders (3,431) (4,536)
Plus: loss allocation to minority interest (263) (297)
Plus: cumulative effect of change in accounting
principle - allocation to minority interest -- (52)
-------- --------
Net loss assuming dilution $ (3,694) $ (4,885)
======== ========
The following is a reconciliation of the weighted average shares used
in the calculation of net loss per common share to the weighted average
shares used in the calculation of net loss per common share - assuming
dilution:
Three Months
Ended March 31,
2001 2000
-------- --------
Weighted average number of common shares 16,926 16,869
Units with redemption rights 1,299 1,299
-------- --------
Weighted average number of common shares
assuming dilution 18,225 18,168
======== ========
During the quarter ended March 31, 2001, the Company declared quarterly
cash dividends of $0.28 per common share and $0.578125 per preferred
share.
5. SUBSEQUENT EVENT
On April 16, 2001, the Company entered into a contract to sell the
Comfort Inn hotel in Raleigh, NC. According to the terms of the
contract, the total sales price was $3,800, of which the Company
received a nonrefundable deposit of $500 and received a promissory note
for the remaining $3,300. The note accrues interest at an annual rate
of 10% for the first 90 days and 15% thereafter, payable monthly, and
the entire principal balance is due December 31, 2001. The Company will
record a loss on sale of property of $643 in the second quarter,
representing the difference between the sales price less selling costs
and the book value.
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CAPSTAR WINSTON COMPANY, L.L.C.
NOTE TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements are prepared by and are the sole
responsibility of CapStar Winston Company, L.L.C. ("CapStar Winston"). CapStar
Winston leased forty-seven of the Company's forty-nine hotels as of March 31,
2001 and one hotel co-owned 51% by Marsh Landing Investment, L.L.C. and 49% by
the Company. Other than this lessee relationship, CapStar Winston is not
affiliated with the Company. These financial statements reflect, in the opinion
of CapStar Winston's management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature. Certain reclassifications have been made to the
2000 financial statements to conform with the 2001 presentation. These
reclassifications have no effect on net income or members' capital previously
reported.
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CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
(in thousands)
ASSETS
March 31, 2001 December 31, 2000
-------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,256 $ 762
Accounts receivable, net of allowance for doubtful accounts of
$90 and $112 3,320 2,275
Due from affiliates 11,871 11,005
Deposits and other assets 768 1,114
------- -------
Total current assets 19,215 15,156
------- -------
Furniture, fixtures and equipment, net of accumulated depreciation of
$228 and $209 202 221
Intangible assets, net of accumulated amortization of $799 and $716 9,768 9,851
Deferred franchise costs, net of accumulated amortization of $192 and $178 484 498
Restricted cash 36 61
------- -------
Total assets $29,705 $25,787
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 2,006 $ 1,147
Accrued expenses 5,247 4,146
Percentage lease payable to Winston Hotels, Inc. 8,700 7,129
Advance deposits 457 178
------- -------
Total current liabilities 16,410 12,600
------- -------
Members' capital 13,295 13,187
------- -------
Total liabilities and members' capital $29,705 $25,787
======= =======
See accompanying note to financial statements.
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CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF OPERATIONS
(in thousands)
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
------------------ ------------------
Revenue:
Rooms $31,141 $ 30,797
Food and beverage 1,898 1,907
Telephone and other operating departments 1,485 1,592
------- --------
Total revenue 34,524 34,296
------- --------
Operating costs and expenses:
Rooms 7,151 7,149
Food and beverage 1,438 1,413
Telephone and other operating departments 850 892
Undistributed expenses:
Lease 14,190 13,980
Administrative and general 3,045 3,585
Sales and marketing 1,920 1,764
Franchise fees 2,243 2,182
Repairs and maintenance 1,635 1,595
Energy 1,492 1,429
Other 336 348
Depreciation and amortization 116 260
------- --------
Total expenses 34,416 34,597
------- --------
Net income (loss) $ 108 $ (301)
======= ========
See accompanying note to financial statements.
