SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

WINSTON HOTELS, INC.

2626 Glenwood Avenue
Raleigh, North Carolina 27608
(Address of principal executive offices)
(Zip Code)

(919) 510-6019
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

The number of shares of Common Stock, $.01 par value, outstanding on April 30, 2005 was 26,513,427.

WINSTON HOTELS, INC.
Index

2

WINSTON HOTELS, INC.

The accompanying notes are an integral part of the consolidated financial statements.

3

WINSTON HOTELS, INC.

The accompanying notes are an integral part of the consolidated financial statements.

4

WINSTON HOTELS, INC.

The accompanying notes are an integral part of the consolidated financial statements.

5

WINSTON HOTELS, INC.

The accompanying notes are an integral part of the consolidated financial statements.

6

WINSTON HOTELS, INC.

1.	ORGANIZATION
	Winston Hotels, Inc., (the “Company”) headquartered in Raleigh, North Carolina, owns and develops hotel properties and owns interests in hotel properties through joint ventures, provides and purchases hotel loans, and provides hotel development and asset management services. The Company conducts substantially all of its operations through its operating partnership, WINN Limited Partnership, (the “Partnership”). The Company and the Partnership (together with the Partnership’s wholly-owned subsidiaries, Barclay Hospitality Services Inc. (“Barclay”), Winston SPE, LLC (“SPE”), Winston SPE II, LLC (“SPE II”), and Winston Finance LLC, are collectively referred to as the “Company”. As of March 31, 2005, the Company’s ownership in the Partnership was 95.33%. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.
	As of March 31, 2005, the Company owned or was invested in 50 hotel properties in 15 states having an aggregate of 7,011 rooms. This included 43 wholly owned properties with an aggregate of 6,088 rooms, a 49 percent ownership interest in one joint venture hotel with 118 rooms, a 48.8 percent ownership interest in one joint venture hotel with 147 rooms, and a 13.05 percent ownership interest in five joint venture hotels with an aggregate of 658 rooms. The Company had also issued loans to owners of 11 hotels with an aggregate of 1,780 rooms. The Company does not hold an ownership interest in any of the hotels for which it has provided financing. All of the hotels in which the Company holds an ownership interest are operated under franchises from nationally recognized franchisors including Marriott International, Inc., Hilton Hotels Corporation, Intercontinental Hotels Group PLC, (formerly Six Continents PLC) and Choice Hotels International.
	Currently, Alliance Hospitality Management, LLC manages 40 of the Company’s 50 hotels, Concord Hospitality Enterprises Company manages four hotels, Promus Hotels, Inc., an affiliate of Hilton Hotels Corporation, manages three hotels, and New Castle Hotels, LLC, Noble Investment Group, Ltd., and Prism Hospitality Corp. each manage one hotel.
2.	BASIS OF PRESENTATION AND ACCOUNTING POLICIES
	Basis of Presentation
	The accompanying unaudited consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation. These reclassifications have no effect on net income or shareholders’ equity previously reported. Due to the seasonality of the hotel business, the information for the three months ended March 31, 2005 and 2004 is not necessarily indicative of the results for a full year. This Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
	Accounting for Long-Lived Assets
	The Company evaluates the potential impairment of its individual long-lived assets, principally its wholly-owned hotel properties and the hotel properties in which it owns an interest through consolidated joint ventures in accordance with FASB No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company records an impairment charge when it believes an investment in hotels has been impaired, such that the Company’s estimate of future undiscounted cash flows, together with its estimate of an anticipated liquidation amount, would not recover the then current carrying value of the investment in the hotel property, or when the Company classifies a property as “held for sale” and the carrying value exceeds fair market value. The Company considers many factors and makes certain subjective assumptions when making this assessment, including but not limited to, general market and economic conditions, operating results over the past several years, the performance of similar properties in the same market and expected future operating results based on a variety of assumptions. Changes in market conditions or poor operating results of underlying investments could adversely impact the Company’s assumptions regarding future undiscounted cash flows and anticipated liquidation amounts therefore requiring an immediate material impairment charge. Further, the Company currently owns certain hotels for which the carrying value exceeds current market value. The Company

