- --------------------------------------------------------------------------------
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, 2002 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, $.01 par value, outstanding on
April 30, 2002 was 20,120,034.
- --------------------------------------------------------------------------------
WINSTON HOTELS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WINSTON HOTELS, INC.
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001 3
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001 4
Unaudited Consolidated Statement of Shareholders' Equity for the three months ended
March 31, 2002 5
Unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
CAPSTAR WINSTON COMPANY, L.L.C. (1)
Note to Financial Statements 9
Balance Sheets as of March 31, 2002 (unaudited) and December 31, 2001 10
Unaudited Statements of Operations for the three months ended
March 31, 2002 and 2001 11
Unaudited Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
(1) The financial statements of CapStar Winston Company, L.L.C.
("CapStar Winston") are included in this report as they
contain material information with respect to Winston Hotels,
Inc.'s (the "Company") investment in hotel properties. As of
March 31, 2002, CapStar Winston served as the lessee of 46 of
the Company's 48 hotels. CapStar Winston also leases one
operating hotel co-owned 51% by Marsh Landing Investment,
L.L.C. and 49% by the Company, and another operating hotel
co-owned 51% by Regent Partners, Inc. and 49% by the Company.
CapStar Winston is not affiliated with the Company other than
through its lessee relationship.
2
WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited)
Land $ 41,129 $ 41,114
Buildings and improvements 359,293 359,024
Furniture and equipment 44,769 44,376
---------- ----------
Operating properties 445,191 444,514
Less accumulated depreciation 101,306 96,343
---------- ----------
343,885 348,171
Properties under development 1,800 1,916
---------- ----------
Net investment in hotel properties 345,685 350,087
Corporate FF&E, net 952 1,033
Cash 156 887
Lease revenue receivable 6,407 4,786
Notes receivable 3,266 3,516
Investment in joint ventures 8,067 8,173
Deferred expenses, net 3,277 3,405
Prepaid expenses and other assets 5,395 5,017
---------- ----------
Total assets $ 373,205 $ 376,904
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 67,374 $ 67,684
Due to banks 81,500 102,900
Deferred percentage lease revenue 3,911 1,226
Accounts payable and accrued expenses 5,178 8,175
Distributions payable 4,885 4,468
Minority interest in Partnership 8,260 8,246
---------- ----------
Total liabilities 171,108 192,699
---------- ----------
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,
19,707,534 and 16,924,533 shares issued and outstanding 197 169
Additional paid-in capital 253,311 230,109
Unearned compensation (659) (542)
Accumulated other comprehensive income (loss) (1,281) (1,844)
Distributions in excess of earnings (49,501) (43,717)
---------- ----------
Total shareholders' equity 202,097 184,205
---------- ----------
Total liabilities and shareholders' equity $ 373,205 $ 376,904
========== ==========
The accompanying notes are an integral part of the financial statements.
3
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Three Months
Ended Ended
March 31, 2002 March 31, 2001
-------------- --------------
Revenue:
Percentage lease revenue $ 9,863 $ 9,695
Interest, joint venture and other income 359 459
--------- ---------
Total revenue 10,222 10,154
Expenses:
Real estate taxes and property and casualty insurance 1,886 1,977
General and administrative 1,555 1,391
Interest 2,832 3,219
Depreciation 5,048 5,291
Amortization 199 236
--------- ---------
Total expenses 11,520 12,114
Loss before allocation to minority interest (1,298) (1,960)
Loss allocation to minority interest (204) (263)
--------- ---------
Net loss (1,094) (1,697)
Preferred stock distribution (1,734) (1,734)
--------- ---------
Net loss applicable to common shareholders $ (2,828) $ (3,431)
========= =========
Earnings per share:
Net loss per common share $ (0.16) $ (0.20)
========= =========
Net loss per common share assuming dilution $ (0.16) $ (0.20)
========= =========
Weighted average number of common shares 17,171 16,926
Weighted average number of common shares assuming dilution 18,470 18,225
The accompanying notes are an integral part of the financial statements.