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CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
------------------ --------------------
Cash flows from operating activities:
Net income (loss) $ 108 $ (301)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 116 260
Write-off of deferred franchise costs -- 11
Changes in operating assets and liabilities:
Accounts receivable (1,045) (359)
Due from affiliates (866) (1,634)
Deposits and other assets 346 94
Restricted cash 25 (5)
Accounts payable and accrued expenses 1,960 2,113
Percentage lease payable to Winston Hotels, Inc. 1,571 1,220
Advance deposits 279 401
------- -------
Net cash provided by operating activities 2,494 1,800
------- -------
Net increase in cash and cash equivalents 2,494 1,800
Cash and cash equivalents at beginning of period 762 1,051
------- -------
Cash and cash equivalents at end of period $ 3,256 $ 2,851
======= =======
See accompanying note to financial statements.
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Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
($ in thousands)
Overview
Winston Hotels, Inc. (the "Company") operates as a real estate investment trust
("REIT") to invest in hotel properties. The Company owned 49 hotels (the
"Current Hotels") in 12 states with an aggregate of 6,723 rooms as of March 31,
2001. The Company owned 38 hotels as of December 31, 1997, acquired eight hotels
and opened five internally developed hotels in 1998 (the "1998 Hotels"), and
sold two hotels in 2000. The Company currently leases 47 of the total 49 Current
Hotels to CapStar Winston Company, L.L.C. ("CapStar Winston"), one of the
Current Hotels to Bristol Hotel Tenant Company, a wholly owned subsidiary of
Bass PLC of London ("Bass") and one of the Current Hotels to Secaucus Holding
Corporation, a wholly owned subsidiary of Prime Hospitality Corp. ("Prime")
under leases that provide for rent payments based, in part, on revenues from the
Current Hotels ("Percentage Leases") through which the Company receives its
principal source of revenue.
The Company also owns a 49% ownership interest in three joint ventures, two of
which each own an operating hotel and a third which owns a hotel under
development and expected to open in July 2001, collectively (the "Joint Venture
Hotels"). The Joint Venture Hotels consist of a Hilton Garden Inn located in
Windsor, CT, a Hampton Inn located in Ponte Vedra, FL and a Hilton Garden Inn,
currently under construction, located in Evanston, IL. Additionally, the Company
has provided mezzanine financing to two unrelated parties for two other hotels
in which the Company has no ownership interest. These hotels include a Hilton
Garden Inn located in Atlanta, GA which opened in April 2001, and a Hilton
Garden Inn located in Tampa, FL which is under construction and scheduled to
open in May 2002.
Results of Operations
The Company adopted Staff Accounting Bulletin No. 101 ("SAB 101") on January 1,
2000. SAB 101 requires that a lessor not recognize contingent rental income
until annual specified hurdles have been achieved by the lessee. SAB 101
effectively defers percentage lease revenue from first and second quarters to
the third and fourth quarters. The Company's deferred percentage lease revenue
totaled $5,208 for the first quarter of 2001 versus $5,269 for the first quarter
of 2000. Had the Company not adopted SAB 101, the Company would have reported
percentage lease revenue totaling $14,903 during the first quarter of 2001
versus $14,919 during the first quarter of 2000. SAB 101 will have no impact on
the Company's Funds From Operations ("FFO"), or its interim or annual cash flow
from its third party lessees, and therefore, on its ability to pay dividends.
The following table outlines the number of hotels owned by the Company by
service type as of March 31, 2001 and 2000.