7

	does not believe an impairment charge for these hotels is appropriate at this time since the Company’s forecast of future undiscounted cash flows, including an anticipated liquidation amount, exceeds the current carrying value. The Company is continually looking for opportunities to upgrade its portfolio by selling older, lower performing hotels and replacing them with newer, higher yielding assets. Should the Company approve a plan to sell any of the hotels for which the carrying value exceeds fair market value, an impairment charge would be required at that time. If our board of directors determines to sell several of the hotels for which the carrying value exceeds fair market value, the aggregate impairment charge could be material.
	One of the Company’s hotels is being closely monitored due to adverse market conditions, including a substantial road construction project, and declining operating results. If the Company’s estimates regarding the improvement of market conditions and operating results prove to be incorrect or adversely change and the Company’s estimate of the sum of the undiscounted future cash flows of this hotel plus the Company’s estimate of its residual value does not exceed the current carrying value, it is reasonably possible that in the near term the Company will record a material impairment charge with respect to this hotel. In addition, if the Company decides to sell this hotel, an impairment charge would be necessary at that time. Taking into consideration the Company’s current estimate of fair market value for this hotel of between $6.0 million and $8.0 million, and the net book value of approximately $13.8 million, the Company estimates that the impairment charge could be up to approximately $8.0 million. Should the Company decide to sell this hotel, there can be no assurances that the selling price will be within the Company’s estimated range for the fair market value of the hotel, in which case this impairment charge could exceed $8.0 million.
	The Company evaluates its investments in joint ventures for impairment by considering a number of factors including assessing current fair value of the investment to carrying value. If the current fair value of the investment is less than the carrying value, and there is either an absence of an ability to recover the carrying value of the investment, or the property does not appear to have the ability to sustain an earnings capacity that would justify the carrying amount of the investment, an impairment charge may be required.
	Minority Interest
	Minority interest as of March 31, 2005 and December 31, 2004, consists of minority interest in the Partnership of $7,125 and $7,255, respectively, and minority interest in consolidated joint ventures of $2,861 and $2,899, respectively.
	Franchise Agreements
	The Company’s franchisors periodically inspect the Company’s hotels to ensure that they meet certain brand standards primarily pertaining to the condition of the property and its guest service scores. In connection with these routine reviews the Company has received default notices from franchisors of seven hotels. These notices pertain to low guest service scores or failure to complete product improvement plans on schedule. The Company is currently in the process of curing these deficiencies to comply with the respective franchisor’s standards and expects to receive an acceptable rating for all hotels.
	Recently Issued Accounting Standards.
	In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (Revised 2004), “Share-Based Payment,” (“SFAS No. 123R”), which is effective for fiscal years beginning after June 15, 2005. SFAS No. 123R is a revision of FASB Statement No. 123, (Accounting for Stock-Based Compensation”). SFAS No. 123R is not expected to have a material impact on the Company’s financial statements or results of operations.
	In December 2004, the FASB issued Statement of Financial Accounting Standards No. 152 “Accounting for Real Estate Time-Sharing Transactions,” (“SFAS No. 152”), which is effective for fiscal years beginning after June 15, 2005. SFAS No. 152 is not expected to have a material impact on the Company’s financial statements or results of operations.
	In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,” (“SFAS No. 153”), which is effective for fiscal years beginning after June 15, 2005. SFAS No. 153 is not expected to have a material impact on the Company’s financial statements or results of operations.

8

3.	CREDIT FACILITIES
	The Company’s $125,000 line of credit (the “Wachovia Line”) bore interest at rates from LIBOR plus 1.75% to 2.50%, based on the Company’s consolidated debt leverage ratio. The Wachovia Line, which had an original maturity date of December 31, 2004, was amended in December 2004 to extend the maturity date to March 31, 2005.
	On March 11, 2005, the Company through its wholly-owned subsidiary, SPE II, entered into a credit facility (the “GE Line”) with General Electric Capital Corporation (“GECC”). The Company subsequently borrowed $77,500 under the GE Line on March 14, 2005 and used these funds to pay off all outstanding debt under the Wachovia Line, terminating the Wachovia Line. The GE Line provides for revolving loan commitments and letters of credit up to $155,000. The GE Line bears interest at rates from 30-day to 180-day LIBOR (30-day LIBOR equaled 2.87% at March 31, 2005) plus 1.75% to 2.50%, based on the ratio of the underwritten net operating income of the hotels that collateralize the GE Line to the outstanding principal balance of the GE Line. An unused fee of up to 0.25% is also payable quarterly on the unused portion of the GE Line. Availability is calculated each quarter on a trailing twelve-month basis based primarily upon the underwritten net operating income of the hotels that collateralize the GE Line divided by 13%. Availability on the GE line at March 31, 2005 was approximately $77,000. The GE Line matures on March 11, 2010.
4.	EARNINGS PER SHARE
	The following is a reconciliation of net income to net income available to common shareholders assuming dilution and the weighted average number of common shares used in calculating basic and fully diluted earnings per common share:

	During the first quarter of 2005, the Company declared quarterly cash dividends of $0.15 per common share and $0.50 per Series B preferred share.
5.	INCOME TAXES
	The income tax benefit for the three months ended March 31, 2005 consists of a deferred federal income tax benefit of $182 and a deferred state income tax benefit of $21. The benefit from income taxes and related deferred tax asset were calculated using an effective tax rate of 38 percent applied to the loss of Barclay. The Company believes that Barclay, through strategic tax planning, will generate sufficient future taxable income to realize in full the deferred tax asset. Accordingly, no valuation allowance has been recorded as of March 31, 2005.