4
WINSTON HOTELS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ---------------------- PAID-IN
SHARES DOLLARS SHARES DOLLARS CAPITAL
------ ------- ------- ------- ----------
Balances at December 31, 2001 3,000 $30 16,925 $169 $ 230,109
Issuance of shares -- -- 2,783 28 23,615
Distributions ($0.15 per common share) -- -- -- -- --
Distributions ($0.578 per preferred share) -- -- -- -- --
Unearned compensation amortization -- -- -- -- --
Minority interest equity adjustment -- -- -- -- (413)
Comprehensive income (loss):
Net loss -- -- -- -- --
Effective portion of derivative instruments -- -- -- -- --
Total comprehensive income (loss) -- -- -- -- --
----- --- ------ ---- ---------
Balances at March 31, 2002 3,000 $30 19,708 $197 $ 253,311
===== === ====== ==== =========
ACCUMULATED
DISTRIBUTIONS OTHER TOTAL
UNEARNED IN EXCESS OF COMPREHENSIVE SHAREHOLDERS'
COMPENSATION EARNINGS INCOME (LOSS) EQUITY
------------ ------------- ------------- -------------
Balances at December 31, 2001 $(542) $(43,717) $(1,844) $ 184,205
Issuance of shares (255) -- -- 23,388
Distributions ($0.15 per common share) -- (2,956) -- (2,956)
Distributions ($0.578 per preferred share) -- (1,734) -- (1,734)
Unearned compensation amortization 138 -- -- 138
Minority interest equity adjustment -- -- -- (413)
Comprehensive income (loss):
Net loss -- (1,094) --
Effective portion of derivative instruments -- -- 563
Total comprehensive income (loss) -- -- -- (531)
----- -------- ------- ---------
Balances at March 31, 2002 $(659) $(49,501) $(1,281) $ 202,097
===== ======== ======= =========
The accompanying notes are an integral part of the financial statements.
5
WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Three Months
Ended Ended
March 31, 2002 March 31, 2001
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,094) $ (1,697)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Minority interest (204) (263)
Adjustment to market value of derivative instruments -- 17
Depreciation 5,048 5,291
Amortization 199 236
Mezzanine loan reserve 250 --
Unearned compensation amortization 138 137
Changes in assets and liabilities:
Lease revenue receivable (1,621) (1,673)
Deferred lease revenue 2,685 5,208
Prepaid expenses and other assets (378) 192
Accounts payable and accrued expenses (2,434) (1,888)
--------- ---------
Net cash provided by operating activities 2,589 5,560
--------- ---------
Cash flows from investing activities:
Prepaid acquisition costs -- 65
Deferred disposition costs -- 8
Investment in hotel properties (565) (983)
Investment in joint ventures (4) (25)
Distributions from joint ventures 110 --
Sale of hotel properties -- 508
--------- ---------
Net cash used in investing activities (459) (427)
--------- ---------
Cash flows from financing activities:
Issuance of mezzanine loans -- (2,436)
Proceeds from issuance of common shares 23,388 --
Fees paid in connection with financing facilities (71) (25)
Purchase of interest rate swap agreement -- (11)
Payment of distributions to shareholders (4,273) (6,465)
Payment of distributions to minority interest (195) (364)
Net increase/(decrease) due to banks (21,400) 4,500
Decrease in long-term debt (310) (289)
--------- ---------
Net cash used in financing activities (2,861) (5,090)
--------- ---------
Net increase (decrease) in cash (731) 43
Cash at beginning of period 887 167
--------- ---------
Cash at end of period $ 156 $ 210
========= =========
Supplemental disclosure:
Cash paid for interest $ 2,756 $ 3,254
========= =========
Summary of non-cash investing and financing activities:
Distributions to shareholders declared but not paid $ 4,690 $ 6,474
Distributions to minority interest declared but not paid 195 364
Deferred equity compensation 255 214
Fair market value adjustment of derivative instruments 563 (1,104)
Minority interest adjustments due to the issuance of common
shares and other comprehensive income (loss) (413) (84)
The accompanying notes are an integral part of the financial statements.
