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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 Number)
2626 GLENWOOD AVENUE, SUITE 200
RALEIGH, NORTH CAROLINA 27608
(Address of principal executive offices) (Zip Code)
(919) 510-6010
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b)of the Act:
Common Stock, $0.01 par value per share New York Stock Exchange
Preferred Stock, $0.01 par value per share New York Stock Exchange
(Title of Class) (Name of Exchange upon
Which Registered)
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|_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. |_|
The aggregate market value of the registrant's Common Stock, $0.01 par
value per share, at March 1, 2002, held by those persons deemed by the
registrant to be non-affiliates was approximately $143,538,109.
As of March 1, 2002, there were 16,957,533 shares of the registrant's
Common Stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
- -------- ------------------
1. Proxy Statement for Annual Meeting of Shareholders to be
held on May 7, 2002 Part III
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WINSTON HOTELS, INC.
FORM 10-K ANNUAL REPORT
INDEX
Page
----
PART I.
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 13
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 35
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 35
ITEM 11. EXECUTIVE COMPENSATION 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 35
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 36
SIGNATURES 40
2
PART I.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering of its common stock ("Common Stock"),
utilizing the majority of the proceeds to acquire one hotel and a general
partnership interest (as the sole general partner) in WINN Limited Partnership
(the "Partnership"). The Partnership used a substantial portion of the proceeds
to acquire nine additional hotel properties. These ten hotels were acquired from
affiliates of WHI. WHI and the Partnership (collectively the "Company") began
operations as a REIT on June 2, 1994. As of December 31, 2001, WHI's ownership
in the Partnership was 92.87%.
During 1995 and 1996, WHI completed follow-on Common Stock offerings, as well
as a Preferred Stock offering in September 1997, and invested the net proceeds
from these offerings in the Partnership. The Partnership utilized the proceeds
to acquire 28 additional hotel properties. During 1998, the Company added 13
additional properties to its portfolio, five of which were internally developed.
The Company sold two hotels in 2000 and one hotel in 2001. As of December 31,
2001, the Company wholly owned 48 hotel properties (the "Current Hotels") in 12
states having an aggregate of 6,574 rooms.
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. 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 679 rooms. The Company has no ownership interest
in any property for which it has provided mezzanine financing.
As of December 31, 2001, the Company leased 46 of the 48 Current Hotels to
CapStar Winston Company, L.L.C. ("CapStar Winston"), a wholly owned subsidiary
of MeriStar Hotels and Resorts, Inc. ("MeriStar"), 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").
CapStar Winston also currently leases two of the Joint Venture Hotels, located
in Ponte Vedra, FL and Evanston, IL. Six Continents also currently leases the
Joint Venture Hotel located in Windsor, CT. All 48 of the Current Hotels are
leased pursuant to separate percentage operating lease agreements that provide
for rent payments based, in part, on revenues from the Current Hotels (the
"Percentage Leases"). Under the terms of the Percentage Leases, the lessees are
obligated to pay the Company the greater of base rent ("Base Rent") or
percentage rent ("Percentage Rent"). The Percentage Leases are designed to allow
the Company to participate in the growth in revenues at the Current Hotels by
requiring that a portion of each Current Hotel's room revenues in excess of
specified amounts will be paid to the Company as Percentage Rent.
NARRATIVE DESCRIPTION OF BUSINESS
Growth Strategy
The Company's growth strategy is to enhance shareholder value by increasing
cash available for distribution per share of Common Stock through: (i)
participating in any increased room revenue from the Current Hotels through
Percentage Leases; (ii) generating development, purchasing and asset management
fee income from joint ventures; (iii) acquiring additional hotels, or ownership
interests in hotels, that meet the Company's investment criteria, either
directly or through joint ventures; (iv) selectively developing new hotels and
making additions to the Current Hotels as market conditions warrant, and (v)
mezzanine financing activities whereby the Company initiates hotel loans to
third party hotel owners.
Internal Growth Strategy
The Company participates in any increased or decreased room revenue from the
Current Hotels through Percentage Leases. The Company believes that internal
growth, through increases in Percentage Rent, has resulted, and in the future
may result, from: (i) continued sales and marketing programs by the lessees and
operators; (ii) completion of necessary refurbishment projects at the Current
Hotels; (iii) maintenance of hotel franchises with demonstrated market
acceptance and national reservation systems; and (iv) increases in occupancy
rates, average daily room rates ("ADR") and revenue per available room
("REVPAR").
The Percentage Leases provide that a percentage of room revenues in specified
ranges is paid as Percentage Rent. For most leases, the percentage of room
revenues paid as Percentage Rent increases as a higher specified level of room
revenues is achieved. Pursuant to each Percentage Lease, Base Rent and the
ranges of room revenues specified for purposes of calculating Percentage Rent
are
3
adjusted on a quarterly or annual basis for inflation beginning on the first day
after the first full fiscal year of the Percentage Lease, based on changes in
the United States Consumer Price Index ("CPI").
Joint Ventures Strategy
The Company is actively seeking one or more institutional investors as joint
venture partners to acquire: (i) hotels for repositioning, (ii) hotels for
rehabilitation and (iii) hotels that could benefit from new management and
additional capital. The Company expects to make a minority interest investment
in any joint venture formed and expects to receive fees for overseeing the joint
venture's properties and operations. In addition to generating development,
purchasing and asset management fee income and thus enhancing the Company's
revenues and cash flow, the Company expects to receive other benefits from joint
venture agreements, such as expanded affiliations with leading upscale brands
and growth in the Company's portfolio with a smaller equity investment by us.
In addition to the three joint ventures described above, the Company owns a
50% interest in a joint venture with an affiliate of Concord Hospitality
Enterprises, Inc. This joint venture currently has no operations, but it has two
hotels under contract for purchase at prices aggregating approximately $7.0
million. The Company estimates that these two hotels will require an additional
approximately $8.0 million in renovations. Under certain circumstances, Concord
will have the right to purchase the Company's interest in the two hotels.
The Company currently has no commitments from any institutional investor to
make any investment in a joint venture with us and there can be no assurance
that the Company will be successful in attracting joint venture investors or in
locating additional hotels for acquisition by any joint venture.
Acquisition Strategy
The Company intends to acquire additional hotels, or ownership interests in
hotels, with strong national franchise affiliations in the "mid-scale without
food and beverage" and "upscale" market segments, or hotel properties with the
potential to obtain such franchise affiliations. In particular, the Company will
consider acquiring limited-service hotels, such as Hampton Inn(R) and Fairfield
Inn by Marriott(R); full-service hotels such as Hilton Garden Inn(R), Courtyard
by Marriott(R) and Holiday Inn(R); and extended-stay hotels such as Homewood
Suites by Hilton(R), Hampton Inn and Suites(R), Residence Inn(R), Spring Hill
Suites by Marriott(R) and Staybridge by Holiday Inn(R) (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Forward Looking Statements").
The Company intends to consider investments in hotel properties that meet one
or more of the following criteria: (i) properties in locations with relatively
high demand for rooms, a relatively low supply of hotel properties and
relatively high barriers to entry into the hotel business, such as a scarcity of
suitable sites or zoning restrictions; (ii) successful hotels available at
favorable prices; (iii) newly developed hotels; (iv) hotels that could benefit
from repositioning; (v) hotels that could benefit from substantial
rehabilitation; and (vi) hotels that could benefit from new management and
additional hotel capital. The Company believes that its relationships with its
lessees and franchisors will provide additional potential investment
opportunities.
Development Strategy
The Company intends to pursue selective hotel development as suitable
opportunities arise. The Company may finance 100% of such development or seek
partners who would co-invest in development or rehabilitation joint ventures.
The Company intends to consider development of hotels with strong national
franchise affiliations in markets where the Company believes that carefully
timed and managed development will yield returns to the Company that exceed
returns from any available hotels in those markets that meet the Company's
acquisition criteria. The Company earns certain fees from its joint venture
development activity and also is exploring other opportunities to use
management's expertise to earn additional fees through third party development.
Since its initial public offering in 1994, the Company has developed five hotels
that it now owns and has developed three hotels through joint ventures in which
it owns a 49% interest.
Mezzanine Financing
In 2000 and 2001, the Company made three mezzanine loans totaling
approximately $3.5 million to third party hotel owners. We continue to seek
additional prudent mezzanine financing opportunities where the Company can
leverage its hotel underwriting and development expertise into attractive
investments.
4
REIT Modernization Act
Prior to January 1, 2001, under the REIT qualification requirements of the
Internal Revenue Code, REITs generally were required to lease their hotels to
third party operators. Under the REIT Modernization Act of 1999 (the "RMA"),
which became effective January 1, 2001, a REIT is permitted to lease hotels to
wholly owned taxable REIT subsidiaries of the REIT ("TRS Lessees"). Under the
RMA, the TRS Lessees may not operate the leased hotels and must enter into
management agreements with eligible independent contractors who will manage the
hotels.
The Company is currently negotiating with CapStar Winston to acquire all 48
operating leases between the companies. If successful, the Company expects to
lease these 48 hotels to new taxable REIT subsidiaries as permitted under the
RMA. In such event, the Company's taxable REIT subsidiaries would in turn enter
into hotel management agreements with third party management companies, which
qualify as eligible independent contractors, to manage the hotels. However,
there can be no assurance that the Company will be able to successfully
negotiate and complete the acquisition of these leases and enter into a taxable
REIT subsidiary lessee structure. The Company expects that the costs incurred in
acquiring these lease agreements will be recorded as an expense in the period
incurred.
Operations and Property Management
As of December 31, 2001, CapStar Winston leased 46 of the Current Hotels, 38
of which they also operated. Interstate Management and Investment Corporation
("IMIC") managed seven of the Current Hotels and Hilton Hotels Corporation
("Hilton") managed one of the Current Hotels (collectively the "Property
Managers") pursuant to management agreements with CapStar Winston with respect
to each of such hotels. Six Continents and Prime each leased and operated one of
the Current Hotels. CapStar Winston leased and operated two of the Joint Venture
Hotels and Six Continents leased and operated the other Joint Venture Hotel. The
lessees and the Property Managers seek to increase revenues at the Current
Hotels by using established systems to manage the Current Hotels for marketing,
rate achievement, expense management, physical facility maintenance, human
resources, accounting and internal auditing. They are trained in all aspects of
hotel operations, including negotiation of prices with corporate and other
clients and responsiveness to marketing requirements in their particular
markets, with particular emphasis placed on customer service. The lessees and
the Property Managers employ a mix of marketing techniques designed for each
specific Current Hotel, which include individual toll-free lines,
cross-marketing of the Current Hotels' billboards and direct marketing, as well
as taking advantage of national advertising by the franchisors of the Current
Hotels.
