Winston Hotels Reports Fourth Quarter, Full-Year 2005 Results

Net income available to common shareholders was $1.9 million for the 2005 fourth quarter, or $0.07 per share, compared to net income available to common shareholders of $0.9 million, or $0.03 per share, for the same period a year earlier.

For the year, net loss available to common shareholders was ($1.7) million, or $(0.07) per share, compared to net income available to common shareholders of $7.8 million, or $0.30 per share, for the full year 2004. The full year 2005 results included a non-cash impairment charge of $12.4 million (net of allocation of minority interest). Excluding this charge, 2005 net income available to common shareholders would have been $10.6 million, or $0.39 per share.

Funds from operations (FFO) available to common shareholders for the 2005 fourth quarter rose 19 percent to $6.4 million, compared to $5.4 million in the 2004 fourth quarter, or $0.23 and $0.20 per common share, respectively. Excluding the effects of the non-cash impairment charge in 2004 and the non-cash income tax expense (benefits) in both years, the fourth quarter 2005 FFO available to common shareholders would have been $6.5 million, or $0.23 per share, versus $5.1 million, or $0.19 per share for the fourth quarter of 2004. The company had approximately 27.7 million and 27.6 million fully diluted weighted average common shares outstanding in the 2005 and 2004 reporting periods, respectively.

For the full year 2005, FFO available to common shareholders decreased to $16.4 million, or $0.59 per common share, compared to $26.2 million, or $0.95 per common share for 2004. Excluding the effects of non-cash impairment charges and non-cash income tax expense/benefits in both years, as well as non-recurring items in both years including the effects of the redemption of the Series A Preferred Stock in 2004, the non-recurring lease agreement acquisition income earned in 2004, as well as $0.06 per share of additional interest income relating to the early payoff of the Cornhusker, Baltimore, Tampa and Kauai hotel loans in 2005, FFO available to common shareholders would have been $28.3 million, or $1.02 per share for 2005 versus $25.8 million, or $0.94 per share for 2004. The company's fully diluted weighted average common shares outstanding was approximately 27.7 million and 27.6 million in the 2005 and 2004 reporting periods, respectively.

Recent Developments

In February 2006, the company closed on its first loan in a program with GE Commercial Franchise Finance ("GEFF"), announced last year, to provide a highly streamlined, cost-effective loan product for hoteliers. Under the program, GEFF and Winston provide seamless first mortgage loans for up to 85 percent of a project's cost. Winston initially funded $0.6 million of the total $2.3 million first loss piece, or the "B" note, of a $12 million total loan amount for a to-be-built 140 room Hilton Garden Inn in Columbia, SC. Winston is obligated to fund the remaining balance of the "B" note ratably over the projected construction period that has commenced and is expected to be completed during the fourth quarter of 2006. The underlying construction-to-five-year-permanent loan, bears interest at an all in annual yield to the company equal to 30-day LIBOR plus approximately 12 percent.

2005 Highlights

"Winston capitalized on all of its growth initiatives in 2005, including acquisitions, development/repositioning and hotel debt financing," said Robert W. Winston, III chief executive officer. "We continue to see significant opportunities in all of our growth strategies."

Hotel Acquisitions, Dispositions

"Prices for hotels rose significantly during 2005, but we believe that we still will be able to acquire premium-branded hotels at reasonable capitalization rates," said Joe Green, president and chief financial officer. "In attractive markets where hotels are selling in excess of replacement costs, we will consider development on a highly selective basis."

-- In the 2005 fourth quarter, the company acquired five Marriott Towneplace Suites and one Courtyard by Marriott for an aggregate cost of $46.9 million.

-- In 2005, the company also acquired the Hampton Inn & Suites in Baltimore's Inner Harbor for $16.3 million and a 60 percent interest in the $18 million Stanley Hotel in Estes Park, Colo.

-- During the year, the company sold three hotels that no longer fit the company's long-term growth strategy, for aggregate net proceeds of $11.5 million.

Hotel Development

"We develop hotels for our own account and through joint ventures," Green noted. "In 2005, we began construction on four hotels at an expected total cost of an aggregate of approximately $62 million. We also were designated a preferred developer for the new select-service aloft brand by Starwood and currently are reviewing several potential development sites on which we can build and own aloft-branded hotels."

-- The company is nearing completion on its conversion of a former historic apartment building in Kansas City into a 123-room Courtyard by Marriott. The $16.7 million project is expected to be completed in late April 2006.

-- Construction is well underway on a 121-room, $12.0 million Hilton Garden Inn in Akron, Ohio, which is expected to open during the fourth quarter of 2006. Winston expects to contribute 70 percent of the total equity investment in the joint-venture project.

-- Construction has begun on the wholly owned, 142-room, $19.6 million Homewood Suites hotel in Princeton, N.J., expected to open during the first quarter of 2007.

-- Winston recently broke ground on a 119-room, $13.3 million Hilton Garden Inn in Wilmington, N.C. The wholly owned hotel is expected to open during the second quarter of 2007.

Hotel Debt Financing Program

-- For the full year, the company closed on five loans totaling approximately $23 million, including $14.0 million of four senior participation interests in certain mezzanine loans originated by Credit Suisse First Boston and purchased by the company in the fourth quarter of 2005.

-- In 2005, four loans with outstanding balances in the aggregate of $16 million, were repaid to the company, prior to their maturity date, resulting in prepayment and related fees totaling $1.6 million, or approximately $0.06 per share.

