Winston Hotels Reports Fourth Quarter, Full-Year 2003 Results

Net income (loss) applicable to common shareholders was $(0.1) million for the three months ended December 31, 2003, or $(0.00) per share, compared to $1.7 million for the three months ended December 31, 2002, or $0.08 per share. Adjusted funds from operations (AFFO) available to common shareholders decreased 20.8 percent to $3.8 million for the fourth quarter of 2003, compared to $4.8 million for the 2002 fourth quarter. AFFO available to common shareholders per share totaled $0.14 for the 2003 fourth quarter on 27.4 million fully diluted weighted average shares outstanding, compared to AFFO available to common shareholders per share of $0.22 on 21.3 million fully diluted weighted average shares outstanding for the 2002 fourth quarter. Results were in line with the company's previously announced revised guidance.

Net income (loss) applicable to common shareholders was $0.8 million for the year ended December 31, 2003, or $0.03 per share, compared to $(6.0) million for the year ended December 31, 2002, or $(0.31) per share. AFFO available to common shareholders decreased 10.8 percent to $21.4 million for the year ended December 31, 2003, compared to $24.0 million for the year ended December 31, 2002. AFFO available to common shareholders per share totaled $0.93 for 2003 on 23.1 million fully diluted weighted average shares outstanding, compared to AFFO available to common shareholders per share of $1.17 on 20.6 million fully diluted weighted average shares outstanding for 2002. Results were in line with the company's previously announced revised guidance.

"Hopefully 2003 was the bottom of the most recent cycle for the hotel industry, which appears to be poised for recovery after a protracted three-year period of declining business travel demand," said Bob Winston, chief executive officer. "We continued to execute our three-pronged growth strategy focused on selected acquisitions, subordinated debt financing and improved operating performance at our hotels."

Acquisitions/Development

In late 2002, we formed a real estate investment joint venture with Charlesbank Capital Partners, LLC, which intends to acquire hotel assets primarily in need of repositioning. We own 15% of the Charlesbank joint venture. In 2003, the joint venture, in conjunction with Concord Hospitality Enterprises, acquired its third hotel, the 190-room Best Western Park Place Suites. The property currently is being converted by Concord to a Springhill Suites by Marriott and should be on-line with Marriott by June of this year. We anticipate the fully renovated cost of the project to be approximately $15 million, which would bring the total all-in cost of the three hotels held by the Charlesbank joint venture to approximately $30 million. We currently are reviewing several opportunities for the joint venture.

In addition to the Charlesbank joint venture acquisition strategy, we have a pipeline of hotels that we are considering that may fit our selected acquisition criteria.

We began construction on a 147-room Courtyard by Marriott in Chapel Hill, N.C. through a joint venture in which the company owns about 49 percent. The property is expected to open in the summer of 2004.

Debt Investment Financing Program

We formed Winston Finance, a new debt finance subsidiary focused on originating and acquiring subordinated hotel debt. We target subordinated hotel loans between 60 percent and 85 percent of a project's value, hotels with 100 to 425 rooms and single asset loan amounts that range from $1 million to $15 million. We also intend to underwrite and acquire the junior mezzanine portion of loans that are originated in the marketplace under Collateralized Mortgage-Backed Securities (CMBS) programs. We have an active pipeline of debt opportunities; however, these are complex transactions that require significant due diligence and negotiations to complete.

Internal Growth

We consolidated 40 of the company's current 49 hotels under an independent management company, Raleigh-based Alliance Hospitality, which we believe more closely aligns our ownership interests with our management company.

We promoted Joe Green to president and Ken Crockett to chief operating officer. Joe also continues to serve as CFO, and Ken serves as managing director of Winston Finance. Joe's expertise in real estate and corporate finance and Ken's expertise in real estate acquisitions, development, commercial and mortgage banking and hotel operations are a great fit with our current direction and strategy for growth.

Fourth Quarter and Year End Operating Statistics

In the 2003 fourth quarter, occupancy improved 3.7 percent from the fourth quarter 2002, and average daily room rate decreased 0.9 percent. RevPAR improved 2.7 percent to $47.57, compared to $46.32 for the 2002 fourth quarter.

For the year ended December 31, 2003, occupancy improved 1.1 percent and average daily room rate decreased 2.5 percent, as compared to the year ended December 31, 2002. RevPAR declined 1.4 percent to $51.01, compared to $51.76 for 2002.