The lessees lease the Current Hotels pursuant to the Percentage Leases. Under
the Percentage Leases, the lessees, or the Property Managers, generally are
required to perform all operational and management functions necessary to
operate the Current Hotels. The lessees are entitled to all profits and cash
flow from the Current Hotels after payment of rent under the Percentage Leases
and other operating expenses, including, in the case of the eight Current Hotels
managed by the Property Managers, the management fee payable to the Property
Managers. The lessees, their affiliates and the Property Managers may manage
other hotel properties in addition to hotels owned by the Company, however, the
lessees and their affiliates may not build or develop a hotel or motel within
five miles of a hotel owned by the Company and leased by the lessee.
CapStar Winston is a wholly owned subsidiary of MeriStar, a New York Stock
Exchange listed company. As of December 31, 2001, MeriStar, the nation's largest
independent hotel management company, leased or managed 275 hospitality
properties with more than 57,000 rooms in 41 states, the District of Columbia
and Canada.
IMIC, a hotel development and management company, operates seven of the
Current Hotels under separate management agreements with CapStar Winston. Each
year, CapStar Winston pays IMIC a base management fee for each Current Hotel
managed by IMIC based on a percentage of the budgeted gross operating profit for
that year with incentive amounts based on actual gross operating profits if they
exceed budgeted amounts. IMIC has agreed that each year it will spend a
specified percentage of the gross revenues of each Current Hotel managed by IMIC
on repairs and maintenance of the hotel. CapStar Winston and the Company have
retained the right to control the expenditure of funds budgeted for capital and
non-routine items, including, at their discretion, approving plans and selecting
and overseeing contractors and other vendors. IMIC currently operates 33 hotels
in six states, including 27 limited-service hotels and 6 full-service,
convention or resort hotels.
Hilton manages one of the Current Hotels under a management agreement with
CapStar Winston. Each year, CapStar Winston pays Hilton a management fee based
on a percentage of the gross operating profit for the hotel managed by Hilton
with certain incentive amounts. Hilton is recognized internationally as a
preeminent hospitality company. Hilton develops, owns, manages or franchises
2,000 hotels, resorts and vacation ownership properties. Its portfolio includes
many of the world's best known and most highly regarded hotel brands, including
Hilton, Doubletree, Embassy Suites, Hampton Inn, Homewood Suites by Hilton, Red
Lion Hotels & Inns and Conrad International.
5
Six Continents is one of the leading hotel operating companies in the world.
As of December 31, 2001, Six Continents operated more than 3,200 hotels in close
to 100 countries, primarily full-service hotels in the upscale and mid-scale
segments of the hotel industry with branded hotels including Crowne Plaza,
Holiday Inn, Holiday Inn Select and Holiday Inn Express hotels.
Prime, a New York Stock Exchange listed company, is one of the nation's
premier lodging companies. Prime operates two proprietary brands, AmeriSuites
(all-suites) and Wellesley Inns (limited-service). It also owns and/or manages
hotels operated under franchise agreements with national hotel chains. As of
December 31, 2001, Prime Hospitality Corporation owned, operated, managed or
franchised over 230 hotels in 32 states.
Franchise Agreements
All of the Company's Current Hotels operate under franchise licenses and the
Company anticipates that most of the additional hotel properties in which it
invests will be operated under franchise licenses. Franchisors provide a variety
of benefits for franchisees which include national advertising, publicity and
other marketing programs designed to increase brand awareness, training of
personnel, continuous review of quality standards and centralized reservation
systems.
The hotel franchise licenses generally specify certain management,
operational, record keeping, accounting, reporting and marketing standards and
procedures with which the lessees must comply. The franchise licenses obligate
the lessees to comply with the franchisors' standards and requirements with
respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided, display of signs, and the type, quality and age of
furniture, fixtures and equipment included in guest rooms, lobbies and other
common areas.
Of the Current Hotels' franchise licenses, one expires in 2006, three expire
in 2007, five expire in 2008, three expire in 2009, two expire in 2010, three
expire in 2011, two expire in 2012, two expire in 2014, two expire in 2016, 17
expire in 2017 and eight expire in 2018. The franchise agreements provide for
termination at the franchisor's option upon the occurrence of certain events,
including the lessees' failure to pay royalties and fees or perform its other
covenants under the franchise agreement, bankruptcy, abandonment of the
franchise, commission of a felony, assignment of the franchise without the
consent of the franchisor, or failure to comply with applicable law in the
operation of the relevant Current Hotel. The franchise agreements will not renew
automatically upon expiration. The lessees are responsible for making all
payments under the franchise agreements to the franchisors. Under the franchise
agreements, the lessees pay a franchise fee of an aggregate of generally between
4% and 5% of room revenues, plus additional fees that amount to between 3% and
4% of room revenues from the Current Hotels.
Competition
The hotel industry is highly competitive with various participants competing
on the basis of price, level of service and geographic location. The Current
Hotels compete with other hotel properties in their geographic markets. Some of
the Company's competitors may have greater marketing and financial resources
than the Company, the lessees, and the Property Managers. Several of the Current
Hotels are located in areas in which they may compete with other Current Hotels
for business. The Company competes for acquisition opportunities with entities
that may have greater financial resources than the Company. These entities may
generally be able to accept more risk than the Company can prudently manage,
including risks with respect to the creditworthiness of a hotel operator.
Employees
The Company had 17 employees as of March 1, 2002.
Environmental Matters
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on such property. Such laws often impose
such liability without regard to whether the owner knew of, or was responsible
for, the presence of hazardous or toxic substances. Furthermore, a person that
arranges for the disposal or transports for disposal or treatment of a hazardous
substance at another property may be liable for the costs of removal or
remediation of hazardous substances released into the environment at that
property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remedy such substances, may adversely affect the owner's ability to use or sell
such real estate or to borrow using such real estate as collateral. Certain
environmental laws and common law principles could be used to impose liability
for the release of and exposure to hazardous substances, including
asbestos-containing materials ("ACMs") released into the air, and third parties
may seek recovery from owners or operators of real properties for personal
injury or property damage associated with exposure to released hazardous
substances, including ACMs. In connection with the ownership and operation of
the Current Hotels, the Company, the lessees, or the Property Managers, as the
case may be, may be potentially liable for such costs.
6
Phase I environmental site assessments ("ESAs") were obtained on all of the
Current Hotels. The Phase I ESAs were intended to identify potential sources of
contamination for which the Current Hotels may be responsible and to identify
readily apparent environmental regulatory compliance concerns. The Phase I ESAs
included historical reviews of the Current Hotels, reviews of certain public
records, preliminary investigations of the sites and surrounding properties,
screening for the presence of asbestos, PCBs (polychlorinated biphenyls) and
underground storage tanks, and the preparation and issuance of a written report.
The Phase I ESAs did not include invasive procedures, such as soil sampling or
ground water analysis. The Phase I ESA reports have not revealed any
environmental condition, liability or compliance concern that the Company
believes would have a material adverse effect on the Company's business, assets
or results of operations, nor is the Company aware of any such condition,
liability or compliance concern. Nevertheless, it is possible that these reports
do not reveal all environmental conditions, liabilities or compliance concerns
or that there are material environmental conditions, liabilities or compliance
concerns that arose at a Current Hotel after the related Phase I ESA report was
completed of which the Company is unaware. Moreover, no assurances can be given
that (i) future laws, ordinances or regulations will not impose any material
environmental liability for existing conditions at the Current Hotels, or (ii)
the current environmental condition of the Current Hotels will not be affected
by the condition of the properties in the vicinity of the Current Hotels (such
as the presence of leaking underground storage tanks) or by third parties
unrelated to the Company.
In addition to the ESAs, the Company also obtained asbestos surveys for the
Holiday Inn Select-Garland (Dallas), Texas and the Comfort Inn-Greenville, South
Carolina. In each of the asbestos surveys, the consultants discovered the
presence of ACMs. The Company is monitoring the presence of the ACMs with the
assistance of its consultants.
The Company believes that the Current Hotels are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances and other environmental
matters. The Company has not been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental substances in connection with any of its
properties.
Tax Status
The Company elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended, effective for its short taxable year
ended December 31, 1994. The Company believes that it qualifies for taxation as
a REIT, and with certain exceptions, the Company will not be subject to tax at
the corporate level on its taxable income that is distributed to the
shareholders of the Company. A REIT is subject to a number of organizational and
operational requirements, including a requirement that it currently distribute
at least 90% of its annual taxable income. For taxable years beginning before
January 1, 2001, the annual taxable income distribution requirement was 95%.
Failure to qualify as a REIT will render the Company subject to federal income
tax (including any applicable minimum tax) on its taxable income at regular
corporate rates and distributions to the shareholders in any such year will not
be deductible by the Company. Although the Company does not intend to request a
ruling from the Internal Revenue Service (the "Service") as to its REIT status,
the Company has obtained the opinion of its legal counsel that the Company
qualifies as a REIT, which opinion is based on certain assumptions and
representations and is not binding on the Service or any court. Even if the
Company qualifies for taxation as a REIT, the Company may be subject to certain
state and local taxes on its income and properties.
Seasonality
The Company's operations historically have been seasonal in nature,
reflecting higher REVPAR during the second and third quarters. This seasonality
and the structure of the Percentage Leases, which provide for a higher
percentage of room revenues above the minimum equal quarterly levels to be paid
as Percentage Rent, can be expected to cause fluctuations in the Company's
receipt of quarterly lease revenue under the Percentage Leases. In December
1999, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 ("SAB 101") which provides guidance on revenue recognition. The Company
adopted SAB 101 effective January 1, 2000. SAB 101, which requires that a lessor
not recognize contingent rental income until annual specified hurdles have been
achieved by the lessee, effectively defers recognition by the Company of a
significant portion of percentage lease revenue from the first and second
quarters, to the third and fourth quarters of the calendar year. SAB 101 has 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 (see Note 2 to the Company's consolidated financial statements).
