FelCor Lodging Trust (FCH) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

     [X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

or

     [   ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

Commission File Number: 001-14236

FelCor Lodging Trust Incorporated

(Exact name of registrant as specified in its charter)

Maryland	75-2541756
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

545 E. John Carpenter Freeway, Suite 1300, Irving, Texas	75062
(Address of principal executive offices)	(Zip Code)

(972) 444-4900

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).oYes   oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   o	Accelerated filer x
Non-accelerated filer     o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yes   xNo

At July 28, 2010, the registrant had issued and outstanding 97,050,021 shares of common stock.

FELCOR LODGING TRUST INCORPORATED

INDEX

Page

		PART I − FINANCIAL INFORMATION
Item 1.	Financial Statements		3
		Consolidated Balance Sheets June 30, 2010 and December 31, 2009 (unaudited)	3
		Consolidated Statements of Operations – For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)	4
		Consolidated Statements of Comprehensive Loss – For the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)	5
		Consolidated Statements of Changes in Equity – For the Six Months Ended June 30, 2010 and 2009 (unaudited)	6
		Consolidated Statements of Cash Flows – For the Six Months Ended June 30, 2010 and 2009 (unaudited) Notes to Consolidated Financial Statements	7
		Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
		General	19
		Results of Operations	20
		Non-GAAP Financial Measures	22
		Pro Rata Share of Rooms Owned	24
		Hotel Portfolio Composition	25
		Hotel Operating Statistics	26
		Hotel Portfolio	28
		Liquidity and Capital Resources	30
		Inflation	32
		Seasonality	32
		Disclosure Regarding Forward-Looking Statements	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33
Item 4.	Controls and Procedures		33
		PART II − OTHER INFORMATION
Item 3.	Defaults Upon Senior Securities		34
Item 6.	Exhibits		34
SIGNATURE			35

2

PART I -- FINANCIAL INFORMATION

Item 1.                      Financial Statements.

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands)

	June 30, 2010			December 31, 2009
Assets
Investment in hotels, net of accumulated depreciation of $958,462 at June 30, 2010 and $916,604 at December 31, 2009	$	2,102,908		$	2,180,394
Investment in unconsolidated entities		104,372			82,040
Cash and cash equivalents		281,474			263,531
Restricted cash		17,288			18,708
Accounts receivable, net of allowance for doubtful accounts of $315 at June 30, 2010 and $406 at December 31, 2009		33,618			28,678
Deferred expenses, net of accumulated amortization of $13,993 at June 30, 2010 and $14,502 at December 31, 2009		22,828			19,977
Other assets		37,387			32,666
Total assets	$	2,599,875		$	2,625,994
Liabilities and Equity
Debt, net of discount of $58,567 at June 30, 2010 and $64,267 at December 31, 2009	$	1,596,635		$	1,773,314
Distributions payable		56,936			37,580
Accrued expenses and other liabilities		156,808			131,339
Total liabilities		1,810,379			1,942,233
Commitments and contingencies
Redeemable noncontrolling interests in FelCor LP at redemption value, 295 units issued and outstanding at June 30, 2010 and December 31, 2009		1,472			1,062
Equity:
Preferred stock, $0.01 par value, 20,000 shares authorized:
Series A Cumulative Convertible Preferred Stock, 12,880 shares, liquidation value of $322,011, issued and outstanding at June 30, 2010 and December 31, 2009		309,362			309,362
Series C Cumulative Redeemable Preferred Stock, 68 shares, liquidation value of $169,950, issued and outstanding at June 30, 2010 and December 31, 2009		169,412			169,412
Common stock, $.01 par value, 200,000 shares authorized and 101,038 and 69,413 shares issued, including shares in treasury, at June 30, 2010 and December 31, 2009, respectively		1,010			694
Additional paid-in capital		2,188,730			2,021,837
Accumulated other comprehensive income		22,879			23,528
Accumulated deficit		(1,852,962	)		(1,792,822	)
Less: Common stock in treasury, at cost, of 3,986 shares at June 30, 2010 and 3,845 shares at December 31, 2009		(72,237	)		(71,895	)
Total FelCor stockholders’ equity		766,194			660,116
Noncontrolling interests in other partnerships		21,830			22,583
Total equity		788,024			682,699
Total liabilities and equity	$	2,599,875		$	2,625,994