6
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, 2002 and 2001 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,
2001.
The Company's Form 10-K and financial statements include descriptions
of the Company's significant and critical accounting policies,
including policies for revenue recognition, joint ventures, impairment
of long-lived assets, and derivative instruments.
2. DERIVATIVE INSTRUMENTS
The Company's financing facilities consist of a $125,000 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 swap agreement, to convert a portion of its variable-rate debt to
fixed-rate debt. Interest rate differentials that arise under these
instruments are recognized in interest expense over the life of the
contracts.
The following table summarizes the notional values and fair values of
the Company's derivative financial instruments. The notional value at
March 31, 2002 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, 2002 VALUE RATE MATURITY FAIR VALUE
------------------ -------- -------- -------- ----------
Interest Rate Swap $ 50,000 5.915% 12/2002 $ (1,281)
The derivative financial instrument listed in the table above converts
variable payments to fixed payments and is, therefore, characterized as
a cash flow hedge. Cash flow hedges address the risk associated with
future cash flows of debt transactions. On March 31, 2002, the
derivative instrument was reported at its fair value of $(1,281) 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)" would be reclassified into earnings in the
same periods in which the hedged interest payments affect earnings.
Since the Company's swap agreement matures in December 2002, within the
next nine months, due to the projected differences between the fixed
interest rate under the Company's swap agreement and the variable
interest rate under the $125,000 line of credit, all of the current
$(1,281) balance held in "Accumulated other comprehensive income
(loss)" will be reclassified into earnings.
3. SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES
The Company participates in 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, 2002, the joint
ventures each owned an operating hotel including a Hilton Garden Inn in
Windsor, CT, a Hampton Inn in Ponte Vedra, FL and a Hilton Garden Inn
in Evanston, IL.
7
As of March 31, 2002, total assets of the three joint ventures were
$44,997, total liabilities were $27,838, and total equity was $17,159.
For the three months ended March 31, 2002 and 2001, total revenue of
the three joint ventures was $927 and $625, respectively, total
expenses were $918 and $705, respectively, resulting in net income
(loss) of $9 and $(80), respectively. Per the requirements of SAB 101,
$324 of total revenue was deferred during the three months ended March
31, 2002, all of which will be recognized during 2002. During the three
months ended March 31, 2001, $140 of total revenue was deferred, all of
which was recognized during 2001.
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,
2002 2001
--------- ---------
Net loss $ (1,094) $ (1,697)
Less: preferred stock distribution 1,734 1,734
--------- ---------
Net loss applicable to common shareholders (2,828) (3,431)
Plus: loss allocation to minority interest (204) (263)
--------- ---------
Net loss assuming dilution $ (3,032) $ (3,694)
========= =========
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,
2002 2001
-------- --------
Weighted average number of common shares 17,171 16,926
Minority interest units with redemption rights 1,299 1,299
-------- --------
Weighted average number of common shares
assuming dilution 18,470 18,225
======== ========
During the quarter ended March 31, 2002, the Company declared quarterly
cash dividends of $0.15 per common share and $0.578125 per preferred
share.
5. COMMON STOCK OFFERING
On March 25, 2002, the Company completed a Common Stock offering,
selling 2,750 shares, which generated cash proceeds totaling $23,388.
In addition, on April 2, 2002, the Company sold an additional 413
Common Shares generating cash proceeds of $3,508. The Company used the
proceeds to reduce its outstanding debt balance under its $125 million
line of credit.
6. SUBSEQUENT EVENT
The Company's Comfort Inn hotel located in Clearwater, FL is currently
under contract to sell for total cash proceeds of $3,400. Upon sale,
which is expected to occur during the second quarter of 2002, the
Company will recognize a loss of approximately $800, representing the
difference between the sales price less selling costs and the net book
value. It is the Company's policy to obtain approval from its Board of
Directors for asset sales, at which time gains and losses are
recognized.