March 31, March 31,
Type of Hotel 2001 2000
------------- --------- ---------
Limited-service hotels 29 30
Extended-stay hotels 9 9
Full-service hotels 11 11
--------- ---------
Total 49 50
========= =========
The Company
Actual - Three Months Ended March 31, 2001 vs. Actual - Three Months Ended
March 31, 2000
- --------------------------------------------------------------------------
The Company had revenue of $10,154 in the three months ended March 31, 2001,
consisting of $9,695 of percentage lease revenue and $459 of interest, joint
venture and other income. Percentage lease revenue increased $45 to $9,695 in
2001 from $9,650 in 2000. The Company's deferred lease revenue for the three
months ended March 31, 2001 and March 31, 2000 were $5,208 and $5,269,
respectively. Had the Company not adopted SAB 101 on January 1, 2000, lease
revenue for the three months ended March 31, 2001 would have been $14,903 versus
$14,919 for the three months ended March 31,
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2000. This slight decrease was primarily due to revenue losses from the sale of
the Comfort Suites hotel in London, KY in February 2000, a 28-day February in
2001 versus a 29-day February in 2000, offset by increases in percentage lease
revenues from the Current Hotels. This increase in percentage lease revenue
consists of $143 from the 1998 Hotels due to an increase in average daily rate,
offset by a decrease of $28 from hotels owned prior to 1998 due to a decrease in
occupancy. Interest, joint venture and other income increased $301 from $158 in
2000 to $459 in 2001. This increase was primarily due to increases in fees
earned from third party development services and interest income from mezzanine
loans.
Real estate taxes and property insurance costs incurred in 2001 were $1,977, a
decrease of $106 from $2,083 in 2000. This decrease was primarily attributable
to an over estimation of increases in assessed values and rates for 1999.
General and administrative expenses increased $255 to $1,391 in 2001 from $1,136
in 2000. This increase was primarily attributable to increases in new business
development expenses and payroll expenses. Interest expense decreased $51 to
$3,219 in 2001 from $3,270 in 2000. This decrease was primarily due to a
decrease of 0.13% in the Company's weighted average interest rate from 7.44% in
2000 to 7.31% in 2001. Weighted average outstanding borrowings increased
slightly from $174,526 in 2000 to $175,329 in 2001. Depreciation expense and
amortization expense remain flat from $5,261 and $227, respectively, in 2000 to
$5,291 and $236, respectively, in 2001.
CapStar Winston
Actual - Three Months Ended March 31, 2001 vs. Actual - Three Months Ended
March 31, 2000
- ---------------------------------------------------------------------------
CapStar Winston had room revenue of $31,141 in 2001, an increase of $344 from
$30,797 in 2000. The increase in room revenue was due to an increase in the
average daily rate to $81.64 from $75.76, partially offset by a decrease in
occupancy rates from 67.8% to 64.7%. Food and beverage revenue decreased $9 to
$1,898 from $1,907. Telephone and other operating departments revenue decreased
$107 to $1,485 from $1,592 due to a decrease in revenue from long distance
calls.
CapStar Winston had total expenses in 2001 of $34,416, a decrease of $181 from
$34,597 in 2000. The decrease was due to a decline in administrative and general
expenses as a result of lower costs relating to payroll and legal and
professional fees.
Liquidity and Capital Resources
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the three months ended March 31,
2001, cash flow provided by operating activities was $5,560 and funds from
operations, which is equal to net income before allocation to minority interest
(excluding gains/losses on sales of operating property), plus adjustments for
unconsolidated joint ventures, plus depreciation, less preferred share
distributions, plus the change in deferred revenue resulting from SAB 101, was
$6,991. Under federal income tax law provisions applicable to REITs, the Company
is required to distribute at least 90% of its taxable income to maintain its tax
status as a REIT. During the first quarter of 2001, the Company declared
distributions of $6,474 to its common and preferred shareholders. The Company
intends to fund cash distributions to shareholders out of cash flow from
operating activities. The Company may incur, or cause the Partnership to incur,
indebtedness to meet distribution requirements imposed on the Company under the
Internal Revenue Code (including the requirement that a REIT distribute to its
shareholders annually at least 90% of its taxable income) to the extent that
available capital and cash flow from the Company's investments are insufficient
to make such distributions.