7
Executive Officers of the Registrant
The following table lists the executive officers of the Company:
NAME AGE POSITION
---- --- --------
Charles M. Winston 72 Chairman of the Board of Directors
Robert W. Winston, III 40 Chief Executive Officer
James D. Rosenberg 48 President, Chief Operating Officer and Secretary
Joseph V. Green 51 Executive Vice President, Chief Financial Officer
Kenneth R. Crockett 45 Executive Vice President of Development
CHARLES M. WINSTON. Charles Winston has served as Chairman of the Board of
Directors since March 15, 1994. Mr. Winston is a native of North Carolina and a
graduate of the University of North Carolina at Chapel Hill with an A.B. degree.
Mr. Winston has more than 37 years of experience in developing and operating
full service restaurants and hotels. Mr. Winston is Robert Winston's father and
brother of James Winston, a director.
ROBERT W. WINSTON, III. Robert Winston has served as Chief Executive
Officer and Director of the Company since March 15, 1994. Mr. Winston served as
the Company's President from March 15, 1994 through January 14, 1999 and as
Secretary for the periods from March 1994 through May 1995 and from October 1997
until May 5, 1998. Mr. Winston is a native of North Carolina and a graduate of
the University of North Carolina at Chapel Hill with a B.A. degree in economics.
Mr. Winston is Charles Winston's son and James Winston's nephew.
JAMES D. ROSENBERG. Mr. Rosenberg assumed the title of President on January
14, 1999. Mr. Rosenberg has also served as Chief Operating Officer since January
5, 1998, Secretary since May 5, 1998, and served as Chief Financial Officer from
January 5, 1998 through May 18, 1999. Mr. Rosenberg is a CPA and a graduate of
Presbyterian College and received an MBA from the University of South Carolina.
Prior to joining the Company, Mr. Rosenberg held the position of Senior Vice
President with Holiday Inn Worldwide since 1994 where he was responsible for
managing 85 hotels in seven countries. Prior to joining the Holiday Inn
organization, Mr. Rosenberg was a partner in Sage Hospitality Resources and
served as Executive Vice President and Chief Financial Officer of the
Denver-based hospitality firm. Mr. Rosenberg started his career with Price
Waterhouse, L.L.P.
JOSEPH V. GREEN. Mr. Green assumed the title of Executive Vice President,
Chief Financial Officer on May 18, 1999. Mr. Green has also served as Executive
Vice President - Acquisitions and Finance from January 1, 1998 through May 18,
1999, after having advised Winston Hospitality, Inc. on matters regarding hotel
acquisitions and finance since 1993, including the initial public offering of
WHI. Mr. Green is a graduate of East Carolina University, was awarded his J.D.
degree from Wake Forest University School of Law and received a Master of Laws
in Taxation from Georgetown University.
KENNETH R. CROCKETT. Mr. Crockett was appointed Senior Vice President of
Development of the Company in September 1995 and Executive Vice President of
Development in January 1998. Mr. Crockett is a graduate of the University of
North Carolina at Chapel Hill with a B.S. degree in Business Administration.
Prior to joining the Company, Mr. Crockett was an Associate Partner for project
development in commercial real estate at Capital Associates, a real estate
development firm located in the Raleigh, North Carolina area.
8
ITEM 2. PROPERTIES
The following table sets forth certain unaudited information with respect
to the Current Hotels:
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Number Room Lease Number Room Lease
of Revenues Occupancy Revenues of Revenues Occupancy Revenues
Rooms ($000) ADR % ($000) Rooms ($000) ADR % ($000)
- ----------------------------------------------------------------------------------------------------------------------------------
Hampton Inns
- ------------
Boone, NC 95 $ 2,046 $ 83.39 70.8% 852 95 $ 2,074 $ 82.45 72.33% 891
Brunswick, GA 127 2,394 64.14 79.9% 960 128 2,112 59.87 75.28% 829
Cary, NC 130 1,933 66.66 61.5% 721 130 1,920 64.65 62.43% 732
Charlotte, NC 125 1,913 82.88 50.6% 732 125 2,590 81.46 69.49% 1,190
Chester, VA 66 1,244 70.33 73.4% 507 66 1,286 69.78 76.32% 544
Duncanville, TX * -- -- -- -- -- -- 1,030 44.25 71.90% 350
Durham, NC 137 2,528 66.43 76.1% 1,039 137 2,410 65.75 73.11% 992
Gwinnett, GA (Hampton Inn & Suites) 136 2,637 83.08 63.9% 1,277 136 2,821 79.61 71.18% 1,428
Hilton Head, SC 124 1,997 76.97 56.9% 686 124 2,349 80.60 63.69% 939
Jacksonville, NC 120 1,838 61.81 67.9% 683 120 1,949 60.16 73.78% 779
Las Vegas, NV 128 1,978 61.25 69.7% 925 128 2,232 59.94 79.50% 1,057
Perimeter, GA 131 2,355 88.09 55.9% 1,110 131 2,452 84.75 60.33% 1,202
Raleigh, NC 141 2,455 76.07 62.7% 1,050 141 2,960 74.08 77.42% 1,396
Southern Pines, NC 126 1,640 65.29 54.6% 558 126 1,740 65.98 57.18% 620
Southlake, GA 124 2,305 73.00 69.2% 929 124 2,319 66.34 76.42% 961
W. Springfield, MA 126 3,132 91.50 75.0% 1,512 126 3,011 85.41 77.07% 1,460
White Plains, NY 156 5,277 117.07 79.2% 2,681 156 5,257 111.72 82.42% 2,728
Wilmington, NC 118 1,762 68.49 60.3% 606 118 2,022 69.44 67.41% 791
Comfort Inns
- ------------
Augusta, GA 123 1,329 58.69 50.4% 380 123 1,294 58.67 49.01% 378
Charleston, SC 128 2,321 73.17 67.9% 1,016 128 2,390 75.65 67.44% 1,086
Chester, VA 123 1,826 64.19 63.9% 784 122 2,008 64.02 70.25% 872
Clearwater/St. Petersburg, FL 120 1,512 59.49 58.0% 448 120 1,548 58.84 60.09% 489
Durham, NC 138 2,403 66.92 71.3% 1,054 138 2,607 68.45 75.40% 1,209
Fayetteville, NC 176 2,191 51.64 66.0% 907 176 2,132 53.92 61.38% 917
Greenville, SC 190 1,493 56.98 37.8% 368 190 1,428 53.33 38.50% 357
London, KY (Comfort Suites) * -- -- -- -- -- -- 68 50.60 36.32% 26
Orlando, FL (Comfort Suites) 215 2,977 62.58 60.9% 1,032 214 3,732 61.44 77.56% 1,583
Raleigh, NC ** -- 375 47.96 51.9% 127 149 1,492 46.77 58.49% 507
Wilmington, NC 146 1,834 57.27 60.2% 607 146 1,993 57.53 64.83% 732
Homewood Suites
- ---------------
Alpharetta, GA 112 2,534 90.41 68.6% 1,352 112 2,613 89.93 70.88% 1,284
Cary, NC 120 3,195 94.41 77.9% 1,926 120 3,086 89.96 78.75% 1,861
Clear Lake, TX 92 2,565 94.52 80.8% 1,134 92 2,460 92.54 78.94% 1,087
Durham, NC 96 2,164 88.51 69.8% 1,056 96 2,178 78.92 78.53% 1,089
Lake Mary, FL 112 2,855 108.00 64.7% 1,691 112 3,175 105.86 73.17% 1,624
Phoenix, AZ 126 2,154 92.00 50.9% 1,340 126 2,364 81.72 62.73% 1,404
Raleigh, NC 137 3,120 91.24 68.4% 1,676 137 3,322 89.43 74.08% 1,666
- ----------------------------------------------------------------------------------------------------------------------------------
9
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Number Room Lease Number Room Lease
of Revenues Occupancy Revenues of Revenues Occupancy Revenues
Rooms ($000) ADR % ($000) Rooms ($000) ADR % ($000)
- ----------------------------------------------------------------------------------------------------------------------------------
Holiday Inns
- ------------
Abingdon, VA (Holiday Inn Express) 81 1,399 67.37 70.2% 650 81 1,374 65.02 71.27% 645
Clearwater, FL (Holiday Inn Express) 127 2,274 74.46 66.1% 944 127 2,452 72.59 72.67% 1,090
Dallas, TX (Holiday Inn Select) 243 3,085 71.66 48.3% 1,299 244 4,079 72.00 63.44% 1,760
Secaucus, NJ 160 5,464 121.70 76.9% 2,749 160 5,907 126.31 79.86% 3,181
Tinton Falls, NJ 171 4,936 108.48 72.9% 1,766 171 4,803 98.81 77.66% 1,727
Courtyard by Marriott
- ---------------------
Ann Arbor, MI 160 4,171 96.49 74.0% 1,929 160 4,468 95.78 79.66% 2,162
Houston, TX 198 3,719 88.74 58.2% 1,655 198 3,619 83.46 59.83% 1,642
Wilmington, NC 128 2,306 78.84 62.6% 882 128 2,415 77.23 67.12% 976
Winston-Salem, NC 122 2,238 81.44 61.7% 1,083 122 2,466 84.34 65.47% 1,253
Hilton Garden Inns
- ------------------
Albany, NY 155 4,132 96.27 75.9% 1,250 155 3,830 88.85 75.98% 1,949
Alpharetta, GA 164 3,181 98.84 53.8% 1,348 164 3,707 96.19 64.21% 2,333
Raleigh/Durham, NC 155 4,101 111.52 65.0% 1,889 155 4,320 110.18 69.12% 2,476
Quality Suites - Charleston, SC 168 3,411 83.56 66.6% 1,358 168 3,738 86.09 70.62% 1,616
Residence Inn - Phoenix, AZ 168 3,004 87.49 56.0% 1,562 168 3,310 81.35 66.17% 1,721
Fairfield Inn - Ann Arbor, MI 110 1,840 72.01 63.6% 665 110 2,068 72.02 71.31% 839
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 6,574 $125,543 $ 81.32 64.04% $54,755 6,723 $134,977 $ 78.24 69.11% $62,430
- ----------------------------------------------------------------------------------------------------------------------------------
* Hotel sold during 2000.