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

3

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2010 and 2009

(unaudited, in thousands, except for per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenues:
Hotel operating revenue	$	249,329		$	235,269		$	475,368		$	463,002
Other revenue		1,007			988			1,372			1,274
Total revenues		250,336			236,257			476,740			464,276
Expenses:
Hotel departmental expenses		86,974			81,487			168,756			160,732
Other property related costs		67,466			63,956			133,070			129,310
Management and franchise fees		11,884			11,043			22,419			22,184
Taxes, insurance and lease expense		26,921			24,656			51,601			49,318
Corporate expenses		6,510			5,236			16,357			11,358
Depreciation and amortization		36,969			35,935			74,567			72,586
Impairment loss		-			-			21,060			-
Other expenses		801			1,761			1,362			2,457
Total operating expenses		237,525			224,074			489,192			447,945
Operating income (loss) (loss)		12,811			12,183			(12,452	)		16,331
Interest expense, net		(37,174	)		(22,782	)		(73,414	)		(44,074	)
Extinguishment of debt		46,060			(594	)		46,060			(594	)
Income (loss) before equity in income (loss) from unconsolidated entities		21,697			(11,193	)		(39,806	)		(28,337	)
Equity in income (loss) from unconsolidated entities		286			(261	)		(1,188	)		(3,685	)
Income (loss) from continuing operations		21,983			(11,454	)		(40,994	)		(32,022	)
Discontinued operations		7			486			42			(368	)
Net income (loss)		21,990			(10,968	)		(40,952	)		(32,390	)
Net income attributable to noncontrolling interests in other partnerships		(325	)		(324	)		(96	)		(108	)
Net loss (income) attributable to redeemable noncontrolling interests in FelCor LP		(51	)		97			274			239
Net income (loss) attributable to FelCor		21,614			(11,195	)		(40,774	)		(32,259	)
Preferred dividends		(9,678	)		(9,678	)		(19,356	)		(19,356	)
Net income (loss) attributable to FelCor common stockholders	$	11,936		$	(20,873	)	$	(60,130	)	$	(51,615	)
Basic and diluted per common share data:
Income (loss) from continuing operations	$	0.17		$	(0.34	)	$	(0.93	)	$	(0.81	)
Net income (loss)	$	0.17		$	(0.33	)	$	(0.92	)	$	(0.82	)
Basic and diluted weighted average common shares outstanding		66,531			63,101			65,014			63,132

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

4

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Six Months Ended June 30, 2010 and 2009

(unaudited, in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Net income (loss)	$	21,990		$	(10,968	)	$	(40,952	)	$	(32,390	)
Foreign currency translation adjustment		(2,731	)		4,159			(652	)		2,450
Comprehensive income (loss)		19,259			(6,809	)		(41,604	)		(29,940	)
Comprehensive income attributable to noncontrolling interests in other partnerships		(325	)		(324	)		(96	)		(108	)
Comprehensive loss (income) attributable to redeemable noncontrolling interests in FelCor LP		(39	)		78			277			228
Comprehensive income (loss) attributable to FelCor	$	18,895		$	(7,055	)	$	(41,423	)	$	(29,820	)

The accompanying notes are an integral part of these consolidated financial statements

5

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Six Months Ended June 30, 2010 and 2009

(unaudited, in thousands)