The net earnings for the Clearwater Comfort Inn hotel for the quarters
ended March 31, 2002 and 2001 were $55 and $153, respectively.
8
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-six of the Company's forty-eight hotels as of March 31,
2002, another operating hotel co-owned 51% by Marsh Landing Investment, L.L.C.
and 49% by the Company, and another operating hotel co-owned 51% by Regent
Partners, Inc. 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.
9
CAPSTAR WINSTON COMPANY, L.L.C.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,157 $ 971
Accounts receivable, net of allowance for doubtful accounts of
$58 and $69 2,840 2,076
Due from affiliates 13,674 12,836
Deposits and other assets 714 842
-------- --------
Total current assets 20,385 16,725
-------- --------
Furniture, fixtures and equipment, net of accumulated depreciation of
$308 and $288 131 142
Intangible assets, net of accumulated amortization of $1,100 and $1,045 9,467 9,522
Deferred franchise costs, net of accumulated amortization of $225 and $213 413 425
Restricted cash 38 37
-------- --------
Total assets $ 30,434 $ 26,851
======== ========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 1,236 $ 1,001
Accrued expenses 6,044 5,066
Percentage lease payable to Winston Hotels, Inc. 6,573 4,829
Advance deposits 570 248
-------- --------
Total current liabilities 14,423 11,144
-------- --------
Members' capital 16,011 15,707
-------- --------
Total liabilities and members' capital $ 30,434 $ 26,851
======== ========
See accompanying note to financial statements.
10
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
------------------ ------------------
Revenue:
Rooms $ 28,591 $ 31,141
Food and beverage 1,770 1,898
Telephone and other operating departments 1,248 1,485
-------- --------
Total revenue 31,609 34,524
-------- --------
Operating costs and expenses:
Rooms 6,506 7,151
Food and beverage 1,318 1,438
Telephone and other operating departments 789 850
Undistributed expenses:
Lease 12,559 14,190
Administrative and general 2,911 3,045
Sales and marketing 1,861 1,920
Franchise fees 2,053 2,243
Repairs and maintenance 1,542 1,635
Energy 1,334 1,492
Other 345 336
Depreciation and amortization 87 116
-------- --------
Total expenses 31,305 34,416
-------- --------
Net income $ 304 $ 108
======== ========
See accompanying note to financial statements.
11
CAPSTAR WINSTON COMPANY, L.L.C.
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 304 $ 108
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 87 116
Changes in operating assets and liabilities:
Accounts receivable (764) (1,045)
Due from affiliates (838) (866)
Deposits and other assets 128 346
Restricted cash (1) 25
Accounts payable and accrued expenses 1,213 1,960
Percentage lease payable to Winston Hotels, Inc. 1,744 1,571
Advance deposits 322 279
-------- --------
Net cash provided by operating activities 2,195 2,494
-------- --------
Cash flows from investing activities:
Additions of furniture, fixtures and equipment (9) --
-------- --------
Net cash used in investing activities (9) --
-------- --------
Net increase in cash and cash equivalents 2,186 2,494
Cash and cash equivalents at beginning of period 971 762
-------- --------
Cash and cash equivalents at end of period $ 3,157 $ 3,256
======== ========
See accompanying note to financial statements.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ IN THOUSANDS)
OVERVIEW
Winston Hotels, Inc. (the "Company") operates so as to qualify for federal
income tax purposes as a real estate investment trust ("REIT") to invest in
hotel properties. The Company owned 48 hotels (the "Current Hotels") in 12
states with an aggregate of 6,574 rooms as of March 31, 2002. The Company
currently leases 46 of the total 48 Current Hotels to CapStar Winston Company,
L.L.C. ("CapStar Winston"), a wholly owned subsidiary of MeriStar Hotels and
Resorts, Inc., one of the Current Hotels to Bristol W. Tenant Company, a wholly
owned subsidiary of Six Continents Hotels, Inc. ("Six Continents") 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, each of
which owns an operating hotel, (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 located in
Evanston, IL, having a total of 453 rooms. The Windsor, CT Hilton Garden Inn
hotel is leased by Six Continents, and the Ponte Vedra, FL Hampton Inn hotel and
Evanston, IL Hilton Garden Inn hotel are both leased by CapStar Winston.