** Hotel sold during 2001.
10
THE PERCENTAGE LEASES
The Partnership leases the Current Hotels for remaining terms of 6 to 12
years pursuant to Percentage Leases, which provide for rent equal to the greater
of Base Rent or Percentage Rent. The Percentage Leases for the Current Hotels
contain the provisions described below. The Company intends that future leases
with respect to its hotel property investments will contain substantially
similar provisions, although the Company may, in its discretion, alter any of
these provisions with respect to any particular future lease, depending on the
purchase price paid, economic conditions and other factors deemed relevant at
the time.
Percentage Lease Terms
Each Percentage Lease for the Current Hotels has a non-cancelable remaining
term of 6 to 12 years, subject to earlier termination upon the occurrence of
certain contingencies described in the Percentage Lease.
Amounts Payable under the Percentage Leases
During the term of each Percentage Lease, the lessees are or will be
obligated to pay (i) the greater of Base Rent or Percentage Rent and (ii)
certain other additional charges. Base Rent accrues and is required to be paid
monthly. Percentage Rent consists of minimum percentage rent and excess
percentage rent, if any. Minimum percentage rent is calculated based primarily
on the amount of room revenue up to a predetermined threshold per the lease. The
percentage, which differs by hotel, is multiplied by this amount to calculate
minimum percentage rent. These percentages range from 23% to 54.44%. Excess
percentage rent is calculated based primarily on the amount of any room revenue
in excess of the predetermined threshold mentioned above. The percentage, which
differs by hotel, is multiplied by this amount to calculate excess percentage
rent. These percentages range from 50% to 80%. For most leases, the percentage
used to calculate excess percentage rent exceeds the percentage used to
calculate the minimum percentage rent. Percentage Rent is due either monthly or
quarterly.
Beginning in the fiscal year following the year in which most Percentage
Leases commence, and for each fiscal year thereafter, (i) the annual Base Rent
and (ii) the Percentage Rent formulas will be adjusted on a quarterly or annual
basis for inflation, based on changes in the CPI. The adjustment in any quarter
may not exceed 2%, which may be less than the change in CPI for the quarter.
Other than real estate and personal property taxes, casualty insurance,
capital improvements and maintenance of underground utilities and structural
elements, which are obligations of the Company, the Percentage Leases require
the lessees to pay rent, insurance, all costs and expenses and all utility and
other charges incurred in the operation of the Current Hotels. The Percentage
Leases also provide for rent reductions and abatements in the event of damage
to, destruction of or a partial taking of any Current Hotel.
Maintenance and Modifications
Under the Percentage Leases, the Company is required to maintain the
underground utilities and the structural elements of the improvements, including
exterior walls (excluding plate glass) and the roof of such Current Hotel. In
addition, the Percentage Leases obligate the Company to fund periodic capital
improvements (in addition to maintenance of underground utilities and structural
elements) to the buildings and grounds comprising their respective Current
Hotels, and the periodic repair, replacement and refurbishment of furniture,
fixtures and equipment in their respective Current Hotels, up to an amount equal
to 5% of room revenues (7% of room revenues and food and beverage revenue for
one of its full-service hotels). These obligations will be carried forward to
the extent that the lessees have not expended such amounts, and any unexpended
amounts will remain the property of the Company upon termination of the
Percentage Leases. Except for capital improvements and maintenance of structural
elements and underground utilities, the lessees are required, at their expense,
to maintain the Current Hotels in good order and repair, except for ordinary
wear and tear, and to make non-structural, foreseen and unforeseen, and ordinary
and extraordinary repairs which may be necessary and appropriate to keep the
Current Hotels in good order and repair.
The lessees are not obligated to bear the cost of capital improvements to the
Current Hotels. With the consent of the Company, however, the lessees, at their
expense, may make non-capital and capital additions, modifications or
improvements to the Current Hotels, provided that such action does not
significantly alter the character or purposes of the Current Hotels or
significantly detract from the value or operating efficiencies of the Current
Hotels. All such alterations, replacements and improvements shall be subject to
all the terms and provisions of the Percentage Leases and will become the
property of the Company upon termination of the Percentage Leases. The Company
owns or will own substantially all personal property not affixed to, or deemed a
part of, the real estate or improvements thereon comprising the Current Hotels,
except to the extent that ownership of such personal property would cause the
rents under the Percentage Leases not to qualify as "rents from real property"
for REIT income test purposes.
11
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not involved in any pending legal proceedings, other
than ordinary routine litigation incidental to the business, nor are any such
proceedings known to be contemplated by governmental authorities. The lessees
have advised the Company that they currently are not involved in any material
pending litigation, other than routine litigation arising in the ordinary course
of business, substantially all of which is expected to be covered by liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
WHI's Common Stock trades on the New York Stock Exchange ("NYSE") under the
symbol "WXH." As of March 1, 2002, WHI had approximately 835 holders of record
of its Common Stock. The following table sets forth, for the indicated periods,
the high and low closing prices for the Common Stock and the cash distributions
declared per share:
Price Range Cash Distributions Declared
----------- ---------------------------
High Low Per Share
---- --- ---------
2001
----
First Quarter $ 8.85 $ 7.13 $ 0.28
Second Quarter 10.68 7.65 0.28
Third Quarter 10.25 6.88 0.28
Fourth Quarter 8.20 7.04 0.15
2000
----
First Quarter $ 8.50 $ 7.38 $ 0.28
Second Quarter 8.12 7.37 0.28
Third Quarter 8.93 7.06 0.28
Fourth Quarter 8.18 7.12 0.28
Although the declaration of distributions is within the discretion of the
Board of Directors and depends on the Company's results of operations, cash
available for distribution, the financial condition of the Company, tax
considerations (including those related to REITs) and other factors considered
important by the Board of Directors, the Company's policy is to make regular
quarterly distributions to its shareholders.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the
Company for the years ended December 31, 2001, 2000, 1999, 1998, and 1997, and
selected historical balance sheet data as of December 31, 2001, 2000, 1999,
1998, and 1997. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto included elsewhere in this
report.
WINSTON HOTELS, INC.
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
STATEMENTS OF INCOME:
Revenue:
Percentage lease revenue $ 54,755 $ 62,430 $ 62,237 $ 54,945 $ 35,868
Interest, joint venture and other income 2,715 1,289 433 249 234
-------- -------- -------- -------- --------
Total revenue 57,470 63,719 62,670 55,194 36,102
-------- -------- -------- -------- --------
Expenses:
Real estate taxes and property and casualty
insurance 6,682 6,630 6,356 5,262 2,702
General and administrative 5,419 4,323 4,236 3,889 2,095
Interest 12,170 13,491 12,513 8,314 2,648
Depreciation 20,792 21,092 20,565 16,389 10,064
Amortization 968 933 834 465 520
-------- -------- -------- -------- --------
Total expenses 46,031 46,469 44,504 34,319 18,029
-------- -------- -------- -------- --------
Income before loss on sale of properties,
allocation to minority interest and
cumulative effect of change in
accounting principle 11,439 17,250 18,166 20,875 18,073
Loss on sale of properties 682 850 239 -- --
-------- -------- -------- -------- --------
Income before allocation to minority
interest and cumulative effect of change
in accounting principle 10,757 16,400 17,927 20,875 18,073
Income allocation to minority interest 272 677 1,026 1,349 1,329
-------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting principle 10,485 15,723 16,901 19,526 16,744
Cumulative effect of change in accounting
principle -- (668) -- -- --
-------- -------- -------- -------- --------
Net income 10,485 15,055 16,901 19,526 16,744
Preferred stock distribution (6,938) (6,938) (6,938) (6,938) (2,100)
-------- -------- -------- -------- --------
Net income available to common shareholders $ 3,547 $ 8,117 $ 9,963 $ 12,588 $ 14,644
======== ======== ======== ======== ========
Earnings per share:
Net income per common share $ 0.21 $ 0.48 $ 0.61 $ 0.77 $ 0.92
======== ======== ======== ======== ========
Net income per common share assuming dilution $ 0.21 $ 0.48 $ 0.61 $ 0.77 $ 0.91
======== ======== ======== ======== ========
Weighted average number of common shares 16,926 16,890 16,467 16,286 15,990
Weighted average number of common shares
assuming dilution 18,239 18,188 18,108 18,040 17,555
Distributions per common share $ 0.99 $ 1.12 $ 1.12 $ 1.09 $ 1.08
14
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA (AT END OF PERIOD):
Cash $ 887 $ 167 $ 28 $ 33 $ 164
Investment in hotel properties 350,087 366,882 388,870 397,861 279,485
Total assets 376,904 394,310 406,071 412,156 287,827
Total debt 170,584 172,672 174,475 173,085 44,081
Shareholders' equity 184,205 198,716 209,078 213,425 217,490
OTHER DATA:
Cash provided by (used in):
Operating activities $ 37,348 $ 39,589 $ 39,952 $ 34,605 $ 27,811
Investing activities (5,967) (10,231) (12,658) (135,398) (82,349)
Financing activities (30,661) (29,219) (27,299) 100,662 54,468
Lessees' room revenue 125,543 134,977 134,886 117,752 79,526
Funds from operations (1) 26,583 31,268 31,793 30,326 26,037
Cash available for distribution 16,768 23,483 24,735 24,093 21,809
(1) Funds from operations ("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 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 (see Note 2 to the
Consolidated Financial Statements). 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 table sets forth selected financial information for CapStar
Winston for the years ended December 31, 2001, 2000 and 1999. This information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and
notes thereto included elsewhere in this report.
CAPSTAR WINSTON COMPANY, L.L.C.
SELECTED HISTORICAL FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
2001 2000 1999
---- ---- ----
Room revenue $ 122,487 $ 126,884 $ 127,571
Other revenue 13,150 14,664 14,144
--------- --------- ---------
Total revenue 135,637 141,548 141,715
--------- --------- ---------
Rooms expense 27,677 29,202 29,037
Percentage lease expense 54,290 57,995 58,551
Other expenses 51,150 74,606 53,240
--------- --------- ---------
Total expenses 133,117 161,803 140,828
--------- --------- ---------
Net income (loss) $ 2,520 $ (20,255) $ 887
========= ========= =========
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering of its common stock ("Common Stock"),
utilizing the majority of the proceeds to acquire one hotel and a general
partnership interest (as the sole general partner) in WINN Limited Partnership
(the "Partnership"). The Partnership used a substantial portion of the proceeds
to acquire nine additional hotel properties. These ten hotels were acquired from
affiliates of WHI. WHI and the Partnership (collectively the "Company") began
operations as a REIT on June 2, 1994. As of December 31, 2001, WHI's ownership
in the Partnership was 92.87% (see Note 7 to the consolidated financial
statements).