Balance Sheet Changes

In September, the company sold 5.25 million shares of common stock through a follow-on offering, and completed the offering in early October with the sale of another 787,500 shares of common stock as a result of the underwriters' exercise of their over-allotment option, raising a total of $51 million in net proceeds. The funds initially were used to reduce borrowings under the company's line of credit, and are expected to be used for the company's subordinated hotel lending business, property acquisitions and for general corporate purposes.

The Financial Accounting Standards Board issued FASB Interpretation No. 46, ("FIN 46") "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (ARB No. 51)," in January 2003, and a further interpretation of FIN 46 in December 2003 ("FIN 46-R" and FIN 46, collectively "FIN 46"). The company currently participates in five joint venture arrangements to own and develop hotel properties, including the Marsh Landing joint venture, a recently formed joint venture which is developing our new Chapel Hill, North Carolina hotel, two joint ventures with Regent Partners, Inc. and a joint venture with Charlesbank Partners and Concord Hospitality Enterprises Company. As a result of the provisions of FIN 46, the company has consolidated the Marsh Landing, Chapel Hill and two Regent joint ventures as of December 31, 2003. The provisions of FIN 46 are not expected to have any impact on the company's debt covenants.

Recent Events

In January 2004, the company announced that it will redeem for cash all outstanding shares of its 9.25% Series A Cumulative Preferred Stock for $25 per share, or $75 million, plus accrued and unpaid dividends on February 24, 2004. Concurrently, the company will issue 3.68 million shares of 8% Series B Cumulative Preferred Stock at $25 per share. The redemption price of the 9.25% Series A Cumulative Preferred Stock will be paid with the proceeds of the company's offering of its 8% Series B Cumulative Preferred Stock. Additional remaining net proceeds of approximately $14 million will be used to reduce borrowings under the company's line of credit and for general corporate purposes. The redemption and the offering are subject to customary closing conditions.

"Subsequent to the sale of the Series B Cumulative Preferred Stock and the concurrent redemption of the Series A Cumulative Preferred Stock, we will have approximately $100 million available under our $125 million corporate line of credit," said Joe Green, president and CFO. "We believe that we can respond rapidly to investment opportunities as the hotel industry recovery begins to gain some traction."

2003 Pro Forma Results

Due to the acquisition of the company's leasehold interests for 47 hotels from Interstate Hotels & Resorts on July 1, 2002, and for two hotels from Intercontinental Hotels Group PLC, effective July 1, 2003, the results of operations for the three and twelve months ended December 31, 2003, compared to the results of operations for the same respective periods ended December 31, 2002, do not offer a meaningful comparison. This is due primarily to recording the operating results of the 47 hotels for which the leasehold interests were acquired on the company's statements of operations beginning in the third quarter of 2002, and recording the operating results of the remaining two hotels beginning in the third quarter of 2003.

In an effort to make a more meaningful comparison between periods, the company has provided below selected financial information on a "same store" basis for the three and twelve months ended December 31, 2003 and 2002, adjusted as if the acquisition of the leasehold interests from both Interstate and Intercontinental had occurred on January 1, 2002. This information is shown for the 43 wholly owned hotels that were open throughout the periods presented and does not include operating results for any hotels that were sold or classified as "held for sale" during the periods.

This presentation is not prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). Statement of Financial Accounting Standards No. 144 requires the company to report the operations of all properties, either disposed of, or classified as held for sale subsequent to January 1, 2002, separately as discontinued operations for all periods presented. The company believes that the presentation of hotel property operating results on a "same store" basis is helpful to investors as it represents a more useful description of its core operations and the comparability of its hotels' results. The company believes the pro forma presentation of operating results provides a meaningful comparison of the company's 2003 and 2002 fourth quarter and 12-month operating results, given the change in the ownership of the leases.