Financing

-- The company expanded its line of credit with GE Capital in 2005 from $155 million to $215 million. Winston had approximately $68 million available under the line as of December 31, 2005.

-- In 2005, the company financed four of its existing hotel loans under its $50 million master repurchase agreement with Marathon Structured Finance Fund, L.P. (Marathon), borrowing approximately $9 million. Availability under the Marathon master repurchase agreement is approximately $41 million.

-- Winston established two new credit facilities with Marathon totaling $13.2 million to finance hotel loans under the company's hotel debt financing program.

Same Store Operating Statistics

Revenue per available room (RevPAR) in the 2005 fourth quarter improved 8.3 percent, led by a 6.8 percent improvement in average daily room rate (ADR) and a 1.4 percent increase in occupancy, compared to the same period a year earlier. Fourth quarter 2005 operating margins decreased slightly to 38.4 percent from 38.7 percent in the same period for the previous year, as they were negatively impacted by non-recurring legal fees, rising utility costs and higher franchise fees, offset by pro-active strategies resulting in a decrease in labor costs. The increase in utility costs was generated solely by rate increases, which was mitigated by implementing various energy-saving measures.

The following table details the "same store" operating statistics, which includes 44 hotels that were open throughout both the three and twelve months ended December 31, 2005 and the three and twelve months ended December 31, 2004 (includes 41 wholly owned hotels and three jointly owned hotels, including the Ponte Vedra, Fla. Hampton Inn, the West Des Moines, Iowa Fairfield Inn & Suites and the Houston, Texas SpringHill Suites by Marriott).

Same Store Operating Statistics

----------------------------------------------------------------------

                                              Three Months Ended

                                                 December, 31,

                                       -------------------------------

                                        2005      2004     Change

                                      --------- ---------  ------

Hotel room revenues                   $  32,367  $ 30,045    7.7%

RevPAR                                $   56.72  $  52.35    8.3%

Occupancy                                  64.6%     63.7%   1.4%

Average Daily rate                    $   87.78  $  82.22    6.8%

Gross Operating Profit margin              38.4%     38.7%  -0.3% pts.





                                             Twelve Months Ended

                                                 December, 31,

                                      --------------------------------

                                        2005      2004     Change

                                      --------- ---------  ------

Hotel room revenues                    $135,150  $126,836    6.6%

RevPAR                                 $  59.44  $  55.56    7.0%

Occupancy                                  68.4%     68.4%   0.0%

Average Daily rate                     $  86.86  $  81.25    6.9%

Gross Operating Profit margin              41.0%     41.1%  -0.1% pts.

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Dividends

During the 2005 fourth quarter, the company declared a regular cash dividend of $0.15 per common share and a cash dividend of $0.50 per share of Series B Preferred Stock. The non-cash impairment charge and the non-cash tax expense do not affect the company's ability to pay out dividends pursuant to its dividend policy. "We continue to evaluate our policy on a quarterly basis and currently are comfortable with the payout level of our current common stock dividend," said Robert W. Winston, III, chief executive officer.

2006 First Quarter Outlook and Guidance

For the 2006 first quarter, the company forecasts net income per share available to common shareholders of ($0.02) to $0.00. On a same store basis, the company expects 2006 first quarter RevPAR to increase 5 to 7 percent, compared to the prior year's first quarter, as well as a slight increase in gross operating profit margins for the first quarter of 2006, compared to the previous year's first quarter.

FFO per share available to common shareholders is expected to be between $0.16 and $0.18 for the 2006 first quarter. "We expect the gross operating profit from our hotel portfolio for the first quarter 2006 to increase over 2005 by $0.08 to $0.10 per share," Green said. "However, we expect this gain to be offset by higher interest expense, general and administrative costs and, management fees, coupled with lower interest income from hotel loans and the negative impact of the seasonality of the operations of the Stanley Hotel in Estes Park, Colo. "We believe that the anticipated negative impacts in the first quarter will be more than offset in the remaining three quarters of the year," Green said. "For example, the Stanley generates most of its profit in the second and third quarters, and we expect it to be accretive for the full year."

This guidance assumes no hotel acquisitions, and no hotel dispositions, developments or placements of hotel debt during the 2006 first quarter.

2006 Yearly Outlook and Guidance

For the year ended December 31, 2006, the company forecasts net income per share available to common shareholders of $0.26 to $0.32. On a same store basis, the company expects 2006 RevPAR to increase 5 to 7 percent, compared to the prior year.

FFO per share available to common shareholders for the year ended December 31, 2006 is expected to be between $1.04 and $1.10 ($1.13 excluding the expected impact of non-cash income tax expense in 2006). This guidance assumes no hotel acquisitions, or dispositions, developments or placements of hotel debt during the year ended December 31, 2006, except for the operations and related debt of the Courtyard by Marriott hotel in Kansas City, Mo., which is expected to open by the end of April. Moreover the guidance does not include any results from the company's assumption that it will replace some of its current variable rate debt with fixed-rate financing.

"We believe interest rates will continue to rise and therefore believe the timing is right to lock in long-term rates," Green noted. "Accordingly, the company is considering several proposals to refinance approximately $160 million of its current portfolio with 10-year fixed rate financing. We expect to complete the refinancing by July 1st of this year."

Green also pointed out, "We have active pipelines in all of our growth strategies and anticipate consummating accretive transactions in 2006. However, timing of complex financings, acquisitions and development transactions is very difficult to predict with reasonable accuracy. We are comfortable with our base assumptions for 2006 and expect improvement in our operations. We expect that 2006 will be a productive year for the company."



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