The Company's net cash used in investing activities for the three months ended
March 31, 2001 totaled $427. Capital additions at the Current Hotels totaled
$983, offset by the sale of vacant land totaling $508. The Company plans to
spend approximately $7,087 to renovate certain of its Current Hotels during the
next nine months. These expenditures exceed the 5% of room revenues for its
hotels (7% of room revenues and food and beverage revenues for one of its
full-service hotels) which the Company is required to spend under its Percentage
Leases for periodic capital improvements and the refurbishment and replacement
of furniture, fixtures and equipment at its Current Hotels. These capital
expenditures are funded from operating cash flow, and possibly from borrowings
under the Company's $140,000 line of credit, sources which are expected to be
adequate to fund such capital requirements. These capital expenditures are in
addition to amounts spent on normal repairs and maintenance which have
approximated 4.6% and 4.7% of room revenues for each of the three months ended
March 31, 2001 and 2000, respectively, and are paid by the Company's lessees:
CapStar Winston, Prime and Bass.
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During 1999, the Company entered into a joint venture agreement with Regent
Partners, Inc., (the "Regent Joint Venture") to jointly develop hotel
properties. As of March 31, 2001, the Company had invested $7,101 in the Regent
Joint Venture. The first hotel developed by the Regent Joint Venture, a full
service 158-room Hilton Garden Inn in Windsor, CT, opened in September 2000. The
second hotel to be developed by the Regent Joint Venture, a full service
178-room Hilton Garden Inn in Evanston, IL, is scheduled to open in July 2001.
In addition, during the first quarter of 2000, the Company entered into a joint
venture agreement with Marsh Landing Investment, L.L.C., (the "Marsh Landing
Joint Venture") to jointly develop hotel properties. As of March 31, 2001, the
Company had invested $1,624 in the Marsh Landing Joint Venture. This is the
Company's first development project under an arms length joint venture agreement
with Marsh Landing Investment, L.L.C., headed by the Company's Chairman, Charles
M. Winston, and Board Member, James H. Winston. The first hotel to be developed
by the Marsh Landing Joint Venture, a 118-room Hampton Inn in Ponte Vedra, FL,
opened in December 2000.
As of March 31, 2001, total assets of the three joint ventures were $37,220,
total liabilities were $21,355, and total equity was $15,865. For the quarter
ended March 31, 2001, total revenue of the three joint ventures was $625, total
expenses were $705, resulting in a net loss of $80. Per the requirements of SAB
101, $140 of total revenue was deferred in the first quarter of 2001, all of
which will be recognized in subsequent quarters during 2001.
The Company holds a 49 percent ownership interest in all three joint venture
projects. Under the terms of each joint venture, in addition to receiving fees
for its services which will include development fees, purchasing fees, and
ongoing asset management fees once each hotel opens, the Company shares 49% of
the percentage lease revenue generated from the two hotels that are in full
operation. The Company also receives cash distributions of the Joint Venture's
operating profits on a quarterly basis. The Company continues to seek additional
joint venture opportunities.
On July 5, 2000, the Company entered into a strategic alliance with Noble
Investment Group, Ltd. ("Noble") to partially finance and develop two Hilton
Garden Inn hotels in Atlanta, GA and Tampa, FL and to explore other similar
upscale Hilton and Marriott opportunities. In July 2000, the Company provided a
$1,080 mezzanine loan for the 122-room Hilton Garden Inn in Atlanta and in
February 2001 provided a $2,186 mezzanine loan for the 150-room Hilton Garden
Inn in Tampa. The Company currently receives interest income from these
mezzanine loans. Noble is responsible for providing the remainder of the funding
and will own and operate the hotels. The Atlanta project opened in April 2001
and the Tampa project is under construction and scheduled to open in May 2002.
In connection with the alliance, the Company co-developed the Atlanta project
with Noble, is providing all development services for the Tampa project, and
accordingly receives fees for its development services. The Company continues to
seek additional mezzanine financing opportunities.
