##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
    
    Commission file number 0-23732
 WINSTON HOTELS, INC.
  North Carolina
    
    56-1624289(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 2626 Glenwood Avenue
Raleigh, North Carolina 27608
 (919) 510-6019
  þ o
  þ o
 o o




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WINSTON HOTELS, INC.
Index
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Unaudited Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004
    
    
    4Unaudited Consolidated Statements of Operations for the nine months ended September 30, 2005 and 2004
    
    
    5Unaudited Consolidated Statement of Shareholders Equity for the nine months ended September 30, 2005
    
    
    6Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004
    
    
    7Notes to Unaudited Consolidated Financial Statements
    
    
    8Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4
    
    Controls and Procedures
    
    
    41PART II.
    
    OTHER INFORMATIONItem 6
    
    Exhibits
    
    
    42SIGNATURES
    
    
    43EXHIBIT INDEX
    
    
    44Ex-31.1Ex-31.2Ex-32.1Ex-32.2
  2




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WINSTON HOTELS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 ($ in thousands, except per share amounts)
 September 30, 2005
    
    
    December 31, 2004(unaudited)ASSETSLand
    
    $
    48,441
    
    
    $
    46,215Buildings and improvements
    
    
    401,545
    
    
    
    382,458Furniture and equipment
    
    
    60,861
    
    
    
    54,661Operating properties
    
    
    510,847
    
    
    
    483,334Less accumulated depreciation
    
    
    145,834
    
    
    
    134,261365,013
    
    
    
    349,073Properties under development
    
    
    15,206
    
    
    
    3,962Net investment in hotel properties
    
    
    380,219
    
    
    
    353,035Assets held for sale
    
    
    
    
    
    
    7,037Corporate furniture fixtures and equipment, net
    
    
    373
    
    
    
    397Cash
    
    
    16,015
    
    
    
    4,115Accounts receivable, net
    
    
    3,500
    
    
    
    2,676Notes receivable
    
    
    32,253
    
    
    
    30,849Investment in joint ventures
    
    
    2,443
    
    
    
    2,512Deferred expenses, net
    
    
    6,259
    
    
    
    3,759Prepaid expenses and other assets
    
    
    10,222
    
    
    
    7,976Deferred tax asset
    
    
    11,517
    
    
    
    12,024Total assets
    
    $
    462,801
    
    
    $
    424,380LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS EQUITYLines of credit
    
    $
    101,394
    
    
    $
    66,850Mortgage loans
    
    
    100,471
    
    
    
    88,075Accounts payable and accrued expenses
    
    
    17,444
    
    
    
    13,066Distributions payable
    
    
    6,011
    
    
    
    5,994Total liabilities
    
    
    225,320
    
    
    
    173,985Minority interest
    
    
    12,144
    
    
    
    10,154Shareholders equity:Preferred stock, Series B, $.01 par value, 5,000,000 shares authorized,
3,680,000 shares issued and outstanding (liquidation preference of
$93,840)
    
    
    37
    
    
    
    37Common stock, $.01 par value, 50,000,000 shares authorized,
26,509,002 and 26,397,574 shares issued and outstanding
    
    
    265
    
    
    
    264Additional paid-in capital
    
    
    325,130
    
    
    
    323,947Unearned compensation
    
    
    (1,629
    )
    
    
    (1,145
    )Distributions in excess of earnings
    
    
    (98,466
    )
    
    
    (82,862
    )Total shareholders equity
    
    
    225,337
    
    
    
    240,241Total liabilities, minority interest and shareholders equity
    
    $
    462,801
    
    
    $
    424,380
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WINSTON HOTELS, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004Operating revenue:Rooms
    
    $
    37,096
    
    
    $
    32,364Food and beverage
    
    
    3,373
    
    
    
    2,235Other operating departments
    
    
    1,201
    
    
    
    1,025Joint venture fee income
    
    
    63
    
    
    
    50Total operating revenue
    
    
    41,733
    
    
    
    35,674Hotel operating expenses:Rooms
    
    
    8,037
    
    
    
    7,226Food and beverage
    
    
    2,430
    
    
    
    1,700Other operating departments
    
    
    865
    
    
    
    732Undistributed operating expenses:Property operating expenses
    
    
    8,058
    
    
    
    7,067Real estate taxes and property and casualty insurance
    
    
    1,850
    
    
    
    1,702Franchise costs
    
    
    2,697
    
    
    
    2,312Maintenance and repair
    
    
    2,076
    
    
    
    1,817Management fees
    
    
    1,048
    
    
    
    771General and administrative
    
    
    2,261
    
    
    
    2,149Depreciation
    
    
    4,990
    
    
    
    4,291Amortization
    
    
    412
    
    
    
    329Impairment of wholly owned hotels
    
    
    12,993
    
    
    
    Total operating expenses
    
    
    47,717
    
    
    
    30,096Operating income (loss)
    
    
    (5,984
    )
    
    
    5,578Interest and other income
    
    
    2,062
    
    
    
    590Interest expense
    
    
    (2,822
    )
    
    
    (1,696
    )Income (loss) before allocation to minority interest in Partnership,
allocation to minority interest in consolidated joint ventures,
income taxes, and equity in income (loss) of unconsolidated
joint ventures
    
    
    (6,744
    )
    
    
    4,472(Income) loss allocation to minority interest in Partnership
    
    
    430
    
    
    
    (146
    )(Income) loss allocation to minority interest in consolidated joint ventures
    
    
    (272
    )
    
    
    52Income tax benefit (expense)
    
    
    (361
    )
    
    
    454Equity in income (loss) of unconsolidated joint ventures
    
    
    75
    
    
    
    (31
    )Income (loss) from continuing operations
    
    
    (6,872
    )
    
    
    4,801Discontinued operations:Income (loss) from discontinued operations
    
    
    (38
    )
    
    
    104Gain on sale of discontinued operations
    
    
    2
    
    
    
    Loss on impairment of asset held for sale
    
    
    
    
    
    
    (2
    )Net income (loss)
    
    
    (6,908
    )
    
    
    4,903Preferred stock distribution
    
    
    (1,840
    )
    
    
    (1,840
    )Net income (loss) available to common shareholders
    
    $
    (8,748
    )
    
    $
    3,063Basic weighted average number of common shares outstanding
    
    
    26,314
    
    
    
    26,230Diluted weighted average number of common shares outstanding
    
    
    26,314
    
    
    
    27,542Income (loss) per common share basic and diluted:Income (loss) from continuing operations
    
    $
    (0.33
    )
    
    $
    0.12Income (loss) from discontinued operations
    
    
    
    
    
    
    Net income (loss) available to common shareholders
    
    $
    (0.33
    )
    
    $
    0.12Per share dividends to common shareholders
    
    $
    0.15
    
    
    $
    0.15
  4




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WINSTON HOTELS, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004Operating revenue:Rooms
    
    $
    105,688
    
    
    $
    93,130Food and beverage
    
    
    8,183
    
    
    