Additionally, the Company has provided mezzanine financing to three unrelated
parties, two of which own Hilton Garden Inn hotels having a total of 275 rooms,
and one of which owns an independent resort hotel with 769 rooms. The Company
has no ownership interest in any property for which it has provided mezzanine
financing.
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 $2,685 for the first quarter of 2002 versus $5,208 for the first quarter
of 2001. Had the Company not adopted SAB 101, the Company would have reported
percentage lease revenue totaling $12,548 during the first quarter of 2002
versus $14,903 during the first quarter of 2001. 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, 2002 and 2001.
MARCH 31, MARCH 31,
TYPE OF HOTEL 2002 2001
------------- --------- ---------
Limited-service hotels 27 28
Extended-stay hotels 10 10
Full-service hotels 11 11
--- ---
Total 48 49
=== ===
THE COMPANY
ACTUAL - THREE MONTHS ENDED MARCH 31, 2002 VS. ACTUAL - THREE MONTHS ENDED MARCH
31, 2001
The Company had revenue of $10,222 in the three months ended March 31, 2002,
consisting of $9,863 of percentage lease revenue and $359 of interest, joint
venture and other income. Percentage lease revenue increased $168 to $9,863 in
2002 from $9,695 in 2001. The Company's deferred lease revenue for the three
months ended March 31, 2002 and March 31, 2001 was $2,685 and $5,208,
respectively. Had the Company not adopted SAB 101 on January 1, 2000, lease
revenue for the three months ended March 31, 2002 would have been $12,548 versus
$14,903 for the three months ended March 31, 2001. This decrease was primarily
due to a decline in both occupancy rates and average daily rates stemming from
13
decreased business travel in a weakened economy. Occupancy rates declined 4.6%,
from 65.2% to 62.2%, while average daily rates declined 4.7%, from $82.32 to
$78.41. Therefore, revenue per available room, "RevPAR", declined 9.1%, from
$53.66 to $48.76. The Company also sold one hotel during 2001 resulting in a
decline of $107 in percentage lease revenue during the first quarter of 2002.
Interest, joint venture and other income decreased $100 from $459 in 2001 to
$359 in 2002. This decrease was primarily due to lower interest income due to
lower interest rates, as well as a slight decline in development fees as the
Company opened the last Joint Venture Hotel, the Tampa Hilton Garden Inn, on
July 2, 2001.
Real estate taxes and property insurance costs incurred in 2002 were $1,886, a
decrease of $91 from $1,977 in 2001. This decrease was primarily attributable to
an over estimation of increases in assessed values and rates for 2001. General
and administrative expenses increased $164 to $1,555 in 2002 from $1,391 in
2001. This increase was primarily attributable to additional mezzanine financing
expenses. Interest expense decreased $387 to $2,832 in 2002 from $3,219 in 2001.
This decrease was primarily due to a decrease of 0.68% in the Company's weighted
average interest rate from 7.31% in 2001 to 6.63% in 2002. Weighted average
outstanding borrowings also decreased, from $175,329 in 2001 to $170,973 in
2002. Depreciation expense and amortization expense remained relatively flat,
from $5,291 and $236, respectively, in 2001 to $5,048 and $199, respectively, in
2002.
CAPSTAR WINSTON
ACTUAL - THREE MONTHS ENDED MARCH 31, 2002 VS. ACTUAL - THREE MONTHS ENDED MARCH
31, 2001
CapStar Winston had room revenue of $28,591 in 2002, a decrease of $2,550 from
$31,141 in 2001. This decrease was due to a decrease in the average occupancy
rate from 64.7% to 61.6%, as well as a decrease in the average daily rate
("ADR") from $81.64 to $78.39, resulting in a RevPAR decrease from $52.80 to
$48.26. Food and beverage revenue decreased $128 to $1,770 in 2002 from $1,898
in 2001. This decrease was due to a decline in revenue from restaurants
resulting from the decreased occupancy rates. Telephone and other operating
departments revenue decreased $237 to $1,248 from $1,485 due to a decrease in
revenue from long distance calls resulting from decreased occupancy rates and
increased use of cellular phones by business travelers.