	Preferred Stock			Common Stock						Accumulated									Noncontrolling
	Number of Shares	Amount		Number of Shares	Amount		Additional Paid-in Capital			Other Comprehensive Income (Loss)			Accumulated Deficit			Treasury Stock			Interests in Other Partnerships			Comprehensive Income (Loss)			Total Equity
Balance at December 31, 2008	12,948	$	478,774	69,413	$	694	$	2,045,482		$	15,347		$	(1,645,947	)	$	(99,245	)	$	23,784					$	818,889
Issuance of stock awards	-		-	-		-		(11,054	)		-			-			11,070			-						16
Amortization of stock awards	-		-	-		-		2,702			-			-			-			-						2,702
Forfeiture of stock awards	-		-	-		-		63			-			-			(186	)		-						(123	)
Allocation to redeemable noncontrolling interests	-		-	-		-		(410	)		-			-			-			-						(410	)
Contribution from noncontrolling interests	-		-	-		-		-			-			-			-			362						362
Distribution to noncontrolling interests	-		-	-		-		-			-			-			-			(725	)					(725	)
Other	-		-	-		-		(168	)		-			(40	)		-			168						(40	)
Preferred dividends accrued:
$0.975 per Series A preferred share	-		-	-		-		-			-			(12,558	)		-			-						(12,558	)
$1.00 per Series C depositary preferred share	-		-	-		-		-			-			(6,798	)		-			-						(6,798	)
Comprehensive loss:
Foreign exchange translation	-		-	-		-		-			2,439			-			-			-		$	2,439
Net income (loss)	-		-	-		-		-			-			(32,259	)		-			108			(32,151	)
Comprehensive loss																						$	(29,712	)		(29,712	)
Balance at June 30, 2009	12,948	$	478,774	69,413	$	694	$	2,036,615		$	17,786		$	(1,697,602	)	$	(88,361	)	$	23,697					$	771,603
Balance at December 31, 2009	12,948	$	478,774	69,413	$	694	$	2,021,837		$	23,528		$	(1,792,822	)	$	(71,895	)	$	22,583					$	682,699
Issuance of common stock	-		-	31,625		316		166,256			-			-			-			-						166,572
Issuance of stock awards	-		-	-		-		(229	)		-			-			297			-						68
Amortization of stock awards	-		-	-		-		2,520			-			-			-			-						2,520
Forfeiture of stock awards	-		-	-		-		149			-			-			(639	)		-						(490	)
Allocation to redeemable noncontrolling interests	-		-	-		-		(687	)		-			-			-			-						(687	)
Contribution from noncontrolling interests	-		-	-		-		-			-			-			-			15						15
Distribution to noncontrolling interests	-		-	-		-		-			-			-			-			(980	)					(980	)
Other	-		-	-		-		(1,116	)		-			(10	)		-			116						(1,010	)
Preferred dividends accrued:
$0.975 per Series A preferred share	-		-	-		-		-			-			(12,558	)		-			-						(12,558	)
$1.00 per Series C depositary preferred share	-		-	-		-		-			-			(6,798	)		-			-						(6,798	)
Comprehensive loss:
Foreign exchange translation	-		-	-		-		-			(649	)		-			-			-		$	(649	)
Net income (loss)	-		-	-		-		-			-			(40,774	)		-			96			(40,678	)
Comprehensive loss																						$	(41,327	)		(41,327	)
Balance at June 30, 2010	12,948	$	478,774	101,038	$	1,010	$	2,188,730		$	22,879		$	(1,852,962	)	$	(72,237	)	$	21,830					$	788,024

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

6

FELCOR LODGING TRUST INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2010 and 2009

(unaudited, in thousands)