    6,614Other operating departments
    
    
    3,233
    
    
    
    3,022Percentage lease revenue
    
    
    
    
    
    
    701Joint venture fee income
    
    
    187
    
    
    
    123Total operating revenue
    
    
    117,291
    
    
    
    103,590Hotel operating expenses:Rooms
    
    
    23,430
    
    
    
    20,629Food and beverage
    
    
    6,117
    
    
    
    4,920Other operating departments
    
    
    2,318
    
    
    
    2,145Undistributed operating expenses:Property operating expenses
    
    
    23,144
    
    
    
    20,855Real estate taxes and property and casualty insurance
    
    
    5,526
    
    
    
    4,936Franchise costs
    
    
    7,662
    
    
    
    6,669Maintenance and repair
    
    
    6,168
    
    
    
    5,344Management fees
    
    
    3,105
    
    
    
    2,327General and administrative
    
    
    6,151
    
    
    
    5,290Depreciation
    
    
    14,340
    
    
    
    12,827Amortization
    
    
    1,064
    
    
    
    985Impairment of wholly owned hotels
    
    
    12,993
    
    
    
    Total operating expenses
    
    
    112,018
    
    
    
    86,927Operating income
    
    
    5,273
    
    
    
    16,663Interest and other income
    
    
    4,809
    
    
    
    1,346Interest expense
    
    
    (7,652
    )
    
    
    (5,100
    )Income before allocation to minority interest in Partnership,
allocation to minority interest in consolidated joint ventures,
income taxes, and equity in income (loss)
of unconsolidated joint ventures
    
    
    2,430
    
    
    
    12,909(Income) loss allocation to minority interest in Partnership
    
    
    192
    
    
    
    (318
    )Income allocation to minority interest in consolidated joint ventures
    
    
    (539
    )
    
    
    (210
    )Income tax benefit (expense)
    
    
    (470
    )
    
    
    1,387Equity in income (loss) of unconsolidated joint ventures
    
    
    42
    
    
    
    (85
    )Income from continuing operations
    
    
    1,655
    
    
    
    13,683Discontinued operations:Income (loss) from discontinued operations
    
    
    (175
    )
    
    
    532Net gain on sale of discontinued operations
    
    
    366
    
    
    
    15Loss on impairment of asset held for sale
    
    
    
    
    
    
    (49
    )Net income
    
    
    1,846
    
    
    
    14,181Preferred stock distribution
    
    
    (5,520
    )
    
    
    (5,475
    )Loss on redemption of Series A preferred stock
    
    
    
    
    
    
    (1,720
    )Net income (loss) available to common shareholders
    
    $
    (3,674
    )
    
    $
    6,986Basic weighted average number of common shares outstanding
    
    
    26,298
    
    
    
    26,221Diluted weighted average number of common shares outstanding
    
    
    26,298
    
    
    
    27,554Income (loss) per common share basic and diluted:Income (loss) from continuing operations
    
    $
    (0.15
    )
    
    $
    0.25Income from discontinued operations
    
    
    0.01
    
    
    
    0.02Net income (loss) available to common shareholders
    
    $
    (0.14
    )
    
    $
    0.27Per share dividends to common shareholders
    
    $
    0.45
    
    
    $
    0.45
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WINSTON HOTELS, INC.
 
 UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
 (in thousands, except per share amounts)
 Additional
    
    
    
    
    
    
    Distributions
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Unearned
    
    
    In Excess of
    
    
    ShareholdersShares
    
    
    Dollars
    
    
    Shares
    
    
    Dollars
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    EquityBalances at December 31,   2004
    
    
    3,680
    
    
    $
    37
    
    
    
    26,398
    
    
    $
    264
    
    
    $
    323,947
    
    
    $
    (1,145
    )
    
    $
    (82,862
    )
    
    $
    240,241Issuance of shares and other
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    1
    
    
    
    1,183
    
    
    
    (1,256
    )
    
    
    
    
    
    
    (72
    )Distributions ($0.45 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,930
    )
    
    
    (11,930
    )Distributions ($1.50 per preferred B share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,520
    )
    
    
    (5,520
    )Unearned compensation amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    772
    
    
    
    
    
    
    
    772Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,846
    
    
    
    1,846Balances at September 30, 2005
    
    
    3,680
    
    
    $
    37
    
    
    
    26,509
    
    
    $
    265
    
    
    $
    325,130
    
    
    $
    (1,629
    )
    
    $
    (98,466
    )
    
    $
    225,337
  6




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WINSTON HOTELS, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 ($ in thousands)
 Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004Cash flows from operating activities:Net income
    
    $
    1,846
    
    
    $
    14,181Adjustments to reconcile net income to net cash
provided by operating activities:Impairment of wholly owned hotels
    
    
    12,993
    
    
    
    Income (loss) allocation to minority interest
    
    
    (183
    )
    
    
    344Income allocation to consolidated joint ventures
    
    
    539
    
    
    
    210Depreciation
    
    
    14,462
    
    
    
    13,473Amortization
    
    
    1,068
    
    
    
    991Deferred income tax expense (benefit)
    
    
    507
    
    
    
    (1,491
    )Net gain on sale of hotel properties
    
    
    (383
    )
    
    
    (16
    )Loss on impairment of hotel properties
    
    
    
    
    
    
    52(Income) loss allocations from unconsolidated joint ventures
    
    
    (42
    )
    
    
    85Distributions from joint ventures
    
    
    111
    
    
    
    78Unearned compensation amortization
    
    
    772
    
    
    
    590Changes in assets and liabilities:Lease revenue receivable
    
    
    
    
    
    
    179Accounts receivable
    
    
    (825
    )
    
    
    (1,037
    )Prepaid expenses and other assets
    
    
    1,217
    
    
    
    (537
    )Accounts payable and accrued expenses
    
    
    4,161
    
    
    
    2,456Net cash provided by operating activities
    
    
    36,243
    
    
    
    29,558Cash flows from investing activities:Investment in hotel properties
    
    
    (46,369
    )
    
    
    (17,022
    )Proceeds from sale of hotel properties
    
    
    10,087
    
    
    
    10,543Issuance of notes receivable
    
    
    (7,700
    )
    
    
    (8,355
    )Collection of notes receivable
    
    
    7,721
    
    
    
    Deferred acquisition costs
    
    
    
    
    
    
    (91
    )Acquisition of business
    
    
    (29
    )
    
    
    (8,163
    )Investment in unconsolidated joint ventures
    
    
    
    
    
    
    (1,040
    )Net cash used in investing activities
    
    
    (36,290
    )
    
    
    (24,128
    )Cash flows from financing activities:Net increase in lines of credit
    
    
    34,531
    
    
    
    3,800Borrowings under loans
    
    
    940
    
    
    
    5,922Payment of loans
    
    
    (1,544
    )
    
    
    (10,694
    )Fees paid in connection with financing activities
    
    
    (3,201
    )
    