9

6.	SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES AND FIN 46R
	For the three months ended March 31, 2005 and 2004, the Company consolidated all voting interest entities in which it owns a majority voting interest and all variable interest entities for which it is the primary beneficiary in accordance with FASB Interpretations No. 46R, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (FIN 46R).
	Consolidated Joint Ventures
	Marsh Landing Joint Venture: During 2000, the Company entered into a joint venture, Marsh Landing Hotel Associates, LLC (“Marsh Landing Hotel Associates”) with Marsh Landing Investment, L.L.C.. The Company currently owns a 49 percent interest in both Marsh Landing Hotel Associates, that owns the Ponte Vedra, Florida Hampton Inn and Marsh Landing Lessee Company, LLC, (“Marsh Landing Lessee”), which leases the hotel from Marsh Landing Hotel Associates. Marsh Landing Investments, LLC owns a 51 percent interest in both entities. The results of operations and the balance sheet of these joint ventures are consolidated in the Company’s consolidated financial statements pursuant to FIN 46R and all intercompany accounts are eliminated.
	Marsh Landing Hotel Associates: For the period ended March 31, 2005 and March 31, 2004, total revenue of the joint venture was $372 and $401, total expenses were $209 and $191, resulting in a net income of $163 and $210, respectively. As of March 31, 2005 and December 31, 2004, total assets of the joint venture were $7,018 and $7,044, total liabilities were $4,996 and $4,978, resulting in stockholders’ equity totaling $2,022 and $2,066, respectively.
	Marsh Landing Lessee: For the period ended March 31, 2005, total revenue of the joint venture was $884, total expenses were $172, resulting in a net income of $712. As of March 31, 2005, total assets of the joint venture were $144, total liabilities were $70, resulting in stockholders’ equity totaling $74. Marsh Landing Lessee began operations in January 2005. Therefore there are no operating results or balances sheet amounts for the prior periods.
	Chapel Hill Joint Ventures: During 2003, the Company entered into a joint venture, Chapel Hill Hotel Associates, LLC, (“Chapel Hill Hotel Associates”) with Chapel Hill Investments, LLC to develop and own hotel properties. The Company currently owns a 48.78 percent interest in both Chapel Hill Hotel Associates, which owns the Chapel Hill Courtyard by Marriott, and Chapel Hill Lessee Company, LLC, (“Chapel Hill Lessee”), which leases the Chapel Hill Courtyard by Marriott from Chapel Hill Hotel Associates., Chapel Hill Investments, LLC owns a 51.22 percent interest in both entities. The results of operations and the balance sheet of these joint ventures are consolidated in the Company’s consolidated financial statements and all intercompany accounts are eliminated pursuant to FIN 46R.
	Chapel Hill Hotel Associates: For the period ended March 31, 2005, total revenue of the joint venture was $427 and $2, total expenses were $421 and $55, resulting in a net income of $6 and a net loss of $53, respectively. The Chapel Hill Courtyard by Marriott opened in September 2004, therefore, there were no hotel operating results for the first quarter of 2004. As of March 31, 2005 and December 31, 2004, total assets of the joint venture were $14,368 and $13,576, total liabilities were $10,820 and $9,916, resulting in stockholders’ equity totaling $3,548 and $3,660, respectively.
	Chapel Hill Lessee: For the period ended March 31, 2005, total revenue of the joint venture was $992, total expenses were $240, resulting in a net income of $752. Chapel Hill Lessee began operations in May 2004. Therefore, there were no operating results for the first quarter of 2004. As of March 31, 2005 and December 31, 2004, total assets of the joint venture were $148 and $130, total liabilities were $197 and $187, resulting in stockholders’ deficit totaling $49 and $57, respectively.
	Unconsolidated Joint Ventures
	Charlesbank Joint Venture: During the fourth quarter of 2002, the Company formed a joint venture (the “Charlesbank Venture”) with Boston-based Charlesbank Capital Partners, LLC (“Charlesbank”). The Company owns 15% of the Charlesbank Venture and Charlesbank owns 85%. The Charlesbank Venture focuses on acquisitions that the partners believe have turnaround or upside potential and can benefit from additional capital and aggressive asset management, which often includes renovating, repositioning, rebranding and/or a change in management. As of March 31, 2005, the Charlesbank Venture had invested in four hotels to date through a joint venture (“WCC Project Company