	Six Months Ended June 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(40,952	)	$	(32,390	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		74,567			74,042
Amortization of deferred financing fees and debt discount		8,608			1,722
Amortization of unearned officers’ and directors’ compensation		3,257			2,802
Equity in loss from unconsolidated entities		1,188			3,685
Distributions of income from unconsolidated entities		1,110			1,388
Extinguishment of debt		(46,060	)		594
Impairment loss		21,060			1,368
Changes in assets and liabilities:
Accounts receivable		(5,469	)		(751	)
Restricted cash – operations		4,066			(676	)
Other assets		(4,059	)		(8,302	)
Accrued expenses and other liabilities		23,924			3,075
Net cash flow provided by operating activities		41,240			46,557
Cash flows from investing activities:
Improvements and additions to hotels		(18,393	)		(45,539	)
Additions to condominium project		(162	)		(88	)
Acquisition of noncontrolling interest		(1,000	)		-
Change in restricted cash – investing		(2,646	)		(1,255	)
Redemption of investment securities		-			632
Distributions from unconsolidated entities		559			3,200
Contributions to unconsolidated entities		(25,122	)		(409	)
Net cash flow used in investing activities		(46,764	)		(43,459	)
Cash flows from financing activities:
Proceeds from borrowings		212,121			418,382
Repayment of borrowings		(347,692	)		(336,243	)
Payment of deferred financing fees		(6,615	)		(7,343	)
Distributions paid to noncontrolling interests		(980	)		(725	)
Contributions from noncontrolling interests		15			362
Distributions paid to preferred stockholders		-			(9,678	)
Net proceeds from common stock issuance		166,704			-
Net cash flow provided by financing activities		23,553			64,755
Effect of exchange rate changes on cash		(86	)		468
Net change in cash and cash equivalents		17,943			68,321
Cash and cash equivalents at beginning of periods		263,531			50,187
Cash and cash equivalents at end of periods	$	281,474		$	118,508
Supplemental cash flow information – interest paid	$	64,490		$	43,187

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

7

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.           Organization

FelCor Lodging Trust Incorporated (NYSE:FCH), or FelCor, a Maryland corporation, operates as a real estate investment trust, or REIT.  We are the sole general partner of, and the owner of a greater than 99% partnership interest in, FelCor Lodging Limited Partnership, or FelCor LP, through which we held ownership interests in 84 hotels with approximately 24,000 rooms at June 30, 2010.

We lease all but one of our hotels to our taxable REIT subsidiaries (or TRS).  These subsidiaries (our operating lessees) have engaged independent third-party management companies to manage the hotels.

Of the 84 hotels in which we had an ownership interest at June 30, 2010, we owned a 100% interest in 65 hotels, a 90% interest in entities owning three hotels, an 82% interest in an entity owning one hotel, a 60% interest in an entity owning one hotel and a 50% interest in entities owning 14 hotels.  We consolidate our real estate interests in the 70 hotels in which we held greater than 50% ownership interests, and we record the real estate interests of the 14 hotels in which we held 50% ownership interests using the equity method.

At June 30, 2010, 83 of the 84 hotels in which we had ownership interests were leased to operating lessees, and one 50%-owned hotel was operated without a lease.  We held greater than 50% ownership interests and had direct or indirect controlling interests in the lessees of the hotels that were leased to operating lessees.  Because we owned controlling interests in these lessees (including lessees of 13 of the 14 hotels in which we owned 50% of the real estate interests), we consolidated our lessee interests in these hotels (we refer to these 83 hotels as our Consolidated Hotels) and reflect 100% of the hotels’ revenues and expenses, including lease expenses, on our statement of operations.  Of our Consolidated Hotels, we owned 50% of the real estate interests in each of 13 hotels (we accounted fo r the ownership in our real estate interests of these hotels by the equity method) and more than 50% of the real estate interests in each of the remaining 70 hotels (we consolidate our real estate interest in these hotels).

At June 30, 2010, we had 97,346,569 shares and units outstanding consisting of 97,051,609 shares of FelCor common stock and 294,960 FelCor LP limited partnership units not owned by FelCor.

The following table illustrates the distribution of our 83 Consolidated Hotels among our various brands at June 30, 2010:

Brand	Hotels		Rooms
Embassy Suites Hotels®		47	12,132
Holiday Inn®		15	5,154
Sheraton® and Westin®		9	3,217
Doubletree®		7	1,471
Marriott® and Renaissance®		3	1,321
Hilton®		2	559
Total		83	23,854

At June 30, 2010, our Consolidated Hotels were located in the United States (81 hotels in 23 states) and Canada (two hotels in Toronto, Ontario), with concentrations in California (15 hotels), Florida (12 hotels) and Texas (11 hotels).  Approximately 50% of our hotel room revenues were generated from hotels in these three states during the first six months of 2010.