Selected Financial Information



                                       Three Months    Twelve Months

                                          Ended            Ended

                                         Dec. 31,         Dec. 31,

                                       2003    2002     2003     2002

                                    

Statistics                          (actual) (pro     (pro     (pro

                                             forma)   forma)   forma)



Average Daily Rate                   $76.10  $76.84   $77.28   $79.04

Occupancy                              62.3%   59.8%    66.3%    65.3%

Revenue Per Available Room           $47.43  $45.96   $51.24   $51.60



Operating Results (in thousands)



Revenue:

Rooms                               $26,686 $25,739 $114,246 $114,580

Other hotel revenue                   2,910   3,185   11,383   12,487

Percentage lease revenue                538     821    2,141    2,426

Interest and other income               423     459    1,560    1,458

Total revenue                        30,557  30,204  129,330  130,951

Hotel operating expenses:

Rooms                                 6,701   6,184   27,008   26,406

Other hotel operating expenses        2,111   2,163    8,403    8,704

Undistributed operating expenses:

Property operating costs              6,186   5,589   25,103   23,376

Real estate taxes and property and

 casualty insurance                   1,200   1,388    6,163    6,258

Other operating costs                 4,354   4,235   17,711   17,947

Percentage lease expense              1,184   1,082    4,610    4,162

Depreciation and amortization         4,570   4,929   18,671   19,700

General and administrative            1,874     749    5,922    4,843

Lease/management agreement

 acquisition                             --      --    1,300       

Total expenses                       28,180  26,319  114,891  111,396



Operating income                     $2,377  $3,885  $14,439  $19,555

Financial Highlights on December 31, 2003


Net income (loss) applicable to common shareholders was $0.8 million for the year ended December 31, 2003 versus $(6.0) million for the year ended December 31, 2002.
AFFO available to common shareholders payout ratio was 64.5 percent on a trailing 12-month basis.
CAD payout ratio was 88.2 percent on a trailing 12-month basis.
Total debt to Adjusted EBITDA multiple was 3.0 on a trailing 12-month basis.
Annual interest coverage ratio multiple was 4.7 on a trailing 12-month basis.
Consolidated debt to total gross assets at cost was 23.4 percent.
Generated an unleveraged return on investment of 8.1 percent on its hotel portfolio on a trailing 12-month basis. Based upon the company's leverage and borrowing costs, the company realized a leveraged return on investment of 8.5 percent on a trailing 12-month basis.
Operating margins decreased from 40.1 percent to 38.0 percent in the 2003 fourth quarter, compared to the same quarter for 2002, and decreased from 42.6 percent to 40.8 percent for the twelve months ended December 31, 2002 and 2003, respectively.
Based on information provided by Smith Travel Research, RevPAR yield for the full-year ended December 31, 2003 for the company's portfolio was approximately 109 percent, indicating that the company's portfolio achieved disproportionately greater RevPAR than its competition.

During the fourth quarter, the company declared a regular cash dividend of $0.15 per common share and also announced its regular quarterly cash dividend to preferred shareholders of $0.578125 per share.

"We evaluate our dividend policy on a quarterly basis and are comfortable with current dividend levels," Green said. Based on the closing price of the company's common stock on February 11, 2004, the company's current dividend is equivalent to an annualized dividend yield of 5.6 percent. The amount of the company's common dividend will continue to be determined each quarter, based upon the operating results of that quarter, economic conditions and other operating trends and is determined at the sole discretion of our board of directors.

Outlook and Guidance

"We believe that the hotel industry is rebounding," Green said. "A hotel industry rebound typically trails a recovery in the general economy. Because of our beliefs with respect to the hotel industry and the nature of potential investments in subordinate debt and hotel properties, long-term visibility regarding our earnings for 2004 remains difficult. Therefore, at this time, we will limit our guidance to the first quarter."

For the first quarter of this year, the company forecasts a positive increase in RevPAR of 1 percent to 3 percent, compared to the first quarter of 2003. AFFO available to common shareholders per share for the 2004 first quarter is expected to be between $0.14 and $0.16. This is equivalent to a per share range of FFO, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), of $0.23 to $0.25. This guidance assumes no additional acquisitions or placement of debt during the first quarter and a flat gross operating profit, compared to the same period in the prior year. AFFO available to common shareholders per share totaled $0.20 for the first quarter of 2003.

As noted earlier in this press release, the company sold approximately 6.0 million shares of common stock through a follow-on offering, which was completed in early October. As a result of issuing these additional shares, and due to the seasonality of the company's operating results, the sum of the AFFO available to common shareholders per share for each of the four quarters of 2003 does not equal the AFFO available to common shareholders per share for the year. AFFO available to common shareholders per share totaled $0.20, $0.32, $0.29 and $0.14 for the four quarters of 2003, while the AFFO available to common shareholders totaled $0.93 per share for the year ended December 31, 2003.

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