The Company's net cash used in financing activities during the quarter ended
March 31, 2001 totaled $5,090. This amount included payment of distributions to
shareholders of $6,465 and the payment of distributions to the Partnership's
minority interest of $364, long-term debt payments of $289, and a payment of
fees related to purchasing the interest rate swap of $11. The Company also
issued mezzanine loans totaling $2,436 during the quarter ended March 31, 2001.
These financing activities were partially funded by borrowings under the
Company's $140,000 line of credit (the "Line"), increasing the outstanding
balance from $103,800 at December 31, 2000 to $108,300 at March 31, 2001.
The Line is collateralized with 28 of the Company's Current Hotels. The Line
bears interest generally at rates from LIBOR plus 1.45% to LIBOR plus 1.70%,
based primarily upon the Company's level of total indebtedness. The Company's
current rate is LIBOR plus 1.45%.
Pursuant to the requirements of the Line, which in effect require the Company to
have at least 50% of its total indebtedness subject to a fixed rate of debt, the
Company entered into an interest rate cap agreement in March 1999. The interest
rate cap agreement eliminates the exposure to increases in 30-day LIBOR over
7.50% on $25,000 of the outstanding balances under the Line for the period March
25, 1999 through March 25, 2002.
On December 18, 2000, the Company completed an interest rate swap on $50,000 of
its outstanding variable rate debt under the Line. This transaction effectively
replaced the Company's variable interest rate based on 30-day LIBOR on $50,000
of outstanding debt under the Line with a fixed interest rate of 5.915% until
December 18, 2002. The Line's interest rate spread is currently 1.45%, equaling
a fixed rate of 7.365% on $50,000 until December 18, 2002.
The Company had $68,583 in long-term debt at March 31, 2001 that was subject to
a fixed interest rate and principal payments. This debt is comprised of a
10-year loan with a 25-year amortization period with GE Capital Corporation,
which carries an interest rate of 7.375%. This debt facility is collateralized
with 14 of the Company's Current Hotels.
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The Company intends to continue to seek additional mezzanine loan opportunities
and to acquire and develop additional hotel properties that meet its investment
criteria and is continually evaluating such opportunities. It is expected that
future mezzanine loans and hotel acquisitions will be financed, in whole or in
part, from additional follow-on offerings, from borrowings under the Line, from
joint venture agreements, from the net sale proceeds of hotel properties and/or
from the issuance of other debt or equity securities. There can be no assurances
that the Company will make any further mezzanine loans or any investment in
additional hotel properties, 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 revenue per available room 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 quarterly levels to be paid
as Percentage Rent, and the revenue recognition provisions of SAB 101, can be
expected to cause fluctuations in the Company's quarterly lease revenue under
the Percentage Leases.