CapStar Winston had total expenses in 2002 of $31,305, a decrease of $3,111 from
$34,416 in 2001. The decrease was primarily due to a decline in lease expense
resulting from lower room revenues.
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,
2002, cash flow provided by operating activities was $2,589 and funds from
operations, which is equal to income (loss) before allocation to minority
interest (determined in accordance with generally accepted accounting
principles), excluding extraordinary items and gains (losses) from debt
restructuring and sales of operating properties, plus real estate-related
depreciation and amortization, adjustments for unconsolidated partnerships and
joint ventures, and the change in deferred revenue resulting from SAB 101, less
preferred share distributions, was $5,043. 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
fourth quarter of 2001, the Company reduced its quarterly common share dividend
from $0.28 per share, which was paid for the first three quarters of 2001, to
$0.15 per share. This reduction was due to weakening economic conditions, which
were further negatively impacted by the terrorist events of September 11, 2001.
During the first quarter of 2001, the Company declared distributions of $4,690
to its common ($0.15 per share) and preferred shareholders ($0.578 per share).
The Company intends to monitor its dividend policy closely and to act
accordingly as earnings dictate. The Company also 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 its
dividend policy or 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, 2002 totaled $459. The Company spent $565 for capital additions at the
Current Hotels, and received distributions from joint ventures totaling $110.
The Company is required to spend, and anticipates that it will spend, at least
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
14
from borrowings under the Company's $125,000 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 5.0% and 4.6% of room revenues for each of the three
months ended March 31, 2002 and 2001, respectively, and are paid by the
Company's lessees: CapStar Winston, Prime and Six Continents.
During 1999, the Company entered into a joint venture agreement with Regent
Partners, Inc., (the "Regent Joint Venture") to jointly develop hotel
properties. The first hotel developed by the Regent Joint Venture, a full
service 157-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, opened in July 2001. As of March 31,
2002, subsequent to distributions paid to the Company from the operations of
these hotels, the Company's investment in the Regent Joint Venture totaled
$6,735.
In addition, in April 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. 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, 2002, subsequent to distributions paid to the
Company from the operations of this hotel, the Company's investment in the Marsh
Landing Joint Venture totaled $1,332.
As of March 31, 2002, total assets of the three joint ventures were $44,997,
total liabilities were $27,838, and total equity was $17,159. For the three
months ended March 31, 2002 and 2001, total revenue of the three joint ventures
was $927 and $625, respectively, total expenses were $918 and $705,
respectively, resulting in net income (loss) of $9 and $(80), respectively. Per
the requirements of SAB 101, $324 of total revenue was deferred during the three
months ended March 31, 2002, all of which will be recognized during 2002. During
the three months ended March 31, 2001, $140 of total revenue was deferred, all
of which was recognized during 2001.
The Company holds a 49 percent ownership interest in all three joint venture
projects. Under the terms of each joint venture agreement, in addition to
receiving fees for its services, which included development fees and purchasing
fees during construction, and currently include ongoing asset management fees,
the Company shares 49% of the percentage lease revenue generated from the
hotels. 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 a Hilton Garden Inn in Atlanta and in February 2001
provided a $2,186 mezzanine loan for a Hilton Garden Inn in Tampa. The Company
currently receives interest income from these mezzanine loans. Noble provided
the remainder of the funding and owns and operates the hotels. The Atlanta hotel
opened in April 2001 and the Tampa hotel opened in February 2002. In connection
with the alliance, the Company co-developed the Atlanta project with Noble,
provided all development services for the Tampa project, and accordingly
received fees for its development services.
