Strategic foresight was fundamental to Winston in 2000. In a year characterized by market uncertainty, Winston and the hotel REIT sector in general faced several market-related pressures and challenges: rising interest rates, reduced availability of capital and a flattening real estate market. Given this environment, Winston achieved the following operating results: FFO reached $31.3 million, or $1.72 per share, which exceeded our expectations set at the beginning of the year by $0.01. The growth in our fee-based revenues helped the Company maintain consistent operating results as well as a constant annualized dividend of $1.12, even as some of our peers were compelled to cut their dividends. Although market conditions were not favorable for growth, we have begun to experience some success in developing additional sources of income. These include a 49% ownership interest in three joint venture projects through which we have earned, and continue to earn, fees from development, design and asset management services. We also have formed a strategic alliance to co-develop two additional hotels, where Winston also has provided mezzanine financing. 

Winston’s portfolio of assets at year-end included 49 operating hotels with 6,723 rooms in 12 states and a 49 percent ownership interest in three joint ventures which own two operating upscale hotels and a third under development. We work continually to move our portfolio toward newer, upscale hotels through the rehabilitation of existing properties or otherwise through divestiture and judicious reinvestment. While some of the portfolio’s upscale hotels, such as the Hilton Garden Inns, were able to generate a 10 percent RevPar increase for the year, there also remain older, limited-service properties that generated only modest growth. The performance of these assets does not satisfy us, and we will continue to look for ways either to improve their operating results or to sell these properties. The geographic distribution of our assets, while still weighted in the Southern Atlantic states, increasingly has become diversified as management looks to initiate a greater number of projects in the United States’ North Eastern, Middle Atlantic and Pacific regions. The Company’s integrated strategy is to continue with the accumulation and development of new and geographically diverse, upscale projects, while improving or selling older, limited-service properties. Moreover, the Company’s strategy includes initiating relationships which enable us to leverage our internal strengths regarding development and financing services.

The Company’s integrated strategy is to continue with the accumulation and development of new and geographically diverse, upscale projects, while improving or selling older, limited-service properties. Moreover, the Company’s strategy includes initiating relationships which enable us to leverage our internal strengths regarding development and financing services.

Two of the three joint-venture upscale hotels opened during 2000. The first was the 158-room Hilton Garden Inn in Windsor, Connecticut, developed in partnership with Regent Partners, Inc. The second was the 118-room Jacksonville Hampton Inn at Ponte Vedra Beach, Florida, which was developed with Marsh Landing Investment, LLC. In addition to these, Winston has commenced construction of its third joint venture property, a 175-room Hilton Garden Inn in Evanston, Illinois, which is scheduled to open in July 2001. The upscale Hilton is adjacent to the campus of Northwestern University.

Investment only constitutes the first part of Winston’s involvement in these projects. Our joint venture agreements also enable Winston to earn fee income through management’s in-house development and asset management capabilities. Arrangements such as these allow us to exploit our core capabilities, which become an especially important resource when market conditions are less certain. The resilience and foresight implicit in this strategy highlight one of Winston’s central goals: to increase shareholder value by creating and maintaining additional sources of income.

Winston entered into a strategic alliance in 2000 with Noble Investment Group, Ltd. for the specific purpose of developing projects requiring both mezzanine debt and consulting services. Noble is a leading private hotel company that, together with Winston, is developing two Hilton Garden Inns in Atlanta, GA and Tampa, FL. In addition to these locations, we also intend to explore projects in other key markets including Princeton, NJ, and Chapel Hill, NC.

Mezzanine financing capabilities bring Winston distinctive market advantages. A mezzanine loan provided by a managing member of the project, like Winston, typically bridges the gap between equity invested and senior debt by providing 10%-15% of the project’s all-in cost through debt. Not only does this create a lending asset with its associated financing fees, but also it creates project management fees, thus enhancing the Company’s FFO. To date, such project fees already have offset the loss of hotel revenue due to the sale of two under performing hotels during 2000.

Winston’s financial foresight has produced one of the most conservative capital structures in the industry. Our year-end outstanding debt level was 37% of the undepreciated cost of total assets. EBITDA at year-end was 3.9 times interest costs. The Company also announced an interest rate swap in December 2000, which fixes our interest rate on $50 million of debt at a rate of 5.915% until December 18, 2002. This results in an effective interest rate of 7.365% on $50 million after considering the 1.45% interest rate spread provided for in our line of credit. The transaction, coupled with our $69 million of outstanding securitized debt bearing an interest rate of 7.375%, effectively locks in approximately 70% of the Company’s outstanding debt at very attractive rates.

Winston believes that it is not in the best interest of its shareholders to acquire all of the leases at this point. The Company and Meristar will continue to work closely together for the benefit of the operations of our hotels. Moreover, we have agreed with Meristar to leave open the possibility of future discussions regarding the Company’s acquisition of some or all of the leases at the appropriate time.

During the year, the Company sold two under performing limited service assets and used the proceeds to generate greater returns through reinvesting the proceeds in joint venture projects and mezzanine loans. This strategy is in line with the Company’s 2001 strategy, which is to continue its efforts to enhance shareholder value by focusing on newer, upscale properties, and to generate additional sources of revenue by capitalizing on our in-house core competencies relating to development and financing activities.

Looking ahead to 2001, Winston again expects to meet or exceed its operations and strategic goals through maintaining its principles of foresight and futuresight. As in the past, we appreciate the confidence you have expressed in the Company’s future. While economic conditions affecting our sector continue to challenge us, we are gratified by the effectiveness of our response to current conditions. We appreciate your continuing loyalty and support and look forward to 2001 and beyond.

Charles M. Winston 

Chairman of the Board

Robert W. Winston, III 

Chief Executive Officer