    
    (274
    )Proceeds from issuance of Series B preferred shares, net
    
    
    
    
    
    
    88,794Redemption of Series A preferred shares, net
    
    
    
    
    
    
    (75,000
    )Distributions to shareholders
    
    
    (17,433
    )
    
    
    (17,213
    )Distributions to minority interest in partnership
    
    
    (583
    )
    
    
    (585
    )Distributions to minority interest in consolidated joint ventures
    
    
    (763
    )
    
    
    (738
    )Net cash provided by (used in) financing activities
    
    
    11,947
    
    
    
    (5,988
    )Net increase (decrease) in cash
    
    
    11,900
    
    
    
    (558
    )Cash at beginning of period
    
    
    4,115
    
    
    
    5,623Cash at end of period
    
    $
    16,015
    
    
    $
    5,065Supplemental disclosure:Cash paid for interest
    
    $
    7,838
    
    
    $
    5,185Summary of
noncash investing and financing activities:Distributions to shareholders declared but not paid
    
    $
    5,816
    
    
    $
    5,799Distributions to minority interest declared but not paid
    
    $
    195
    
    
    $
    195Issuance of stock grants
    
    $
    1,256
    
    
    $
    1,331Adjustment to minority interest due to
issuance of common stock
    
    $
    (72
    )
    
    $
    29Sale of hotel property for note receivable
    
    $
    1,425
    
    
    $
    Interest rate swap adjustment to market value
    
    $
    
    
    
    $
    33Purchase of Stanley hotel with mortgage loan
    
    $
    13,000
    
    
    $
    
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##### Table of Contents



WINSTON HOTELS, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 ($ in thousands, except per share amounts)
 1. ORGANIZATION
    2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
 Basis of Presentation
  Accounting for Long-Lived Assets
 General.
 8




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Impairment on Possible Dispositions.
 Fourth Quarter Changes in Classification.
 Accounting for Joint Ventures
  Minority Interest
  Franchise Agreements
   9




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
   Recently Issued Accounting Standards
   3. MINORITY INTEREST IN PARTNERSHIP
  4. HOTEL DEVELOPMENT AND ACQUISITION
 Development of Princeton Homewood Suites
  10




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Development of Wilmington Hilton Garden Inn
  Acquisition of Hampton Inn & Suites Baltimore Inner Harbor
  5. CREDIT FACILITIES AND MORTGAGE LOANS
 Credit Facilities
    11




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Mortgage Loans
  6. EARNINGS PER SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Income (loss) from continuing operations
    
    $
    (6,872
    )
    
    $
    4,801
    
    
    $
    1,655
    
    
    $
    13,683Less: preferred stock distributions
    
    
    (1,840
    )
    
    
    (1,840
    )
    
    
    (5,520
    )
    
    
    (5,475
    )Less: loss on redemption of Series A preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,720
    )Income (loss) from continuing operations available to common shareholders
    
    
    (8,712
    )
    
    
    2,961
    
    
    
    (3,865
    )
    
    
    6,488Plus: income allocation to minority interest
    
    
    
    
    
    
    146
    
    
    
    
    
    
    
    318Net income (loss) available to common
shareholders  assuming dilution
    
    $
    (8,712
    )
    
    $
    3,107
    
    
    $
    (3,865
    )
    
    $
    6,806Weighted average number of common shares
    
    
    26,314
    
    
    
    26,230
    
    
    
    26,298
    
    
    
    26,221Minority interest units with redemption rights
    
    
    
    
    
    
    1,298
    
    
    
    
    
    
    
    1,298Stock options and unvested stock grants
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    35Weighted average number of common shares
assuming dilution
    
    
    26,314
    
    
    
    27,542
    
    
    
    26,298
    
    
    
    27,554Income (loss) per share  assuming dilution
    
    $
    (0.33
    )
    
    $
    0.12
    
    
    $
    (0.15
    )
    
    $
    0.25
  12




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Income (loss) from discontinued operations
    
    
    (36
    )
    
    
    102
    
    
    
    191
    
    
    
    498Plus: income allocation to minority interest
    
    
    
    
    
    
    5
    
    
    
    9
    
    
    
    26Income (loss) from discontinued operations
 assuming dilution
    
    $
    (36
    )
    
    $
    107
    
    
    $
    200
    
    
    $
    524Weighted average number of common shares
    
    
    26,314
    
    
    
    26,230
    
    
    
    26,298
    
    
    
    26,221Minority interest units with redemption rights
    
    
    
    
    
    
    1,298
    
    
    
    1,298
    
    
    
    1,298Stock options and unvested stock grants
    
    
    
    
    
    
    14
    
    
    
    13
    
    
    
    35Weighted average number of common shares
assuming dilution
    
    
    26,314
    
    
    
    27,542
    
    
    
    27,609
    
    
    
    27,554Income per share  assuming dilution
    
    $
    
    
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.02
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss) available to common shareholders
    
    
    (8,748
    )
    
    
    3,063
    
    
    
    (3,674
    )
    
    
    6,986Plus: income allocation to minority interest
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    344Net income (loss) available to common
shareholders  assuming dilution
    
    $
    (8,748
    )
    
    $
    3,214
    
    
    $
    (3,674
    )
    
    $
    7,330Weighted average number of common shares
    
    
    26,314
    
    
    
    26,230
    
    
    
    26,298
    
    
    
    26,221Minority interest units with redemption rights
    
    
    
    
    
    
    1,298
    
    
    
    
    
    
    
    1,298Stock options and unvested stock grants
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    35Weighted average number of common shares
assuming dilution
    
    
    26,314
    
    
    
    27,542
    
    
    
    26,298
    
    
    
    27,554Income (loss) per share  assuming dilution
    
    $
    (0.33
    )
    
    $
    0.12
    
    
    $
    (0.14
    )
    
    $
    0.27
   13




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 7. INCOME TAXES
  8. SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES AND FIN 46R
  Consolidated Joint Ventures
     14




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
    15




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##### Table of Contents



WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  September 30, 2005
    
    
    December 31, 2004Marsh Landing Hotel AssociatesAssets
    
    $
    6,801
    
    
    $
    7,044Liabilities
    
    
    5,033
    
    
    
    4,978Equity
    
    $
    1,768
    
    
    $
    2,066March Landing LesseeAssets
    
    $
    86
    
    
    $
    Liabilities
    
    
    51
    
    
    
    Equity
    
    $
    35
    
    
    $
    Chapel Hill Hotel AssociatesAssets
    
    $
    13,755
    
    
    $
    13,576Liabilities
    
    
    10,881
    
    
    
    9,916Equity
    
    $
    2,874
    
    
    $
    3,660Chapel Hill LesseeAssets
    
    $
    196
    
    
    $
    130Liabilities
    
    
    135
    
    
    
    187Equity (deficit)
    