8

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization – (continued)

At June 30, 2010, of our 83 Consolidated Hotels: (i) subsidiaries of Hilton Hotels Corporation, or Hilton, managed 54 hotels, (ii) subsidiaries of InterContinental Hotels Group, or IHG, managed 15 hotels, (iii) subsidiaries of Starwood Hotels & Resorts Worldwide Inc., or Starwood, managed nine hotels, (iv) subsidiaries of Marriott International Inc., or Marriott, managed three hotels, and (iv) independent management companies managed two hotels.

Our hotels managed by Marriott are accounted for on a fiscal year comprised of 52 or 53 weeks ending on the Friday closest to December 31.  Our quarterly period ending June 30, 2010 and 2009 includes the results of operations for our Marriott-managed hotels for the 12 week period ending June 18, 2010 and June 19, 2009, respectively.

The information in our consolidated financial statements for the three and six months ended June 30, 2010 and 2009 is unaudited.  Preparing financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  The accompanying financial statements for the three and six months ended June 30, 2010 and 2009, include adjustments based on management’s estimates (consisting of normal and recurring accruals), which we consider necessary for a fair presentation of the results for the periods.  The fin ancial information should be read in conjunction with the consolidated financial statements for the year ended December 31, 2009, included in our Annual Report on Form 10-K.  Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of actual operating results for the entire year.

2. Investment in Unconsolidated Entities

We owned 50% interests in joint ventures that owned 14 hotels at June 30, 2010 and 15 hotels at December 31, 2009.  We also own a 50% interest in entities that own real estate in Myrtle Beach, South Carolina and provide condominium management services.  We account for our investments in these unconsolidated entities under the equity method.  We do not have any majority-owned subsidiaries that are not consolidated in our financial statements.  We make adjustments to our equity in income from unconsolidated entities related to the difference between our basis in investment in unconsolidated entities compared to the historical basis of the assets recorded by the joint ventures.

The following table summarizes combined balance sheet information for our unconsolidated entities (in thousands):

	June 30, 2010		December 31, 2009
Balance sheet information:
Investment in hotels, net of accumulated depreciation	$	246,415	$	259,977
Total assets	$	272,004	$	279,611
Debt	$	160,261	$	214,963
Total liabilities	$	166,630	$	220,389
Equity	$	105,374	$	59,222

Our unconsolidated entities’ debt at June 30, 2010 and December 31, 2009 consisted entirely of non-recourse mortgage debt.

9

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Investment in Unconsolidated Entities – (continued)

In April 2010, we contributed $23 million to an unconsolidated joint venture.  That contribution, along with a $23 million contribution from our joint venture partner, was used to pay-off the joint venture’s $46 million mortgage debt.

The following table sets forth summarized combined statement of operations information for our unconsolidated entities (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Total revenues	$	19,648		$	18,182		$	32,387		$	32,920
Net income (loss)	$	1,022		$	374		$	(2,114	)	$	(4,588	)(a)
Net income (loss) attributable to FelCor	$	751		$	187		$	(817	)	$	(2,295	)
Impairment loss		-			-			-			(476	)(b)
Gain on joint venture liquidation		-			-			559	(b)		-
Depreciation of cost in excess of book value		(465	)		(448	)		(930	)		(914	)
Equity in income (loss) from unconsolidated entities	$	286		$	(261	)	$	(1,188	)	$	(3,685	)

(a)Net loss includes a $3.2 million impairment charge.  The impairment was based on sales contracts for two hotels then owned by one of our joint ventures (a Level 2 input).

(b)As a result of a 2009 impairment charge recorded by a joint venture, the net book value of the joint venture’s assets no longer supported the recovery of our investment.  Therefore, we recorded an additional 2009 impairment charge to reduce our investment in the joint venture to zero.  In March 2010, the joint venture sold its remaining hotel asset for $3.7 million, with respect to which we received $559,000 in net proceeds.