During 1995 and 1996, WHI completed follow-on Common Stock offerings, as well
as a Preferred Stock offering in September 1997, and invested the net proceeds
from these offerings in the Partnership. The Partnership utilized the proceeds
to acquire 28 additional hotel properties. The Company owned 31 hotels as of
December 31, 1996 and acquired seven hotels in 1997 (collectively the "1997
Hotels"). During 1998, the Company added 13 additional properties to its
portfolio, five of which were internally developed (the "1998 Hotels"). The
Company sold two hotels in 2000 and one hotel in 2001. As of December 31, 2001,
the Company wholly owned 48 hotel properties (the "Current Hotels") in 12 states
having an aggregate of 6,574 rooms.
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. 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 679 rooms. The Company has no ownership interest
in any property for which it has provided mezzanine financing.
As of December 31, 2001, the Company leased 46 of the 48 Current Hotels to
CapStar Winston Company, L.L.C. ("CapStar Winston"), a wholly owned subsidiary
of MeriStar Hotels and Resorts, Inc. ("MeriStar"), 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").
CapStar Winston also currently leases two Joint Venture Hotels located in Ponte
Vedra, FL and Evanston, IL. Six Continents also currently leases the Joint
Venture Hotel located in Windsor, CT. All 48 of the Current Hotels are leased
pursuant to separate percentage operating lease agreements that provide for rent
payments based, in part, on revenues from the Current Hotels (the "Percentage
Leases"). Under the terms of the Percentage Leases, the lessees are obligated to
pay the Company the greater of base rent or percentage rent ("Percentage Rent").
The Percentage Leases are designed to allow the Company to participate in the
growth in revenues at the Current Hotels by requiring that a portion of each
Current Hotel's room revenues in excess of specified amounts will be paid to the
Company as Percentage Rent.
CapStar Winston is a wholly owned subsidiary of MeriStar Hotels and Resorts,
Inc. ("MeriStar"). As of December 31, 2001, MeriStar, the nation's largest
independent hotel management company, leased or managed 275 hospitality
properties with more than 57,000 rooms in 41 states, the District of Columbia
and Canada.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The Company believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its financial statements.
Revenue Recognition
- -------------------
The Company recognizes contingent percentage lease revenue when each hotel
achieves annual specified room revenue hurdles, effectively deferring the
recognition of contingent percentage lease revenue from the first and second
quarters to the third and fourth quarters of the calendar year. There are no
significant estimates involved in the recognition of revenue. Due to the timely
remittance of payments, no significant allowance for doubtful accounts is
recorded.
Joint Ventures
- --------------
The Company has a 49% interest in three joint ventures. The Company has
determined that it does not have a controlling interest in any of the joint
ventures and therefore uses the equity method to recognize its share of net
income or loss from the joint ventures and
16
adjusts the carrying value of the investment accordingly. The joint ventures'
assets, liabilities, and equity are not recorded on the Company's balance sheet.
The Company receives current financial information from the joint ventures
and performs an analysis to determine its share of income. This analysis
includes the review of operational data, significant assets and liabilities, and
results of operations to ensure that the Company's interests are realizable. The
Company considers the operating trends and expectations for the foreseeable
future. The Company believes that these joint venture operations presently
support the carrying value of the investments in joint ventures.
Impairment of Long-Lived Assets
- -------------------------------
The Company evaluates the potential impairment of individual long-lived
assets, principally the hotel properties. The Company performs an analysis of
the operating results of the assets and trends and prospects of the local hotel
and lodging market. Key company and industry statistics include occupancy rates,
average daily room rates, and revenue per available room ("RevPar"). Significant
changes in the hotel and lodging market could affect the analysis. During the
second half of 2001, the industry and the Company experienced a decline in
RevPar. The Company expects the negative trend in RevPar to continue through the
second quarter of 2002. The Company will continue to analyze the operating
results of each hotel and evaluate the potential for impairment.
Derivative Instruments
- ----------------------
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 derivatives.
Derivatives are used primarily to fix the interest rate on debt based on
floating-rate indices and to 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. On December 18,
2000, the Company completed an interest rate swap on $50,000 of its outstanding
variable rate debt under its $125,000 line of credit (the "Line"). The Company's
interest rate swap qualifies as a hedge for accounting purposes, and therefore
is reported at its fair value on the Consolidated Balance Sheets. Changes in the
Company's amounts due to banks could affect the hedge determination. The
interest rate swap 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, which is two years prior to the expiration of
the Line, at which time the variable rate debt will no longer be fixed. The
Company plans to continue to monitor its interest rate risk and to manage and
limit this risk in accordance with its established interest rate risk management
policies.
RESULTS OF OPERATIONS
For the periods ended December 31, 2001 and 2000, the differences in
operating results are attributable primarily to a weakening economy that was
accelerated by the terrorist attacks that occurred on September 11, 2001. The
Company sold its Comfort Inn hotel in Raleigh, NC in April 2001, resulting in a
net loss of $682. The Company sold its Comfort Suites hotel in London, Kentucky
in February 2000 and its Hampton Inn hotel in Duncanville, Texas in September
2000, resulting in combined net losses of $850.
For the periods ended December 31, 2000 and 1999, the differences in
operating results are primarily attributable to the adoption of Staff Accounting
Bulletin No. 101 ("SAB 101"). SAB 101 was issued by the Securities and Exchange
Commission in December 1999 and adopted by the Company effective January 1,
2000. SAB 101 requires that a lessor not recognize contingent rental income
until annual specified hurdles have been achieved by the lessees. As a result of
SAB 101, the Company recognized an additional $221 of percentage lease revenue
for the year 2000. Had the Company not adopted SAB 101, the Company would have
reported percentage lease revenue totaling $62,209 for 2000, a decrease of $28
versus $62,237 for 1999. SAB 101 has 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 terrorist attacks of September 11, 2001 and the effects of the economic
recession have led to a substantial reduction in business and leisure travel
throughout the United States. As a result, in the fourth quarter of 2001, our
RevPar decreased 11% and our FFO per share decreased 41% from our results for
the fourth quarter of 2000. We expect the decline in our year over year RevPar
for the first quarter of 2002 to be generally consistent with the decline we
experienced in the fourth quarter of 2001. In addition, we expect the decline
in our year over year FFO per share for the first quarter of 2002 to be
approximately 31%. Depending on the speed of the economic recovery and other
factors, we may experience declines in our year over year RevPar and FFO per
share for the second quarter of 2002 at similar levels.
The table below outlines the Company's hotel properties owned as of December
31, 2001, 2000 and 1999.
December 31, 2001 December 31, 2000 December 31, 1999
-------------------------- ------------------------- -------------------------
Acquisitions Properties Acquisitions Properties Acquisitions Properties
during owned at during owned at during owned at
Type of Hotel the year year end the year year end the year year end
- ------------- -------- -------- -------- -------- -------- --------
Limited-service hotels -- 27* -- 28** -- 30
Extended-stay hotels -- 10 -- 10 -- 10
Full-service hotels -- 11 -- 11 -- 11
-------- -------- -------- --------- -------- --------
Total -- 48 -- 49 -- 51
======== ======== ======== ========= ======== ========
17
* The Company sold one hotel during 2001 as noted above.
** The Company sold two hotels during 2000 as noted above.
In order to present a more meaningful comparison of operations, the following
comparisons are presented:
THE COMPANY:
o operating results for the year ended December 31, 2001 versus
operating results for the year ended December 31, 2000;
o operating results for the year ended December 31, 2000 versus
operating results for the year ended December 31, 1999;
CAPSTAR WINSTON COMPANY, L.L.C.:
o operating results for the year ended December 31, 2001 versus
operating results for the year ended December 31, 2000;
o operating results for the year ended December 31, 2000 versus
operating results for the year ended December 31, 1999.
THE COMPANY
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000
- ----------------------------------------------------------------
The Company had revenues of $57,470 in 2001, consisting of $54,755 of
percentage lease revenues and $2,715 of interest, joint venture and other
income. Percentage lease revenues decreased $7,675 in 2001 from $62,430 in 2000.
This decrease was due primarily to a sharp decline in RevPar during the last
four months of 2001 as a result of a weakening economy accelerated by the
terrorist attacks that occurred on September 11, 2001. In 2001, RevPar decreased
1.4% from January through August, as occupancy declined 6.2%, offset by an
increase in the average daily rate of 5.1%. However, RevPar decreased 12.0% from
September through December, including a RevPar decline of 19.8% in September.
During the last four months of 2001, occupancy declined 10.1% and the average
daily rate declined 2.2%. Percentage lease revenue also decreased $756 due to
the sale of two hotels during 2000 and one hotel during 2001. Interest, joint
venture and other income increased $1,426 to $2,715 in 2001 from $1,289 in 2000.
This increase is due primarily to an increase in development and design and
purchasing fees, an increase in income generated by the Joint Venture Hotels and
an increase in interest income from mezzanine loans.
Real estate taxes and property and casualty insurance expenses remained
constant, at $6,682 in 2001 as compared to $6,630 in 2000. Real estate taxes
increased $141 due to increased rates and property values in 2001 while property
insurance expense decreased $23 due primarily to a lower number of claims made
in 2001. In addition, ground lease expense decreased $66 in 2001 as a result of
lower room revenues at the corresponding hotel. General and administrative
expenses increased to $5,419 in 2001 from $4,323 in 2000. This increase is due
primarily to site acquisition expenses of $272, costs related to efforts to
purchase the Percentage Leases totaling $255, a decrease in capitalized costs
totaling $341, and loan costs totaling $124. The loan costs were expensed due to
the inability to finalize a collateralized mortgage backed securities debt
instrument as a result of the instability in the marketplace caused by the
terrorist attacks on September 11, 2001. Interest expense decreased $1,321 to
$12,170 in 2001 from $13,491 in 2000, due primarily to a decrease in the annual
weighted-average interest rate of 0.74% from 7.77% in 2000 to 7.03% in 2001 and
a decrease in weighted average borrowings from $173,213 in 2000 to $172,022 in
2001. Depreciation expense decreased $300 to $20,792 in 2001 from $21,092 in
2000, due primarily to the sale of two hotels during 2000 and one hotel during
2001. Amortization expense increased slightly to $968 in 2001 from $933 in 2000.
YEAR ENDED DECEMBER 31, 2000 VERSUS YEAR ENDED DECEMBER 31, 1999
- ----------------------------------------------------------------
The Company had revenues of $63,719 in 2000, consisting of $62,430 of
percentage lease revenues and $1,289 of interest, joint venture and other
income. Percentage lease revenues increased $193 in 2000 from $62,237 in 1999.