    $
    61
    
    
    $
    (57
    )Stanley AssociatesAssets
    
    $
    18,240
    
    
    $
    Liabilities
    
    
    13,093
    
    
    
    Equity
    
    $
    5,147
    
    
    $
    Stanley LesseeAssets
    
    $
    1,152
    
    
    $
    Liabilities
    
    
    754
    
    
    
    Equity
    
    $
    398
    
    
    $
    Baltimore LesseeAssets
    
    $
    1,484
    
    
    $
    Liabilities
    
    
    441
    
    
    
    Equity
    
    $
    1,043
    
    
    $
    
 16




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Marsh Landing Hotel AssociatesRevenue
    
    $
    270
    
    
    $
    336
    
    
    $
    983
    
    
    $
    1,145Expense
    
    
    223
    
    
    
    194
    
    
    
    654
    
    
    
    577Net income
    
    $
    47
    
    
    $
    142
    
    
    $
    329
    
    
    $
    568March Landing LesseeRevenue
    
    $
    649
    
    
    $
    
    
    
    $
    2,345
    
    
    $
    Expense
    
    
    701
    
    
    
    
    
    
    
    2,310
    
    
    
    Net income (loss)
    
    $
    (52
    )
    
    $
    
    
    
    $
    35
    
    
    $
    Chapel Hill Hotel AssociatesRevenue
    
    $
    487
    
    
    $
    35
    
    
    $
    1,464
    
    
    $
    37Expense
    
    
    476
    
    
    
    243
    
    
    
    1,385
    
    
    
    353Net income (loss)
    
    $
    11
    
    
    $
    (208
    )
    
    $
    79
    
    
    $
    (316
    )Chapel Hill LesseeRevenue
    
    $
    1,155
    
    
    $
    23
    
    
    $
    3,458
    
    
    $
    23Expense
    
    
    1,125
    
    
    
    56
    
    
    
    3,340
    
    
    
    66Net income (loss)
    
    $
    30
    
    
    $
    (33
    )
    
    $
    118
    
    
    $
    (43
    )Stanley AssociatesRevenue
    
    $
    426
    
    
    $
    
    
    
    $
    426
    
    
    $
    Expense
    
    
    278
    
    
    
    
    
    
    
    278
    
    
    
    Net income
    
    $
    148
    
    
    $
    
    
    
    $
    148
    
    
    $
    Stanley LesseeRevenue
    
    $
    2,105
    
    
    $
    
    
    
    $
    2,105
    
    
    $
    Expense
    
    
    1,707
    
    
    
    
    
    
    
    1,707
    
    
    
    Net income
    
    $
    398
    
    
    $
    
    
    
    $
    398
    
    
    $
    Baltimore LesseeRevenue
    
    $
    450
    
    
    $
    
    
    
    $
    450
    
    
    $
    Expense
    
    
    415
    
    
    
    
    
    
    
    415
    
    
    
    Net income
    
    $
    35
    
    
    $
    
    
    
    $
    35
    
    
    $
    Total
    
    
    5,542
    
    
    
    394
    
    
    
    11,231
    
    
    
    1,2054,925
    
    
    
    493
    
    
    
    10,089
    
    
    
    996Net income (loss)
    
    $
    617
    
    
    $
    (99
    )
    
    $
    1,142
    
    
    $
    209
  Unconsolidated Joint Ventures
  17




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WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
    18




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##### Table of Contents



WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  September 30,
    
    
    December 31,2005
    
    
    2004Current assets
    
    $
    3,489
    
    
    $
    4,193Gross fixed assets
    
    
    49,800
    
    
    
    47,599Accumulated depreciation
    
    
    (3,532
    )
    
    
    (2,178
    )Other assets
    
    
    692
    
    
    
    914Total assets
    
    
    50,449
    
    
    
    50,528Current liabilities
    
    
    4,316
    
    
    
    3,303Outstanding loans
    
    
    31,914
    
    
    
    30,768Total liabilities
    
    
    36,230
    
    
    
    34,071Equity
    
    
    14,219
    
    
    
    16,457Companys share of equity
    
    
    2,019
    
    
    
    2,077Companys additional basis
    
    
    424
    
    
    
    435Investment in joint venture
    
    $
    2,443
    
    
    $
    2,512
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    4,812
    
    
    $
    3,150
    
    
    $
    12,084
    
    
    
    8,199Hotel operating expenses
    
    
    2,423
    
    
    
    1,991
    
    
    
    6,891
    
    
    
    5,105Management fees
    
    
    246
    
    
    
    155
    
    
    
    588
    
    
    
    381Fixed expenses
    
    
    1,443
    
    
    
    1,154
    
    
    
    3,946
    
    
    
    3,120Hotel net income (loss)
    
    
    700
    
    
    
    (150
    )
    
    
    659
    
    
    
    (407
    )Charlesbank Ventures 87% share of net income (loss)
    
    
    609
    
    
    
    (131
    )
    
    
    573
    
    
    
    (354
    )Corporate charges
    
    
    (83
    )
    
    
    (50
    )
    
    
    (219
    )
    
    
    (134
    )Charlesbank Venture net income (loss)
    
    
    526
    
    
    
    (181
    )
    
    
    354
    
    
    
    (488
    )Winstons 15% share of Charlesbank
Venture net income (loss)
    
    
    79
    
    
    
    (27
    )
    
    
    53
    
    
    
    (73
    )Amortization of investment true-up
    
    
    (4
    )
    
    
    (4
    )
    
    
    (11
    )
    
    
    (12
    )Equity in
income (loss) of unconsolidated joint ventures
    
    $
    75
    
    
    $
    (31
    )
    
    $
    42
    
    
    $
    (85
    )
   19




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##### Table of Contents



WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 September 30,
    
    
    December 31,2005
    
    
    2004$1.1 million mezzanine loan
collateralized by the ownership
interest of the entity that
owns the hotel, matures
December 2006 at an interest
rate of 30-day LIBOR plus
7.36%, with interest-only
payments through maturity, with
additional interest of 2% of
gross monthly revenues until
maturity of which 25% is paid
currently and 75% is accrued,
at maturity Company will
receive greater of accrued
interest or 15% of the
appreciation in value
    
    $
    1,080
    
    
    $
    1,080$2.2 million mezzanine loan
collateralized by the ownership
interest of the entity that
owns the hotel, matures January
2006, at an interest rate of
30-day LIBOR plus 8.44%, with
interest-only payments through
maturity, with additional
interest of 2% of gross monthly
revenues until maturity of
which 25% is paid currently and
75% is accrued, at maturity
Company will receive greater of
accrued interest or 20% of the
appreciation in value
    
    
    2,186
    
    
    
    2,186$1.8 million mezzanine loan
collateralized by the ownership
interest of the entity that
owns the hotel, at an interest
rate of 30-day LIBOR plus
10.21%, with interest and
principal payments based on a
ten year amortization, with
additional accrued interest of
10% of gross monthly revenues
until maturity, at maturity
Company received the greater of
accrued interest or 60% of the
appreciation in value, paid in
full September 2005 (see Note
4)
    