Also, in 2001 the Company provided mezzanine financing totaling $250, which
represents a participating interest in a $5,478 mezzanine loan to the owner of a
769-room resort hotel in Orlando, FL. As a result of a default by the borrower
in accordance with the terms of the loan agreement, this mezzanine loan was
fully reserved for in the first quarter of 2002. The Company continues to seek
to recover the full loan balance, however there are no guarantees that the
Company will be able to recover any portion of the loan balance.
The Company's net cash used in financing activities during the quarter ended
March 31, 2002 totaled $2,861. This amount included the payment of distributions
to shareholders of $4,273, the payment of distributions to the Partnership's
minority interest of $195, long-term debt payments of $310, and a reduction of
$21,400 in the outstanding balance under the Company's $125,000 line of credit
(the "Line") from $102,900 at December 31, 2001 to $81,500 at March 31, 2002.
The Company was able to reduce its outstanding balance under the Line through
the execution of a public offering on March 25, 2002, raising net proceeds of
$23,388 through the sale of 2,750,000 Common Shares. Fees incurred during the
quarter in connection with financing facilities totaled $71. In addition, the
Company sold an additional 412,500 shares on April 2, 2002 generating net
proceeds of $3,508 which were used to further reduce the outstanding balance
under the Line.
15
The Line is collateralized with 28 of the Current Hotels. The Company is in the
process of pledging six additional properties as collateral for the Line, which
process is expected to be completed during the second quarter of 2002. At this
time all 48 Current Hotels will be pledged as collateral, 34 against the Line
and 14 against its long-term CMBS note with GE Capital Corporation. In
accordance with the provisions of the Line, the Company's availability under the
Line totaled approximately $28.4 million as of March 31, 2002. The availability
will increase approximately $15 million once the six additional hotels are
pledged as collateral. The Line bears interest generally at rates from LIBOR
plus 1.75% to 2.50%, based on the Company's consolidated debt leverage ratio.
The Company's current rate is LIBOR plus 2.00%.
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 2.00%, equaling
a fixed rate of 7.915% on $50,000 until December 18, 2002.
The Company had $67,374 in long-term debt at March 31, 2002 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.
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") to be 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
allocation to minority interest (determined in accordance with generally
accepted accounting principles), excluding extraordinary items and gains
(losses) from debt restructuring and 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 (in thousands, except
per share data):
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
-------- --------
Loss before allocation to minority interest $ (1,298) $ (1,960)
Plus: depreciation 5,048 5,291
Plus: depreciation of joint venture properties 184 117
Plus: deferred percentage lease revenue 2,685 5,208
Plus: deferred percentage lease revenue of joint venture properties 158 69
Less: preferred stock dividends (1,734) (1,734)
-------- --------
FFO $ 5,043 $ 6,991
======== ========
16
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:
changes in general economic conditions, 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, non-payment of mezzanine loans and failure to attract
joint venture opportunities. 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, 2002, the Company's exposure to market risk for a change in
interest rates related solely to debt outstanding under its $125,000 line of
credit (the "Line"). Debt outstanding under the Line totaled $81,500 at March
31, 2002. The Line, which expires in December 2004, bears interest generally at
rates from 30-day LIBOR plus 1.75% to 2.50%, based on the Company's consolidated
debt leverage ratio. The Company's current interest rate is 30-day LIBOR plus
2.00%. 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 2.00%, equating to an effective fixed rate of 7.915% 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, 2002 was 4.68%. At March 31, 2002, the Company had $31,500 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 $128, based on the weighted-average amount of variable rate debt
outstanding and exposed to fluctuations in the market rate of interest. 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, 2002:
Maturity Date Fixed Rate Debt Interest Rate
------------- --------------- -------------
2002 967 7.375%
2003 1,376 7.375%
2004 1,480 7.375%
2005 1,594 7.375%
2006 1,715 7.375%
Thereafter 60,242 7.375%
-------- ------
$ 67,374 7.375%
======== ======
17
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, 2002.
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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 7, 2002 /s/ Joseph V. Green
------------------------ ----------------------------------------------------
Joseph V. Green
Executive Vice President and Chief Financial Officer
(Authorized officer and Principal Financial
Officer)
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