The following table summarizes the components of our investment in unconsolidated entities (in thousands):

	June 30, 2010		December 31, 2009
Hotel-related investments	$	42,739	$	18,969
Cost in excess of book value of hotel investments		51,565		52,429
Land and condominium investments		10,068		10,642
	$	104,372	$	82,040

The following table summarizes the components of our equity in income (loss) from unconsolidated entities (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Hotel investments	$	292		$	(371	)	$	(613	)	$	(3,196	)
Other investments		(6	)		110			(575	)		(489	)
Equity in income (loss) from unconsolidated entities	$	286		$	(261	)	$	(1,188	)	$	(3,685	)

10

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.           Debt

Consolidated debt consisted of the following (in thousands):

	Encumbered					June 30,		December 31,
	Hotels	Interest Rate			Maturity Date	2010		2009
Mortgage debt(a)	none		8.73	%	May 2010	$	-	$	112,703
Mortgage debt(b)	none		8.70		May 2010		-		98,639
Mortgage debt(c)(d)	2 hotels		8.62		May 2010		31,740		31,740
Other	none		4.25		May 2011		477		354
Senior notes	none		8.50	(e)	June 2011		86,640		86,604
Mortgage debt(f)	1 hotel		6.15		June 2011(g)		4,402		4,922
Mortgage debt	1 hotel		6.15		June 2011(g)		8,607		9,228
Capital lease(f)	1 hotel		10.50		August 2011		1,236		1,735
Mortgage debt	9 hotels	L +	3.50	(h)	August 2011(i)		199,300		200,425
Mortgage debt	12 hotels	L +	0.93	(j)	November 2011(k)		250,000		250,000
Mortgage debt(l)	none	L +	1.55		May 2012		-		176,555
Mortgage debt	1 hotel		8.77		May 2013(m)		27,770		27,829
Mortgage debt	7 hotels		9.02		April 2014		115,368		117,422
Mortgage debt(c)	5 hotels		6.66		June - August 2014		70,069		70,917
Senior secured notes(n)	14 hotels		10.00		October 2014		577,493		572,500
Mortgage debt	9 hotels	L+	5.10	(o)	April 2015		212,000		-
Mortgage debt	1 hotel		5.81		July 2016		11,533		11,741
Total	63 hotels					$	1,596,635	$	1,773,314

(a)	This loan was refinanced in May 2010, as a consequence of which two hotels were unencumbered.
(b)	These loans were refinanced in May 2010.
(c)	The hotels securing this debt are subject to separate loan agreements and are not cross-collateralized.
(d)	We are in the process of transferring the two hotels securing this debt to the lenders in full satisfaction of the debt.
(e)	As a result of a rating down-grade in February 2009, the interest rate on our 8½% senior notes increased to 9%.
(f)	Since the end of the second quarter 2010, we have repaid this debt.
(g)	In February 2010, the maturity date on these loans was extended to June 2011.
(h)	LIBOR for this loan is subject to a 2% floor.
(i)	This loan can be extended for as many as two years (to 2013), subject to satisfying certain conditions.
(j)	We purchased an interest rate cap that caps LIBOR at 7.8% and expires November 2010 for a $250 million notional amount.
(k)	The maturity date assumes that we will exercise the remaining one-year extension option that is exercisable, at our sole discretion, and would extend the current November 2010 maturity to 2011.
(l)	This loan was repaid in June 2010 for a payment of $130 million plus accrued interest.
(m)	In February 2010, the maturity date on this loan was extended to May 2013.
(n)	These notes have $636 million in aggregate principal outstanding and were sold at a discount that provides an effective yield of 12.875% before transaction costs.
(o)	LIBOR for this loan is subject to a 3% floor.  We purchased an interest rate cap that caps LIBOR at 5.0% and expires May 2012 for a $212 million notional amount.

11

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.           Debt – (continued)

In June 2010, we repaid $177 million of secured debt scheduled to mature in 2012 for $130 million, plus accrued interest, representing a 27% discount to the principal balance.  This allowed us to reduce our leverage substantially and unencumber two hotels.