    
    
    
    
    
    1,683$2.4 million mezzanine loan
collateralized by the ownership
interest of the entity that
owns the hotel, matures
February 2009, at an interest
rate of 60-day LIBOR (with a 2%
floor) plus 9%, with
interest-only payments through
maturity, with additional
interest of 2% of outstanding
principal balance accruing
monthly
    
    
    2,400
    
    
    
    2,400$6 million B-note
collateralized by the hotel
property, matures June 2006, at
an interest rate of 10%,
interest only payments until
maturity or payoff, paid in
full March 2005
    
    
    
    
    
    
    6,000$5.5 million mezzanine loan
collateralized by the ownership
interest of the entity that
owns the hotel, matures
September 2009, at an interest
rate of 30-day LIBOR plus
10.25%, with interest only for
the first two years of
operations and interest and
principal payments thereafter
based on a ten year
amortization schedule, with
additional interest of 3% of
outstanding principal balance
accruing monthly
    
    
    5,500
    
    
    
    5,500$6.0 million participation in a
$38 million senior loan
collateralized by the hotel
property, matures December
2005, at an interest rate of
11%, with interest only
payments until maturity
    
    
    6,000
    
    
    
    6,000$6.0 million mezzanine loan
collateralized by the ownership
interest of the entity that
owns the hotel, matures
December 2007, at an interest
rate of 30-day LIBOR plus 9%,
with interest only payments
until maturity
    
    
    6,000
    
    
    
    6,000$1.4 million loan
collateralized by the hotel
property, matures January 2010,
at an interest rate of prime
plus 1.5%, with principal
payments of $6, based on a
twenty year amortization
schedule (see Note 9)
    
    
    1,383
    
    
    
    $3.4 million mezzanine loan
collateralized by the ownership
interest of the entity that
owns the hotel, matures August
2011, at an interest rate of
30-day LIBOR plus 9.41%, with
interest only payments until
maturity, with additional
interest of 4% accruing monthly
until maturity
    
    
    3,375
    
    
    
    $2.3 million B-notes
collateralized by three hotel
properties, mature September
2011, at an effective interest
rate of 9.3% (and a yield to
maturity of 11.7%), interest
and principal payments based on
a six and one-half year
amortization schedule
    
    
    2,329
    
    
    
    $2.0 million participation in a
$20 million senior bridge loan
collateralized by the hotel,
matures August 2007, at an
interest rate of 11%, with
interest only payments until
maturity
    
    
    2,000
    
    
    
    Total
    
    $
    32,253
    
    
    $
    30,849
 20




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##### Table of Contents



WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
   9. DISCONTINUED OPERATIONS
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Total revenue
    
    $
    
    
    
    $
    1,361
    
    
    $
    709
    
    
    $
    5,209Total expenses
    
    
    46
    
    
    
    1,299
    
    
    
    854
    
    
    
    4,754Income (loss) from discontinued operations
    
    
    (46
    )
    
    
    62
    
    
    
    (145
    )
    
    
    455Allocation to minority interest in Partnership  (income)
loss from discontinued operations
    
    
    2
    
    
    
    (5
    )
    
    
    8
    
    
    
    (27
    )Gain on sale of discontinued operations
    
    
    2
    
    
    
    
    
    
    
    383
    
    
    
    16Allocation
to minority interest in Partnership 
gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    (1
    )Loss on impairment of asset held for sale
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (51
    )Allocation to minority interest in Partnership  loss on
impairment of asset held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Income tax benefit (expense)
    
    
    6
    
    
    
    47
    
    
    
    (38
    )
    
    
    104Income (loss) from discontinued operations
    
    $
    (36
    )
    
    $
    102
    
    
    $
    191
    
    
    $
    498
 21




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##### Table of Contents



WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 10. SEGMENT REPORTING
   Three months ended September 30, 2005:
 Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    41,733
    
    
    $
    
    
    
    $
    
    
    
    $
    41,733Operating expenses
    
    
    (27,061
    )
    
    
    2
    
    
    
    (2,263
    )
    
    
    (29,322
    )Depreciation and amortization
    
    
    (5,402
    )
    
    
    
    
    
    
    
    
    
    
    (5,402
    )Impairment of wholly owned hotels
    
    
    (12,993
    )
    
    
    
    
    
    
    
    
    
    
    (12,993
    )Interest and other income
    
    
    
    
    
    
    1,973
    
    
    
    89
    
    
    
    2,062Interest expense
    
    
    (2,370
    )
    
    
    (452
    )
    
    
    
    
    
    
    (2,822
    )Income (loss) before allocation to
minority interest in Partnership,
allocation to minority interest in
consolidated joint ventures, income
taxes, and equity in income of
unconsolidated joint ventures
    
    
    (6,093
    )
    
    
    1,523
    
    
    
    (2,174
    )
    
    
    (6,744
    )Loss allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    430
    
    
    
    430Income allocation to minority interest in consolidated joint ventures
    
    
    (272
    )
    
    
    
    
    
    
    
    
    
    
    (272
    )Income tax expense
    
    
    (361
    )
    
    
    
    
    
    
    
    
    
    
    (361
    )Equity in income of unconsolidated joint ventures
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75Income (loss) from continuing operations
    
    $
    (6,651
    )
    
    $
    1,523
    
    
    $
    (1,744
    )
    
    $
    (6,872
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (6,908
    )Total assets
    
    $
    429,428
    
    
    $
    33,373
    
    
    $
    
    
    
    $
    462,801
 22




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##### Table of Contents



WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Three months ended September 30, 2004:
 Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    35,674
    
    
    $
    
    
    
    $
    
    
    
    $
    35,674Operating expenses
    
    
    (23,327
    )
    
    
    (22
    )
    
    
    (2,127
    )
    
    
    (25,476
    )Depreciation and amortization
    
    
    (4,620
    )
    
    
    
    
    
    
    
    
    
    
    (4,620
    )Interest and other income
    
    
    
    
    
    
    517
    
    
    
    73
    
    
    
    590Interest expense
    
    
    (1,570
    )
    
    
    (126
    )
    
    
    
    
    
    
    (1,696
    )Income (loss) before allocation to
minority interest in Partnership,
allocation to minority interest in
consolidated joint ventures, income
taxes, and equity in loss of
unconsolidated joint ventures
    
    
    6,157
    
    
    
    369
    
    
    
    (2,054
    )
    
    
    4,472Income allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    (146
    )
    
    
    (146
    )Loss allocation to minority interest in consolidated joint ventures
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Income tax benefit
    
    
    454
    
    
    
    
    
    
    
    
    
    
    
    454Equity in loss of unconsolidated joint ventures
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    (31
    )Income (loss) from continuing operations
    
    $
    6,632
    
    
    $
    369
    
    
    $
    (2,200
    )
    