10

	LLC”) comprised of Concord Hospitality Enterprises Company (“Concord”) and the Charlesbank Venture. Concord owns a 13% interest in the projects acquired by WCC Project Company LLC, while the Charlesbank Venture owns 87%, so that the Company has an indirect 13.05% ownership interest in WCC Project Company LLC. In February 2004, the Charlesbank Venture invested in a fifth hotel through a joint venture with Shelton III Hotel Equity LLC, owned in part by New Castle Hotels LLC (“New Castle”) and the Charlesbank Venture (“WNC Project Company LLC”). Charlesbank owns an indirect ownership interest of 73.95 percent of WNC Project Company LLC, New Castle owns 13 percent and the Company owns an indirect ownership interest of 13.05 percent.
	The results of operations and the balance sheets of these five hotels are not consolidated in the Company’s consolidated financial statements. Therefore, the Company accounts for its investment in these hotels under the equity method of accounting. For the year ended March 31, 2005 and March 31, 2004, total revenue of the Charlesbank joint venture was $3,085 and $2,306, total expenses were $3,447 and $2,433, resulting in a net loss of $362 and $127, respectively. As of March 31, 2005 and December 31, 2004, total assets of the joint venture were $50,300 and $50,528, total liabilities were $34,204 and $34,071, resulting in stockholders’ equity totaling $16,096 and $16,457, respectively. The Company’s equity balance exposed to loss as a result of its involvement in this joint venture totaled $2,450 and $2,512 as of March 31, 2005 and December 31, 2004, respectively.
	Notes Receivable
	First Quarter 2005 Loans. In February 2005, the Company issued a $3.4 million mezzanine loan to finance the development of a 165-room Hampton Inn & Suites in Albany, New York. M&T Realty provided an $11.5 million first mortgage loan. The Company’s loan is subordinate to the M&T Realty first mortgage loan. The term of the Company’s loan is 6.5 years. During the term of the loan, interest will be payable at 30-day LIBOR (2.87% at March 31, 2005) plus 9.41%. In addition during this period, interest in the amount of 4.0% will accrue and be added to the outstanding principal balance on the note and shall be due and payable upon repayment of the loan. Interest will not be paid on the accrued interest.
	In March 2005, the Company purchased from Lehman Brothers $2.8 million of B-notes for $2.3 million. The fixed-rate notes are collateralized by second mortgages on three hotels with a weighted average yield at the time of purchase of 9.3% and each has a remaining term of approximately six years. The total monthly payment is a fixed amount, with interest and principal varying based on the amortization schedule. The three B-Notes, which are debt subordinated to the first mortgage “A” note, are cross-collateralized. The A note is collateralized by the first mortgages on each of the three assets, which are held in a Collateralized Mortgage-Backed Securities trust. The loans are collateralized by a 146-room SpringHill Suites and a 91-room TownePlace Suites, both in Boca Raton, Florida, and a 95-room TownePlace Suites in Fort Lauderdale, Florida.
	All Notes Receivable. As of March 31, 2005, the Company has 11 loans to third party hotel owners. The Company does not hold an ownership interest in any of the hotels for which it has provided financing. The Company issued or purchased four of these loans during 2005 as noted above. The Company issued four of these loans currently totaling $19.9 million, during 2004. The Company issued one loan in each of 2002, 2001 and 2000 currently totaling $1.7 million, $2.2 million and $1.1 million, respectively. These loan arrangements are considered to be variable interests in the entities that own the hotels, all of which are VIEs. However, the Company is not considered to be the primary beneficiary. Therefore, the Company does not consolidate the results of operations of the hotels for which it has provided financing. The Company’s total outstanding loan balance and related interest receivable balance exposed to loss as a result of its involvement in these loans totaled $30,526 and $1,157, respectively, as of March 31, 2005. The Company’s note receivable balance as a result of the sale of the Greenville, South Carolina Comfort Inn was $1,413 at March 31, 2005 (See Note 7).

11

7.	DISCONTINUED OPERATIONS
	The Company sold two hotels during January 2005. The Chester, Virginia Comfort Inn was sold for $5.2 million in cash, net of closing costs. The Greenville, South Carolina Comfort Inn was sold for $1.9 million of which the Company received approximately $0.5 million in cash proceeds and a note receivable for approximately $1.4 million. The note requires monthly fixed principal payments of $6 over five years, (at which time the balance of the note is due) and bears interest at a rate of prime plus 1.5%. Both of these properties were classified as held for sale as of December 31, 2004.