This increase was primarily attributable to an increase in lease revenue due to
the Company's adoption of SAB 101 effective January 1, 2000, which resulted in
additional lease revenue recognition of $221. Had the Company not adopted SAB
101, lease revenue for 2000 would have been $62,209, a decrease of $28 from its
1999 lease revenue of $62,237. This decrease was primarily due to a decrease of
$1,348 in percentage lease revenue generated from the 1997 Hotels due to
competitive pressures resulting in lower occupancy rates. This decrease also
included a decrease of $421 in percentage lease revenue from the two hotels sold
during 2000. This decrease was offset by an increase of $1,741 in percentage
lease revenue generated from the 1998 Hotels due to higher occupancy rates and
average daily rates. Most of the 1998 Hotels are full service, up scale hotels,
while the 1997 Hotels are mostly limited service hotels. Interest, joint venture
and other income increased $856 to $1,289 in 2000 from $433 in 1999. This
increase is due primarily to an increase in development and design and
purchasing fees and an increase in interest income from mezzanine loans.
Real estate taxes and property and casualty insurance expenses incurred in
2000 were $6,630, an increase of $274 from $6,356 in 1999. Real estate taxes
increased $131 due to increased rates and property values in 2000. Property
insurance increased $143 due primarily to property coverage premium increases.
General and administrative expenses remained constant, at $4,323 in 2000 as
18
compared to $4,236 in 1999. Interest expense increased $978 to $13,491 in 2000
from $12,513 in 1999, primarily due to an increase in the annual
weighted-average interest rate of 0.72% from 7.05% in 1999 to 7.77% in 2000 and
a decrease in capitalized interest of $137 from $163 in 1999 to $26 in 2000,
offset by a decrease in weighted average borrowings from $178,038 in 1999 to
$173,213 in 2000. Depreciation expense increased $527 to $21,092 in 2000 from
$20,565 in 1999, primarily due to depreciation related to renovations and
capital additions completed during 2000 and the second half of 1999 offset by
disposals of two hotels sold during 2000. Amortization expense increased $99 to
$933 in 2000 from $834 in 1999. The increase is primarily attributable to twelve
months of amortization in 2000 of deferred financing costs associated with the
Company's then new $140,000 line of credit, which originated in February 1999,
versus eleven months of amortization in 1999.
CAPSTAR WINSTON COMPANY, L.L.C.
YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000
- ----------------------------------------------------------------
CapStar Winston had room revenues of $122,487 in 2001, a decrease of $4,397
from $126,884 in 2000. The decrease in room revenues was due to a decrease in
occupancy rates from 68.6% to 63.5% partially offset by an increase in the
average daily rate of $3.29 from $77.29 to $80.58. RevPar decreased $1.86 to
$51.13 in 2001 from $52.99 in 2000. Food and beverage revenue decreased $645 to
$7,546 in 2001 from $8,191 in 2000. This decrease was due to a decline in room
service, lounge, and banquet related revenues resulting from decreased
occupancy. Telephone and other operating departments revenue decreased $869 to
$5,604 in 2001 from $6,473 in 2000 due to a decrease in long distance telephone
revenue. Increased use of cellular phones and calling cards by business
travelers led to this decline.
CapStar Winston had total expenses in 2001 of $133,117, a decrease of $28,686
from $161,803 in 2000. The decrease was primarily attributable to an asset
impairment charge in 2000 of $21,658 to adjust goodwill created from the
acquisition of the leases from Winston Hospitality, Inc. in 1997. This charge is
a non-cash adjustment to the carrying value of those assets. Lower lease expense
and administrative and general expenses also led to the decline. Lease expense
declined as a result of decreased occupancy and room revenues. Administrative
and general expenses were lower due to reductions in labor cost, security and
corporate reimbursables.
YEAR ENDED DECEMBER 31, 2000 VERSUS YEAR ENDED DECEMBER 31, 1999
- ----------------------------------------------------------------
CapStar Winston had room revenues of $126,884 in 2000, a decrease of $687
from $127,571 in 1999. The decrease in room revenues was primarily due to the
sale of the Comfort Suites in London, Kentucky by the Company in February 2000,
the sale of the Hampton Inn in Duncanville, Texas in September 2000, and a
decrease in occupancy rates from 71.0% to 68.6%. Although room revenues
decreased, RevPar increased 0.2% due to a decrease in total rooms available.
Food and beverage revenue increased $176 to $8,191 in 2000 from $8,015 in 1999.
This increase was due to a rise in room service, lounge, and banquet related
revenues. Telephone and other operating departments revenue increased $344 to
$6,473 in 2000 from $6,129 in 1999 due to a rise in revenues from movies/videos
and banquet production for limited service hotels.
CapStar Winston had total expenses in 2000 of $161,803, an increase of
$20,975 from $140,828 in 1999. The increase was primarily attributable to an
asset impairment charge of $21,658 to adjust goodwill created from the
acquisition of the leases from Winston Hospitality, Inc. in 1997. This charge is
a non-cash adjustment to the carrying value of those assets. This increase is
partially offset by a decrease in expenses attributable to the sale of the
Comfort Suites in London, Kentucky in February 2000 and the sale of the Hampton
Inn in Duncanville, Texas in September 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the year ended December 31, 2001
cash flow provided by operating activities was $37,348 and FFO was $26,583. The
Company's FFO is equal to net income 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. Under federal income tax law provisions applicable to REITs prior
to January 1, 2001, the Company was required to distribute at least 95% of its
taxable income to maintain its tax status as a REIT. For taxable years beginning
after December 31, 2000, the taxable income distribution requirement has been
reduced to 90%. In 2001, the Company declared total distributions of $23,694,
$16,756 to its common shareholders and $6,938 to its preferred shareholders.
Based on the Company's 2001 taxable income, the Company was required to
distribute approximately $14,081 to maintain its REIT status as described above.
During the fourth quarter of 2001, the Company reduced its quarterly common
share dividend from $0.28 per share,
19
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. The Company
intends to monitor its dividend policy closely and to act accordingly as
earnings dictate. 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 its dividend policy or the
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 during the year ended
December 31, 2001 totaled $5,967, consisting of cash out flows for mezzanine
financing, capital expenditures, renovation of hotels and investments in joint
ventures, offset by proceeds from the sale of one hotel and proceeds from the
settlement of a lawsuit.
In 2001 and 2000, the Company made three mezzanine loans totaling $3,516 to
third party hotel owners. During 2001, the Company provided $2,186 in mezzanine
financing to Noble Investments-Tampa, LLC to develop a Hilton Garden Inn in
Tampa, FL (the "Tampa Hotel"). The Company receives monthly interest at annual
rates based on 30-day LIBOR plus 8.44% until the earliest of (a) prepayment of
the loan, (b) the initial maturity date of January 1, 2004, or (c) the earlier
of (1) 60 days before the maturity date of the borrower's qualified refinancing,
or (2) February 1, 2006. During 2000, the Company provided $1,080 in mezzanine
financing to Noble Investments-Sugarloaf, LLC to develop a Hilton Garden Inn in
Atlanta (Sugarloaf), GA (the "Sugarloaf Hotel"). The Company receives monthly
interest at annual rates based on 30-day LIBOR plus 7.36% until the earlier of
(a) prepayment of the loan or (b) June 30, 2005. Both loans are subject to
prepayment penalties during the first three years. When each hotel opened, the
Company began to earn interest equal to 2% of gross revenues, 25% of which is
paid monthly and the remainder is accrued ("Accrued Interest"). On the earlier
of prepayment or the maturity date of each loan, the Company will also receive
the greater of the Accrued Interest or, with respect to the Tampa Hotel, 20% of
the appreciation in value, and with respect to the Sugarloaf Hotel, 15% of the
appreciation in value. In addition to earning interest income, the Company also
provided development and purchasing services to Noble during each hotel's
construction stage for additional fee income. The Company co-developed the
Sugarloaf Hotel and developed the Tampa Hotel. During 2001 and 2000, these fees
totaled $645 and $137, respectively. Both the Tampa Hotel and the Sugarloaf
Hotel are owned 100% by unaffiliated single purpose entities (the "Borrowers").
The Company holds collateral equal to 100% of the ownership interest in the
Borrowers. Noble Investments LLC and The Noble Company, LLC each unconditionally
guaranteed the loan for the benefit of the Company. The Borrowers made initial
equity investments equal to 20% of the total cost of the respective hotel, and
there are certain default provisions under which the Company may declare the
loan immediately due and payable or may step in and take control of the
Borrowers, including for failure to maintain specified debt coverage ratios. The
Atlanta (Sugarloaf) project opened during the second quarter of 2001, and the
Tampa project opened during the first quarter of 2002. In 2001, the Company also
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.
During 2001, the Company spent $9,436 or 7.5% of the lessees' room revenue,
in connection with the renovation of its Current Hotels and plans to spend
approximately $6,500 during 2002. Pursuant to the Percentage Leases, the Company
is required to spend 5% of room revenues for its hotels (7% of room revenues and
food and beverage revenues for one of its full service hotels) 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 $125,000 line of credit (the "Line"), sources that 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 were
approximately 5.1% of room revenues in both 2001 and 2000 and are paid by the
lessees.
During 1999, the Company entered into a joint venture agreement with a
subsidiary of Regent Partners, Inc. (the "Regent Joint Venture") to jointly
develop and own upscale hotel properties. The Regent Joint Venture consists of
two separate joint ventures, each of which owns one hotel. The first hotel
developed under the Regent Joint Venture was a $16 million, full service
157-room Hilton Garden Inn in Windsor, CT, opened in September 2000. The second
hotel, a $20 million, 178-room Hilton Garden Inn in Evanston, IL, opened in July
2001.