    $
    4,801Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,903Total assets
    
    $
    378,763
    
    
    $
    14,250
    
    
    $
    
    
    
    $
    393,013
 Nine Months ended September 30, 2005:
 Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    117,291
    
    
    $
    
    
    
    $
    
    
    
    $
    117,291Operating expenses
    
    
    (77,470
    )
    
    
    (9
    )
    
    
    (6,142
    )
    
    
    (83,621
    )Depreciation and amortization
    
    
    (15,404
    )
    
    
    
    
    
    
    
    
    
    
    (15,404
    )Impairment of wholly owned hotels
    
    
    (12,993
    )
    
    
    
    
    
    
    
    
    
    
    (12,993
    )Interest and other income
    
    
    
    
    
    
    4,587
    
    
    
    222
    
    
    
    4,809Interest expense
    
    
    (6,381
    )
    
    
    (1,271
    )
    
    
    
    
    
    
    (7,652
    )Income (loss) before allocation to
minority interest in Partnership,
allocation to minority interest in
consolidated joint ventures, income
taxes, and equity in income of
unconsolidated joint ventures
    
    
    5,043
    
    
    
    3,307
    
    
    
    (5,920
    )
    
    
    2,430Loss allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    192
    
    
    
    192Income allocation to minority interest in consolidated joint ventures
    
    
    (539
    )
    
    
    
    
    
    
    
    
    
    
    (539
    )Income tax expense
    
    
    (470
    )
    
    
    
    
    
    
    
    
    
    
    (470
    )Equity in income of unconsolidated joint ventures
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    42Income (loss) from continuing operations
    
    $
    4,076
    
    
    $
    3,307
    
    
    $
    (5,728
    )
    
    $
    1,655Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,846Total assets
    
    $
    429,428
    
    
    $
    33,373
    
    
    $
    
    
    
    $
    462,801
 23




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##### Table of Contents



WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
 Nine Months ended September 30, 2004:
 Hotel
    
    
    HotelOwnership
    
    
    Financing
    
    
    Corporate
    
    
    ConsolidatedOperating revenues
    
    $
    103,590
    
    
    $
    
    
    
    $
    
    
    
    $
    103,590Operating expenses
    
    
    (67,825
    )
    
    
    (24
    )
    
    
    (5,266
    )
    
    
    (73,115
    )Depreciation and amortization
    
    
    (13,812
    )
    
    
    
    
    
    
    
    
    
    
    (13,812
    )Interest and other income
    
    
    
    
    
    
    1,133
    
    
    
    213
    
    
    
    1,346Interest expense
    
    
    (4,853
    )
    
    
    (247
    )
    
    
    
    
    
    
    (5,100
    )Income (loss) before allocation to
minority interest in Partnership,
allocation to minority interest in
consolidated joint ventures, income
taxes, and equity in loss of
unconsolidated joint ventures
    
    
    17,100
    
    
    
    862
    
    
    
    (5,053
    )
    
    
    12,909Income allocation to minority interest in Partnership
    
    
    
    
    
    
    
    
    
    
    (318
    )
    
    
    (318
    )Income allocation to minority interest in consolidated joint ventures
    
    
    (210
    )
    
    
    
    
    
    
    
    
    
    
    (210
    )Income tax benefit
    
    
    1,387
    
    
    
    
    
    
    
    
    
    
    
    1,387Equity in loss of unconsolidated joint ventures
    
    
    (85
    )
    
    
    
    
    
    
    
    
    
    
    (85
    )Income (loss) from continuing operations
    
    $
    18,192
    
    
    $
    862
    
    
    $
    (5,371
    )
    
    $
    13,683Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    498Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,181Total assets
    
    $
    378,763
    
    
    $
    14,250
    
    
    $
    
    
    
    $
    393,013
 11. SUBSEQUENT EVENTS
 Acquisition of Mezzanine Loan Portfolio
   New Marathon Loan Facility
  Acquisition of Hotels
  24




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##### Table of Contents



WINSTON HOTELS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  ($ in thousands, except per share amounts)
  Planned Hotel Disposition and Related Reclassification
  25




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##### Table of Contents



Item 2  Managements Discussion and Analysis of Financial  Condition and Results of Operations
 ($ in thousands)
 Overview
     
    
    directing our hotel managers to minimize operating costs and increase revenues;
    
    acquiring and developing hotels with a favorable current yield and an opportunity for appreciation;
    
    selling older, underperforming hotels or hotels that no longer meet the Companys yield objectives;
    
    implementing selective capital improvements designed to increase profitability consistent with
franchisor standards and mandates; and
    
    originating or acquiring hotel loans, and other investments that our Board of Directors deems
appropriate.
   26




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##### Table of Contents



Recent Developments
  
    
    In December 2004, the Company formed a new joint venture, Winston Kansas City, LP with
U.S. Bancorp Community Development Corporation to acquire a historic residential building
in Kansas City, MO. The property is undergoing extensive renovations to be converted into
a 123-room Courtyard by Marriott hotel with an estimated all-in cost of approximately $16.7
million, net of tax credits totaling $7.7 million, $10.9 million of which is being financed
by a first mortgage loan. As of September 30, 2005, the Company had invested $11.1 million
and expects the hotel to open in the summer of 2006.
    
    In July 2005, the Company closed on the purchase of 4.5 acres of land in the Forrestal
Center of Princeton University for $2.9 million and plans to build a 142-room Homewood
Suites hotel for an estimated all-in cost of approximately $19.6 million, $12.0 million of
which is expected to be borrowed under a first mortgage loan with the remainder to be
funded with funds available under the Companys credit facilities. The Company broke ground
on the hotel in September and expects to open the hotel in the first quarter of 2007.
    
    In July 2005, the Company formed a joint venture with DeHoff Development Company
(DeHoff), a diversified real estate owner and developer. The joint venture plans to build
a 121-room Hilton Garden Inn at Gateway Corporate Park, adjacent to the Akron-Canton
Airport in Green, Ohio, for approximately $12.0 million. The total equity investment in
the joint venture is expected to be approximately $4.6 million. The Company plans to
contribute $1.0 million in exchange for common equity in the joint venture, and another
$2.2 million in exchange for preferred equity in the joint venture bearing an expected
annual cash dividend of LIBOR plus 11 percent, while DeHoff plans to contribute
approximately $1.4 million to the joint venture in exchange for common equity. The joint
venture broke ground on the hotel in September 2005 with an anticipated late fall 2006
opening. The joint venture anticipates borrowing approximately $7.4 million under a first
mortgage loan to fund the remainder of the projects estimated all-in cost.
    
    In September 2005, the Company acquired the 116-room Hampton Inn & Suites Baltimore
Inner Harbor in Maryland for $16.3 million from a private investment group.
    
    In September 2005, the Company invested $3 million in a joint venture with Stanley
Holdings, LLC to acquire a 60% ownership interest in the 138-room Stanley Hotel in Estes
Park, Colorado.
    