In May 2010, we entered into a new $212 million loan, secured by nine hotels, that matures in 2015.  The new loan bears interest at LIBOR (subject to a 3.0% floor) plus 5.1%.  The proceeds were used to repay $210 million in loans that were secured by 11 hotels and scheduled to mature in May.  The terms of this financing are significantly more favorable than the refinanced debt, and we unencumbered two previously mortgaged hotels.

We reported $37.2 million and $22.8 million of interest expense for the three months ended June 30, 2010 and 2009, respectively, which is net of: (i) interest income of $97,000 and $167,000 and (ii) capitalized interest of $138,000 and $175,000, respectively.  We reported $73.4 million and $44.1 million of interest expense for the six months ended June 30, 2010 and 2009, respectively, which is net of: (i) interest income of $202,000 and $344,000 and (ii) capitalized interest of $283,000 and $407,000, respectively.

4.           Common Stock Offering

In June 2010, we completed a public offering of 31,625,000 shares of our common stock at $5.50 per share.  The net proceeds from the offering were $166.7 million.  These proceeds together with cash on hand were used to repay $177 million of secured debt for $130 million, representing a 27% discount, and will be used to fund our $98.5 million acquisition of the Fairmont Copley Plaza in Boston, which is expected to close in the third quarter of 2010.

5.           Hotel Operating Revenue, Departmental Expenses, and Other Property Operating Costs

Hotel operating revenue from continuing operations was comprised of the following (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Room revenue	$	195,876	$	185,567	$	373,136	$	363,746
Food and beverage revenue		38,792		35,063		74,288		70,914
Other operating departments		14,661		14,639		27,944		28,342
Total hotel operating revenue	$	249,329	$	235,269	$	475,368	$	463,002

Nearly 100% of our revenue in all periods presented was comprised of hotel operating revenue, which includes room revenue, food and beverage revenue, and revenue from other hotel operating departments (such as telephones, parking and business centers).  These revenues are recorded net of any sales or occupancy taxes collected from our guests. All rebates or discounts are recorded, when allowed, as a reduction in revenue, and there are no material contingent obligations with respect to rebates or discounts offered by us.  All revenues are recorded on an accrual basis, as earned.  Appropriate allowances are made for doubtful accounts, which are recorded as a bad debt expense.  The remainder of our revenue was derived from other sources.

12

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Hotel Operating Revenue, Departmental Expenses, and Other Property Operating Costs – (continued)

Hotel departmental expenses from continuing operations were comprised of the following (in thousands):

	Three Months Ended June 30,
	2010					2009
	Amount		% of Total Hotel Operating Revenue			Amount		% of Total Hotel Operating Revenue
Room	$	51,115		20.5	%	$	47,685		20.3	%
Food and beverage		29,373		11.8			27,589		11.7
Other operating departments		6,486		2.6			6,213		2.6
Total hotel departmental expenses	$	86,974		34.9	%	$	81,487		34.6	%

	Six Months Ended June 30,
	2010					2009
	Amount		% of Total Hotel Operating Revenue			Amount		% of Total Hotel Operating Revenue
Room	$	98,902		20.8	%	$	92,907		20.0	%
Food and beverage		57,282		12.1			55,476		12.0
Other operating departments		12,572		2.6			12,349		2.7
Total hotel departmental expenses	$	168,756		35.5	%	$	160,732		34.7	%

Other property operating costs from continuing operations were comprised of the following (in thousands):

	Three Months Ended June 30,
	2010					2009
	Amount		% of Total Hotel Operating Revenue			Amount		% of Total Hotel Operating Revenue
Hotel general and administrative expense	$	21,833		8.8	%	$	20,325		8.6	%
Marketing		21,056		8.5			19,648		8.4
Repair and maintenance		12,833		5.1			12,030		5.1
Utilities		11,744		4.7			11,953		5.1
Total other property operating costs	$	67,466		27.1	%	$	63,956		27.2	%