Regent currently may offer the Company the right to purchase its interest
in either of the Regent Joint Ventures and, if the Company refuses to purchase
the interest, Regent may cause the joint venture to sell the hotel owned by the
applicable joint venture to a third party. In addition, at the Company's
option, it has the right to acquire Regent's interest in either joint venture
(1) at any time after 60 months following the date the applicable hotel
commenced operations or (2) if Regent fails to sell the applicable hotel
following the Company's rejection of an offer by Regent to sell the Company its
interest in that joint venture. The Company owns a 49% ownership interest in the
Regent Joint Venture.
Additionally, in April 2000, the Company entered into a joint venture
agreement with Marsh Landing Investment, LLC ("Marsh") to jointly develop an $8
million, 118-room Hampton Inn in Ponte Vedra, FL. This hotel opened in December
2000. The Company owns 49% of the joint venture, and Marsh, a company owned by
Charles M. Winston and James H. Winston, owns the remaining 51%. Both Charles M.
Winston and James H. Winston serve on the Company's Board of Directors. Marsh
currently may offer the Company the right to purchase Marsh's interest in the
joint venture and, if the Company refuses to purchase the interest, Marsh may
cause the joint venture to sell the hotel owned by the joint venture to a third
party. In addition, at the Company's option, it has the right to acquire Marsh's
interest in the joint venture (1) at any time after December 2005 or (2) if
Marsh to fails to sell the hotel following the Company's rejection of an offer
by Marsh to sell it's interest in the joint venture to the Company.
During 2001, the Company received cash distributions from the three joint
ventures totaling $1,029. Under the terms of the joint ventures, the Company has
provided property development and purchasing services and will continue to
provide ongoing asset
20
management services for additional fee income. Fifty-one percent of such fee
income is recognized as revenue, and 49% as a reduction of investment in the
joint ventures, based on the Company's ownership level in each joint venture
hotel. Such income earned during 2001 and 2000 totaled $286 and $308,
respectively. Under the terms of the operating agreement for each joint venture,
the Company must approve all major decisions, including refinancing or selling
the respective hotels, making loans, changes in partners' interests, entering
into contracts of $25 or more, and purchasing or acquiring assets. As of
December 31, 2001, the total assets of the three joint ventures were $44,925,
total liabilities were $27,887 ($27,068 of which represented long-term debt),
and total equity was $17,038. The Company's 49% proportionate share of the total
assets, liabilities, long-term debt and equity equated to $22,013, $13,665,
$13,263 and $8,349, respectively. For the years ended December 31, 2001 and
2000, the total revenue of the three joint ventures was $4,394 and $414, and
total expenses were $3,326 and $478, resulting in net income(loss) of $1,068 and
$(64), respectively. During the year ended December 31, 2001, the unaudited
financial statements of the joint ventures reflected aggregate cash flow
provided by operating activities of $2,261, cash used in investing activities of
$14,487, principally for hotel additions, and cash provided by financing
activities of $11,448, principally in the form of loan proceeds and capital
contributions less distributions to joint venture partners.
The Company is actively seeking one or more institutional investors as joint
venture partners to acquire: (i) hotels for repositioning, (ii) hotels for
rehabilitation and (iii) hotels that could benefit from new management and
additional capital. The Company expects to make a minority interest investment
in any joint venture formed and expects to receive fees for overseeing the joint
venture's properties and operations. In addition to generating development,
purchasing and asset management fee income and thus enhancing the Company's
revenues and cash flow, the Company expects to receive other benefits from joint
venture agreements, such as expanded affiliations with leading upscale brands
and growth in the Company's portfolio with limited equity investments.
The Company owns a 50% interest in a joint venture with an affiliate of
Concord Hospitality Enterprises, Inc. This joint venture currently has no
operations, but it has two hotels under contract for purchase at prices
aggregating approximately $7.0 million. The Company estimates that these two
hotels will require an additional approximately $8.0 million in renovations.
Under certain circumstances, Concord will have the right to purchase the
Company's interest in the two hotels.
The Company sold its Comfort Inn hotel in Raleigh, NC during 2001. The total
proceeds were $3,800. The Company also sold a parcel of land during 2001 for
proceeds totaling $508. The Company also is considering the sale of certain
other non-core hotels that lie outside the Company's "mid-scale without food and
beverage" and "upscale" segment focus and plans to use the proceeds to reduce
debt, invest in hotel properties, or provide mezzanine loans.
The Company's net cash used in financing activities during the year ended
December 31, 2001 totaled $30,661. This net use of cash was primarily due to the
payment of distributions to shareholders of $25,887 and the payment of
distributions to the Partnership's minority interest of $1,454. This amount also
includes principal payments totaling $1,188 related to the Company's $71,000
fixed rate note.
On December 19, 2001, the Company amended and restated its previous $140,000
line of credit with the same group of banks, led by Wachovia Bank, N.A. Fees
paid in connection with the new financing facility totaled $1,232. The new
$125,000, three-year line of credit (the "Line") bears interest at rates from
LIBOR plus 1.75% to 2.50%, based on the Company's consolidated debt leverage
ratio. The Line is collateralized with 28 of the Current Hotels, with a net book
value of $200,786 as of December 31, 2001. The Company used the proceeds from
the Line to pay off the outstanding balances under the previous $140,000 line of
credit. During 2001, the Company reduced the outstanding balance under its line
of credit $900, from $103,800 to $102,900. In accordance with the provisions of
the Line, the Company's availability under the Line totaled approximately
$14,300 as of December 31, 2001. The Line requires the Company to maintain
certain financial ratios including maximum leverage, minimum interest coverage
and minimum fixed charge coverage, as well as certain levels of unsecured and
secured debt and tangible net worth, all of which the Company was in compliance
with as of December 31, 2001.
The Company had $67,684 in debt at December 31, 2001 that was subject to a
fixed interest rate and fixed monthly payments with GE Capital Corporation. This
debt, a ten-year loan with a 25-year amortization period,carries an interest
rate of 7.375%. All unpaid principal and interest are due on December 1, 2008.
The GE Capital loan is collateralized with 14 of the Company's Current Hotels
with a net book value of $117,427 as of December 31, 2001.
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
2.25%, equaling a fixed rate of 8.165% on $50,000 until December 18, 2002.
In August 2000, the Company announced that its Board of Directors authorized
the Company to purchase up to 1,000,000 shares of its Common Stock. In making
the determination of whether or not to buy shares of Common Stock, management
thoroughly analyzes
21
the yield on such a buyback versus the yield from alternative uses of capital.
Management also considers that when borrowing under the Line to purchase Common
Stock, the Company's availability under the Line is permanently impaired. To
date, the Company has determined that a Common Stock buyback is not in the best
interest of its shareholders.
As of December 31, 2001, the Company's contractual obligations and
commitments (excluding obligations and commitments pursuant to the Company's
joint ventures) were as follows:
PAYMENTS DUE BY PERIOD
----------------------
AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
- ----------------------- -------- -------- --------- --------- -------
Long-term debt $ 67,684 $ 1,278 $ 2,856 $ 3,308 $60,242
Corporate office lease 1,154 355 736 63 --
-------- -------- --------- --------- -------
Total Contractual Obligations $ 68,838 $ 1,633 $ 3,592 $ 3,371 $60,242
======== ======== ========= ========= =======
AFTER 5
OTHER COMMERCIAL COMMITMENTS TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
- ---------------------------- -------- -------- --------- --------- -------
Line of credit $102,900 $ -- $ 102,900 $ -- $ --
======== ======== ========= ========= =======
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, as
well as other investment opportunities including, but not limited to, the
acquisition of assets that require substantial renovation and repositioning
within a particular market. 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. Furthermore, there can be no assurances that
the Company will be able to obtain any additional financing.
CapStar Winston leases 46 of the 48 properties the Company wholly-owns, and
leases two of the three properties in which the Company owns a 49% interest.
CapStar Winston does not lease any hotel for which the Company has provided
mezzanine financing. CapStar Winston's largest source of funds is cash flows
from operations, which provided $209 in 2001, but used $235 in 2000 and $820 in
1999. During the three year period ended December 31, 2001, CapStar Winston
advanced an aggregate of $7,444 to its 99% owner, MeriStar H&R Operating
Company, L.P. (MHOC). As of December 31, 2001, cumulative advances to MHOC
amounted to $12,386 and are recorded as current assets. At that date, total
current assets of CapStar, exclusive of the advances receivable from MHOC,
amounted to $3,889, while current liabilities amounted to $11,144. Repayment to
CapStar Winston by MHOC of these advances may be dependent on the financial
condition and future profitable operations of MHOC and/or its parent company and
affiliates. MeriStar Hospitality Corporation, an affiliate of both CapStar
Winston and MHOC, has guaranteed amounts due and payable to the Company, up to
$20,000, under the 46 properties CapStar Winston leases and the Company
wholly-owns.
If CapStar Winston's operations are adversely affected by economic or other
circumstances, it may be unable to meet its obligations to Winston for the hotel
leases, which amount to a minimum of $34,352 for each of the next 5 years, and
an aggregate of $206,433 thereafter. If CapStar Winston defaults under the terms
and conditions of any hotel lease with the Company, the remainder of all such
leases shall be deemed to be in default. If this occurs, the Company has the
right to terminate all of the CapStar Winston leases and to replace CapStar
Winston with another lessee without any further obligations to CapStar Winston.
The Company is currently negotiating with CapStar Winston to acquire the 46
operating leases for the hotels that the Company owns 100% of and the two
operating leases for the hotels that the Company owns a 49% ownership interest
in through joint venture agreements. If successful, the Company expects to
lease these 48 hotels to new taxable REIT subsidiaries as permitted under the
REIT Modernization Act that became effective January 1, 2001. In such event, the
Company's taxable REIT subsidiaries would enter into hotel management agreements
with third party management companies, which qualify as eligible independent
contractors, to manage the hotels. However, there can be no assurance that the
Company will be able to successfully negotiate and complete the acquisition of
these leases and enter into a taxable REIT subsidiary lessee structure.