    In October 2005, the Company acquired six hotels with an aggregate of 698 rooms for
$46.0 million. The properties consist of one Courtyard by Marriott hotel and five
Towneplace Suites hotels. Five of these hotels are located in Texasone in Austin, one in
College Station, one in Clearlake and two in Houstonand one is located in Birmingham, Ala.
The hotels will continue to be managed by Marriott, which will become the Companys eighth
management company. The Company simultaneously closed on an increase in the Companys line
of credit from General Electric Capital Corporation (GECC) (the GE Line) of $60 million
to finance the acquisition. The maximum potential availability under the GE Line is now
$215 million. The six hotels were also added as collateral to support outstanding balances
under the GE Line.
    
    The Company is currently under contract, and is continuing its due diligence, to buy a
site in Wilmington, N.C. to build a 119-room Hilton Garden Inn. The estimated all-in cost
of this development is expected to be approximately $13.3 million, 65 percent of which is
expected to be borrowed under a first mortgage loan. If the Company completes its
acquisition of the site, the hotel is slated to break ground in the fourth quarter of 2005
with an anticipated first quarter 2007 opening.
  
    
    In May 2005, the Company announced a program with GE Commercial Franchise Finance
(GEFF) to provide a highly streamlined, cost-effective loan program for hoteliers. Under
the program, GEFF expects to provide loans collateralized by a first mortgage loan for up
to 85 percent of a projects cost and the Company would fund approximately 25 percent of
the total loan amount, which is the first loss piece, or the B note, of the mortgage
loan. Borrowers will work with GEFF and the Company as one seamless entity, which is
expected to reduce
 27




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##### Table of Contents



significantly the time and cost to acquire the financing for hotel projects, compared to
having to deal with two separate lenders.
    
    In August 2005, the Company closed on a $2.0 million participation in a $20 million
senior bridge interest only loan that bears interest at a fixed rate of 11% for two years
to finance a 95-unit condo hotel conversion project in Miami, Florida. Canyon Capital
Realty Advisors LLC funded the remaining $18 million.
    
    In October 2005, the Company purchased from an affiliate of Credit Suisse First Boston
a $14.0 million portfolio of four senior participation interests in certain mezzanine
loans; Lehman Brothers holds the related junior participation interests. The underlying
three year mezzanine loans, with two one-year extensions, bear interest at a rate of
30-day LIBOR plus 4.5% and are individually collateralized by equity interests in
affiliates of Walton Street Capital, which entities own an aggregate of four Marriott
Renaissance hotels, located in Los Angeles, CA (499 rooms), St. Petersburg, FL (360
rooms), Austin, TX (478 rooms), and Chicago, IL (553 rooms). Each individual mezzanine
loan is subordinate to a first mortgage loan secured by the hotels. The loans are not
cross-collateralized or cross-defaulted. The Company simultaneously closed an $8.4
million credit facility with Marathon Structured Finance Fund, L.P. (Marathon) to
finance the acquisition of the portfolio of participation interests. Borrowings under the
facility bear interest at a rate of 30-day LIBOR plus 2.25%.
 Results of Operations for the Three and Nine months ended September 30, 2005 versus the Three and
Nine months ended September 30, 2004
 HOTEL OWNERSHIP SEGMENT
 Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Percentage
    
    
    
    
    
    
    
    
    
    
    Percentage2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangeHotels owned as of September 30, 2005(a):Hotel room revenues
    
    $
    37,096
    
    
    $
    32,364
    
    
    
    14.6
    %
    
    $
    105,688
    
    
    $
    93,130
    
    
    
    13.5
    %RevPAR
    
    $
    63.52
    
    
    $
    59.03
    
    
    
    7.6
    %
    
    $
    61.75
    
    
    $
    57.53
    
    
    
    7.3
    %Occupancy
    
    
    70.9
    %
    
    
    72.1
    %
    
    
    -1.7
    %
    
    
    69.9
    %
    
    
    70.9
    %
    
    
    -1.4
    %Average daily rate (ADR)
    
    $
    89.59
    
    
    $
    81.91
    
    
    
    9.4
    %
    
    $
    88.36
    
    
    $
    81.10
    
    
    
    9.0
    %
 
 (a)
    
    Includes all owned or partially owned consolidated hotels as of September 30, 2005. Room
  28




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##### Table of Contents



Food and Beverage 
 Other Operating Departments 
 Percentage Lease Revenue
 Expenses
 Rooms 
 Food and Beverage 
 Other Operating Departments
 Property Operating
 Real Estate Taxes and Property and Casualty Insurance 
 29




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##### Table of Contents



Franchise Costs 
 Maintenance and Repair Costs 
 Management Fees 
 Depreciation and Amortization
 Impairment of wholly owned hotels
  Interest Expense
 30




---



##### Table of Contents



Income Allocation to Minority Interest in Consolidated Joint Ventures
 Income Tax Benefit (Expense)
 HOTEL FINANCING SEGMENT
 General and Administrative
 Interest and Other Income
 Interest Expense
 GENERAL CORPORATE INCOME AND EXPENSES
  General and Administrative
 Interest and Other Income
 31




---



##### Table of Contents



Income (Loss) Allocation to Minority Interest in Partnership
 Discontinued Operations
 Liquidity and Capital Resources
 Operating
  Investing
   32




---



##### Table of Contents



33




---



##### Table of Contents



Financing
        34




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations and Commercial Commitments
  Critical Accounting Policies
  Accounts and Notes Receivable
  Accounting for Long-Lived Assets
 General.
 35




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##### Table of Contents



Impairment on Possible Dispositions
 Fourth Quarter Change in Reclassification
 Accounting for Joint Ventures
  Franchise Agreements
   36




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##### Table of Contents



Seasonality
  Funds From Operations (FFO)
   37




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##### Table of Contents



WINSTON HOTELS, INC.
RECONCILIATION AND CALCULATION OF FFO AND
FFO AVAILABLE TO COMMON SHAREHOLDERS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    (6,908
    )
    
    $
    4,903
    
    
    $
    1,846
    
    
    $
    14,181Gain on sale of discontinued operations
    
    
    (2
    )
    
    
    
    
    
    
    (383
    )
    
    
    (16
    )Minority interest in Partnership allocation of income (loss)
    
    
    (430
    )
    
    
    146
    
    
    
    (192
    )
    
    
    318Minority interest in Partnership allocation of gain
on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    1Minority interest in Partnership allocation of income
(loss) from discontinued operations
    
    
    (2
    )
    
    
    5
    
    
    
    (8
    )
    
    
    26Depreciation
    
    
    4,624
    
    
    
    4,201
    
    
    
    13,430
    
    
    
    12,355Depreciation from discontinued operations
    
    
    
    
    
    
    158
    
    
    
    123
    
    
    
    646Depreciation from joint ventures
    
    
    280
    
    
    
    103
    
    
    
    660
    
    
    
    411FFO
    
    
    (2,438
    )
    