Funds From Operations
The Company considers Funds From Operations ("FFO") a widely used and
appropriate measure of performance for an equity REIT. FFO, as defined by the
National Association of Real Estate Investment Trusts, is income (loss) before
minority interest (determined in accordance with generally accepted accounting
principles), excluding extraordinary items and gains (losses) from sales of
operating properties, plus real estate-related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. The
Company further adjusts FFO by subtracting preferred share distributions and
adding the change in deferred revenue during the period to eliminate the impact
of Staff Accounting Bulletin No. 101. The calculation of FFO may vary from
entity to entity and as such the presentation of FFO by the Company may not be
comparable to other similarly titled measures of other reporting companies. FFO
is not intended to represent cash flows for the period. FFO has not been
presented as an alternative to operating income, but as an indicator of
operating performance, and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
The following presents the Company's calculation of FFO and FFO per share (in
thousands, except per share data):
Three Months Ended March 31,
----------------------------
2001 2000
---- ----
Loss before allocation to minority interest
and cumulative effect of change in
accounting principle $ (1,960) $ (2,431)
Plus: depreciation 5,291 5,261
Plus: depreciation of joint venture properties 117 --
Plus: loss on sale of property -- 262
Plus: deferred percentage lease revenue 5,208 5,263
Plus: deferred percentage lease revenue of joint
venture properties 69 --
Less: preferred stock dividends (1,734) (1,734)
--------- ---------
FFO $ 6,991 $ 6,621
========= =========
Forward Looking Statements
This report contains certain "forward looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. You can identify these statements
by use of words like "may," "will," "expect," "anticipate," "estimate," or
"continue" or similar expressions. 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, including but not limited to the following risks:
properties held for sale will not sell, financing risks, development risks
including the risks of construction delays and cost overruns, lower than
expected occupancy and average daily rates, non-issuance or delay of issuance of
governmental permits, zoning restrictions, the increase of development costs in
connection with projects that are not pursued to completion and non-payment
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of mezzanine loans. From time to time, these and additional risks are discussed
in the Company's filings with the Securities and Exchange Commission, including
but not limited to its Form S-3 Registration Statements, and its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q and its other periodic reports.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
($ in thousands)
As of March 31, 2001, the Company's exposure to market risk for a change in
interest rates related solely to debt outstanding under its $140,000 line of
credit (the "Line"). Debt outstanding under the Line totaled $108,300 at March
31, 2001. The Line, which expires in January 2002, bears interest generally at
rates from 30-day LIBOR plus 1.45% to 30-day LIBOR plus 1.70%, based, in part,
on the Company's level of total indebtedness. The Company's current interest
rate is 30-day LIBOR plus 1.45%. During 1999, the Company entered into an
interest rate cap agreement to eliminate the exposure to increases in 30-day
LIBOR over 7.50%, and therefore from its exposure to interest rate increases
over 8.95% under the Line on a principal balance of $25,000 for the period of
March 23, 1999 through March 25, 2002. In addition, on December 18, 2000, the
Company completed an interest rate swap on $50,000 of its outstanding variable
rate debt under the Line. The agreement is a contract to exchange floating rate
interest payments for fixed interest payments periodically over the life of the
agreement without the exchange of the underlying notional amounts. This
transaction effectively replaces the Company's variable interest rate based on
30-day LIBOR on $50,000 of the Line with a fixed interest rate of 5.915% until
December 18, 2002. The Line's interest rate spread is currently 1.45%, equating
to an effective fixed rate of 7.365% on $50,000 until December 18, 2002. The
differential actually paid or received on interest rate agreements is recognized
as an adjustment to interest expense over the life of the swap. The weighted
average interest rate on the Line for the three months ended March 31, 2001 was
7.31%. At March 31, 2001, the Company had $58,300 of variable rate debt
outstanding under the Line that was exposed to fluctuations in the market rate
of interest.
The definitive extent of the Company's interest rate risk under the Line is not
quantifiable or predictable because of the variability of future interest rates
and business financing requirements. If interest rates increased by 100 basis
points, the Company's first quarter interest expense would have increased by
approximately $144, based on the amount of variable rate debt outstanding and
exposed to fluctuations in the market rate of interest at March 31, 2001. The
Company does not enter into derivative or interest rate transactions for
speculative purposes.
The following table presents the aggregate maturities and historical cost
amounts of the Company's GE Capital Corporation fixed rate debt principal and
interest rates by maturity dates at March 31, 2001:
Maturity Date Fixed Rate Debt Interest Rate
------------- --------------- -------------
2001 $ 898 7.375%
2002 1,278 7.375%
2003 1,376 7.375%
2004 1,480 7.375%
2005 1,594 7.375%
Thereafter 61,957 7.375%
--------------- -------------
$ 68,583 7.375%
=============== =============
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - none.
(b) Report on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
March 31, 2001.
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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, 2001 /s/ Joseph V. Green
------------------ ----------------------------------------------------
Joseph V. Green
Executive Vice President and Chief Financial Officer
(Authorized officer and Principal Financial Officer)
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