22
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations,"
("SFAS No. 141"). SFAS No. 141 supersedes APB Opinion No. 16, "Business
Combinations," and FASB Statement No. 38, "Accounting for Pre-acquisition
Contingencies of Purchased Enterprises." SFAS No. 141 requires: (1) that all
business combinations be accounted for by the purchase method, thereby
eliminating the pooling method, (2) that assets (including intangible assets) be
recognized and valued apart from goodwill, and (3) that additional disclosures
be made regarding business combinations and the resulting allocation of purchase
price. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001 and to all purchase method acquisitions dated on
or after July 1, 2001. The Company's adoption of SFAS No. 141 did not have a
material impact on the Company's financial statements or results of operation.
In June 2001, the FASB issued Statement of Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142
supersedes APB Opinion No. 17, "Intangible Assets" and primarily addresses
accounting for goodwill and other intangible assets subsequent to their
acquisition. The major provisions include (1) the ceasing of amortization of
goodwill and indefinite lived intangible assets, (2) the testing for impairment
of goodwill and indefinite lived intangible assets at least annually, and (3)
the removal of the restriction that the maximum amortization period of
intangible assets with finite lives be limited to 40 years. The provisions of
SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001 (with the exception that any goodwill or intangible assets acquired after
June 30, 2001 will be subject immediately to the statement's provisions) with
application being required at the beginning of an entity's fiscal year. Any
impairment losses from the initial application are to be reported as a
cumulative effect of a change in accounting principle in accordance with APB 20,
"Accounting Changes." The Company's adoption of SFAS No. 142 is not expected to
have a material impact on the Company's financial statements or results of
operations.
In October 2001, the FASB issued FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121") and APB 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of Business, and Extraordinary, Unusual and Infrequent Occurring Events
and Transactions." In summary, SFAS No. 144 retains the fundamental recognition
and measurement provision of SFAS No. 121, however, establishes a
"primary-asset" approach to determining the cash flow estimation period for a
group of assets and liabilities. SFAS No. 144 retains the basic provisions of
APB 30, but broadens the presentation to include a component of an entity. In
addition, discontinued operations are no longer measured on a net realizable
value basis and future operating losses are no longer recognized before they
occur. Rather, they are carried at the lower of its carrying amount or fair
value less cost to sell. The provisions of SFAS No. 144 are required to be
applied for fiscal years beginning after December 15, 2001. The Company's
adoption of SFAS No. 144 is not expected to have a material impact on the
Company's financial statements or results of operations.
SEASONALITY
The Company's operations historically have been seasonal in nature,
reflecting higher RevPar during the second and third quarters. This seasonality
and the structure of the Percentage Leases, which provide for a higher
percentage of room revenues above the minimum equal quarterly levels to be paid
as Percentage Rent, can be expected to cause fluctuations in the Company's
receipt of quarterly lease revenue under the Percentage Leases. SAB 101, which
requires that a lessor not recognize contingent rental income until the lessee
has achieved annual specified hurdles, effectively defers recognition by the
Company of a significant portion of percentage lease revenue from the first and
second quarters to the third and fourth quarters of the calendar year. SAB 101
has no impact on the Company's FFO, or on its interim or annual cash flow from
its third party lessees, and therefore, on its ability to pay dividends (see
Note 2 to the Company's consolidated financial statements).
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, non-payment of
mezzanine loans, failure to attract joint venture opportunities and other risk
factors described in Exhibit 99.1 attached to this report and hereby
incorporated herein by reference.
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RISK FACTORS
RISKS RELATING TO OUR BUSINESS
THE EVENTS OF SEPTEMBER 11, 2001, AS WELL AS THE U.S. ECONOMIC RECESSION, HAVE
ADVERSELY IMPACTED THE HOTEL INDUSTRY GENERALLY, AND WE HAVE EXPERIENCED AN
ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
Prior to September 11, 2001, our hotels had begun experiencing declining
revenue per available room, or "RevPAR," as a result of the slowing U.S.
economy. The terrorist attacks of September 11, 2001 and the effects of the
economic recession have led to a substantial reduction in business and leisure
travel throughout the United States, and industry RevPAR generally, and RevPAR
at our hotels specifically, has declined substantially since September 11. While
RevPAR at our hotels has improved from the depressed levels in the weeks
immediately following the events of September 11, RevPAR at our hotels remains
below pre-September 11 levels and may remain at such depressed levels. We cannot
predict the extent to which the events of September 11 and the economic
recession will continue to directly or indirectly impact the hotel industry or
our operating results in the future. Continued depressed RevPAR at our hotels
which we expect in the near term could have an adverse effect on our results of
operations and financial condition, including our ability to remain in
compliance with the covenants contained in our debt instruments, our ability to
fund capital improvements and renovations at our hotels and our ability to make
dividend payments necessary to maintain our REIT tax status. Additional
terrorist attacks could have further material adverse effects on the hotel
industry and our operations.
WE MAY NOT HAVE ACCESS TO FINANCING FOR ACQUIRING OR DEVELOPING ADDITIONAL
HOTELS.
Our ability to pursue our growth strategy depends, in part, on our ability
to finance additional hotel acquisitions and development. We are subject to
restrictions that may limit our ability to take advantage of expansion
opportunities that we believe are attractive. Our existing $125 million line of
credit limits our borrowing availability to a percentage of the value of the
hotels provided as collateral, with the value determined in part by the cash
flow generated by those hotels. As a result, as of December 31, 2001, we had
approximately $117.2 million available for borrowing under our line of credit,
of which $102.9 million was outstanding. If we need to borrow funds under the
line of credit in excess of our current borrowing availability, we must provide
additional collateral, which may not be available, to increase our borrowing
availability to the total amount of debt we need, up to a maximum amount $125
million. In addition, our articles of incorporation limit our debt to 60% of the
cost of our investment in hotel properties.
Our ability to raise additional equity capital will depend on market
conditions. We cannot assure you that we will be able to raise funds through a
public or private offering at a time when we need access to funds. We may seek
alternative methods of funding expansion, such as joint venture development;
however, we cannot assure you that such opportunities will be available when we
need them or on acceptable terms.
OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR SHAREHOLDERS DEPENDS UPON THE ABILITY
OF OUR LESSEES TO MAKE RENT PAYMENTS UNDER OUR LEASES, PARTICULARLY THE ABILITY
OF ONE LESSEE THAT ACCOUNTS FOR MOST OF OUR REVENUE.
Our income depends upon rental payments from lessees of our hotels. Any
failure or delay by the lessees in making rent payments would adversely affect
our ability to make distributions to our shareholders. Our lessees' ability to
make rental payments depends on their ability to generate sufficient revenues
from our hotels in excess of operating expenses. Our leases require the lessees
to pay us (1) the greater of a base rent or percentage rent and (2) other
additional charges. As a result, we participate in the economic operations of
our hotels through our share of room revenues which exceed threshold amounts
specific to each hotel. The lessees' ability to pay on time or at all could be
negatively affected by reductions in revenue from the hotels or in the
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net operating income of the lessees or otherwise. Our lessees also will be
affected by factors beyond their control, such as changes in the level of demand
for rooms and related services of our hotels, their ability to maintain and
increase gross revenues at our hotels and other factors. Forty-eight of our 51
hotels are leased to CapStar Winston Company, L.L.C., a subsidiary of MeriStar
Hotels and Resorts, Inc. For 2001, approximately 93% of our percentage lease
revenue was generated by lease payments from CapStar Winston. Therefore, any
operating difficulties or other factors specifically affecting CapStar Winston's
ability to maintain and increase gross revenues at our hotels and to pay rent to
us could significantly adversely affect our financial condition and results of
operations.
OUR RETURNS DEPEND ON MANAGEMENT OF OUR HOTELS BY THIRD PARTIES.
In order to qualify as a REIT, we cannot operate any hotel or participate
in the decisions affecting the daily operations of any hotel. Either our
lessees, or an operator under a management agreement with a lessee, controls the
daily operations of our hotels. Under the REIT Modernization Act of 1999 (the
"RMA"), which became effective January 1, 2001, REITs are permitted to lease
their hotels to wholly owned taxable REIT subsidiaries of the REITs ("TRS
Lessees"). Even under the RMA, TRS Lessees may not operate the leased hotels and
must enter into management agreements with eligible independent contractors that
will manage the hotels. We do not have the authority to require any hotel to be
operated in a particular manner or to govern any particular aspect of the daily
operations of any hotel (e.g., setting room rates). Thus, even if we believe our
hotels are being operated inefficiently or in a manner that does not result in
anticipated rent payments under existing leases, we cannot require a change to
the method of operation. In particular, if the hotels leased by CapStar Winston
were operated in an inefficient or ineffective manner, we would not be able to
require changes in the operation of those hotels, and the rent from those hotels
constitutes most of our revenue. We can only seek redress if a lessee violates
terms of its lease, and then only to the extent of the remedies provided for
under the terms of the lease.
In addition, our growth strategy contemplates additional hotel acquisitions
that meet our investment criteria and selective development of hotels as market
conditions warrant. Our ability to grow depends, in part, upon the ability of
our lessees and any third-party managers to manage our current and future hotels
effectively. If the lessees or the third-party managers are not able to operate
additional hotels at current staffing levels and office locations, they may need
to hire additional personnel, engage additional third-party managers and/or
operate in new geographic locations. If the lessees or the managers fail to
operate the hotels effectively, our ability to generate revenues from the hotel
leases could be diminished.
WE HAVE A SIGNIFICANT LEVEL OF DEBT THAT MAY LIMIT OUR ABILITY TO TAKE CERTAIN
ACTIONS.
We currently have a significant amount of debt. As of December 31, 2001, we
had $102.9 million outstanding under our line of credit and Winston SPE, LLC, a
special purpose financing subsidiary of WINN Limited Partnership (a partnership
of which we are the sole general partner), had $67.7 million outstanding under a
fixed-rate loan. As of December 31, 2001, the total liabilities of our three
joint ventures were $27.9 million ($27.1 million of which represented long term
debt). Our 49% proportionate share of such total liabilities and long term debt
equated to $13.7 million and $13.3 million. Our level of debt could have
important consequences to you. For example, it could:
- impair our ability to obtain additional financing, if needed, for working
capital, capital expenditures, acquisitions or other purposes in the
future;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing our funds available
for operations, future business opportunities and other purposes;
- place us at a disadvantage compared to competitors that have less