    
    9,516
    
    
    
    15,493
    
    
    
    27,922Loss on redemption of Series A preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,720
    )Preferred stock dividend
    
    
    (1,840
    )
    
    
    (1,840
    )
    
    
    (5,520
    )
    
    
    (5,475
    )FFO Available to Common Shareholders
    
    $
    (4,278
    )
    
    $
    7,676
    
    
    $
    9,973
    
    
    $
    20,727
  Forward Looking Statements
  38




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##### Table of Contents



Item 3  Quantitative and Qualitative Disclosures About Market Risk
 ($ in thousands)
   39




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##### Table of Contents



2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total
    
    
    Fair ValueVariable rate  GE line:
    
    $
    93,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    93,500
    
    
    $
    93,500Average interest rate
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )
    
    
    (a
    )Variable rate  Marathon master repurchase agreement:
    
    $
    7,894
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,894
    
    
    $
    7,894Average interest rate
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )
    
    
    (b
    )Mortgage loans:Fixed rate  GECC
    
    $
    409
    
    
    $
    1,715
    
    
    $
    1,846
    
    
    $
    58,396
    
    
    $
    
    
    
    $
    
    
    
    $
    62,366
    
    
    $
    62,575Average interest rate
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %
    
    
    7.38
    %Variable rate  Evanston, IL Hilton Garden Inn
    
    $
    64
    
    
    $
    262
    
    
    $
    281
    
    
    $
    300
    
    
    $
    321
    
    
    $
    10,181
    
    
    $
    11,409
    
    
    $
    11,409Average interest rate
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )Consolidated joint venture loans:Fixed rate  The Stanley Hotel
    
    $
    35
    
    
    $
    218
    
    
    $
    232
    
    
    $
    245
    
    
    $
    263
    
    
    $
    11,973
    
    
    $
    12,966
    
    
    $
    12,673Average interest rate
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %
    
    
    6.19
    %Fixed rate  Chapel Hill, NC Courtyard by Marriott
    
    $
    51
    
    
    $
    213
    
    
    $
    229
    
    
    $
    247
    
    
    $
    267
    
    
    $
    7,951
    
    
    $
    8,958
    
    
    $
    9,027Average interest rate
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %
    
    
    7.51
    %Variable rate  Ponte Vedra, FL Hampton Inn
    
    $
    21
    
    
    $
    92
    
    
    $
    100
    
    
    $
    109
    
    
    $
    119
    
    
    $
    4,331
    
    
    $
    4,772
    
    
    $
    4,772Average interest rate
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
    
    
    (c
    )
 
 (a)
    
    Weighted average interest rate for the nine months ended September 30, 2005 was 5.23%. Rate is 30-day to 180-day
LIBOR plus 1.75% to 2.50%, (30-day and 180-day LIBOR were 3.86% and 4.23%, respectively, at September 30, 2005)
(see Note 5 to the Consolidated Financial Statements).(b)
    
    Rate is 30-day LIBOR plus 4.5% or 5.5%, (30-day LIBOR was 3.86%, at September 30, 2005)
(see Note 5 to the Consolidated Financial Statements).(c)
    
    Weighted average interest rate for the nine months ended September 30, 2005 was 6.86% (30-day LIBOR plus 3.0%). 40




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##### Table of Contents



Item 4  Controls and Procedures
     41




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 6  Exhibits
 Exhibit Number
    
    Description3.1
    
    Restated Articles of Incorporation, as amended (Incorporated by reference to (i)
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 4, 1999, (ii) Exhibit 4.4(b) to the
Companys Registration Statement on Form 8-A as filed with the Securities and
Exchange Commission on January 30, 2004 and (iii) Exhibit 3.1(b) to the Companys
Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on
August 5, 2005).3.2
    
    Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 19, 2001).4.1
    
    Specimen certificate for Common Stock (Incorporated by reference to Exhibit 4.1
to the Companys Registration Statement on Form S-11 as filed with the Securities and
Exchange Commission (Registration No. 33-76602) effective May 25, 1994).4.2
    
    Specimen certificate for 8.00% Series B Cumulative Preferred Stock (Incorporated
by reference to Exhibit 4.3 to the Companys Registration Statement on Form 8-A as
filed with the Securities and Exchange Commission on January 30, 2004).4.3
    
    Form of Articles of Amendment to the Restated Articles of Incorporation
Establishing and Fixing the Rights and Preferences of the 8.00% Series B Cumulative
Preferred Stock (Incorporated by reference to Exhibit 4.4(b) to the Companys
Registration Statement on Form 8-A as filed with the Securities and Exchange
Commission on January 30, 2004).31.1
    
    Certification of Principal Executive Officer of Periodic Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a)31.2
    
    Certification of Principal Financial Officer of Periodic Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a)32.1
    
    Certification of Robert W. Winston, III, Chief Executive Officer of Winston
Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and dated November 9, 200532.2
    
    Certification of Joseph V. Green, Chief Financial Officer of Winston Hotels,
Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and dated November 9, 2005
 42




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##### Table of Contents



SIGNATURES
  WINSTON HOTELS, INC.Date November 9, 2005
    
    /s/ Joseph V. GreenJoseph V. GreenPresident and Chief Financial Officer(Authorized officer and Principal Financial Officer)
 43




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description3.1
    
    Restated Articles of Incorporation, as amended (Incorporated by reference to (i)
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 4, 1999, (ii) Exhibit 4.4(b) to the
Companys Registration Statement on Form 8-A as filed with the Securities and
Exchange Commission on January 30, 2004 and (iii) Exhibit 3.1(b) to the Companys
Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on
August 5, 2005).3.2
    
    Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on March 19, 2001).4.1
    
    Specimen certificate for Common Stock (Incorporated by reference to Exhibit 4.1
to the Companys Registration Statement on Form S-11 as filed with the Securities and
Exchange Commission (Registration No. 33-76602) effective May 25, 1994).4.2
    
    Specimen certificate for 8.00% Series B Cumulative Preferred Stock (Incorporated
by reference to Exhibit 4.3 to the Companys Registration Statement on Form 8-A as
filed with the Securities and Exchange Commission on January 30, 2004).4.3
    
    Form of Articles of Amendment to the Restated Articles of Incorporation
Establishing and Fixing the Rights and Preferences of the 8.00% Series B Cumulative
Preferred Stock (Incorporated by reference to Exhibit 4.4(b) to the Companys
Registration Statement on Form 8-A as filed with the Securities and Exchange
Commission on January 30, 2004).31.1
    
    Certification of Principal Executive Officer of Periodic Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a)31.2
    
    Certification of Principal Financial Officer of Periodic Report Pursuant to Rule
13a-14(a) or Rule 15d-14(a)32.1
    
    Certification of Robert W. Winston, III, Chief Executive Officer of Winston
Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and dated November 9, 200532.2
    
    Certification of Joseph V. Green, Chief Financial Officer of Winston Hotels,
Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and dated November 9, 2005
 44