13

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Hotel Operating Revenue, Departmental Expenses, and Other Property Operating Costs – (continued)

	Six Months Ended June 30,
	2010					2009
	Amount		% of Total Hotel Operating Revenue			Amount		% of Total Hotel Operating Revenue
Hotel general and administrative expense	$	42,940		9.0	%	$	41,219		8.9	%
Marketing		40,618		8.6			39,173		8.4
Repair and maintenance		25,782		5.4			24,590		5.3
Utilities		23,730		5.0			24,328		5.3
Total other property operating costs	$	133,070		28.0	%	$	129,310		27.9	%

Hotel departmental expenses and other property operating costs include hotel employee compensation and benefit expenses of $75.7 million and $71.7 million for the three months ended June 30, 2010 and 2009, respectively, and $149.0 million and $143.8 million for the six months ended June 30, 2010 and 2009, respectively.

6.           Taxes, Insurance and Lease Expense

Taxes, insurance and lease expense from continuing operations were comprised of the following (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Hotel lease expense(a)	$	11,769	$	10,853	$	21,263	$	20,913
Land lease expense(b)		2,550		2,438		4,704		4,625
Real estate and other taxes		9,744		8,499		19,207		17,516
Property insurance, general liability insurance and other		2,858		2,866		6,427		6,264
Total taxes, insurance and lease expense	$	26,921	$	24,656	$	51,601	$	49,318

(a) Hotel lease expense is recorded by the consolidated operating lessees of 13 hotels owned by unconsolidated entities, and is partially offset through noncontrolling interests in other partnerships.  Our 50% share of the corresponding lease income is recorded through equity in income from unconsolidated entities.  Hotel lease expense includes percentage rent of $4.7 million and $3.8 million for the three months ended June 30, 2010 and 2009, respectively, and $7.1 million and $6.9 million for the six months ended June 30, 2010 and 2009, respectively.

(b) Land lease expense includes percentage rent of $1.0 million and $1.1 million for the three months ended June 30, 2010 and 2009, respectively, and $1.6 million and $1.8 million for the six months ended June 30, 2010 and 2009, respectively.

7.           Impairment

Our hotels comprise operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes, from the remainder of our operations.  Accordingly, we consider our hotels to be components for purposes of determining impairment charges and reporting discontinued operations.

14

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.           Impairment – (continued)

During the quarter ended March 31, 2010, we determined that we would be unable to negotiate satisfactory modifications or reductions that make sense for our stockholders on loans secured by two hotels.  Therefore, we recorded a $21.1 million impairment charge in connection with our decision to transfer these hotels to the lenders in full satisfaction of the debt secured by that hotel.  These hotels’ cash flows did not cover debt service, and we stopped funding shortfalls in December 2009.  We consider these hotels as part of continuing operations until the hotels are transferred, and the debt satisfied, whereupon we expect to record approximately $12 million of gain on extinguishment of debt.  We estimated the hotels’ fair v alue by using estimated future cash flows, terminal values based on the projected cash flows and capitalization rates in the range of what is reported in industry publications for operationally similar assets and other available market information.  The cash flows used for determining the fair values were discounted using market based discounts generally used for operationally and geographically similar assets.  The inputs used to determine the fair values of these hotels are classified as Level 3 under the authoritative guidance for fair value measurements.

During the quarter ended March 31, 2009, we recorded a $1.4 million impairment charge related to one of our sale candidate hotels.  This valuation was based on a third-party offer to purchase (a Level 2 input) at a price less than our previously estimated fair value.

We did not have any hotels held for sale at June 30, 2010.  We consider a sale to be probable within the next twelve months (for purposes of determining whether a hotel is held for sale) when a buyer completes its due diligence review of the asset, we have an executed contract for sale, and we have received a substantial non-refundable deposit.

We may be subject to additional impairment charges in the event that operating results of individual hotels are materially different from our forecasts, the economy and lodging industry weakens, or we shorten our contemplated holding period for certain of our hotels.

In order to enhance long-term shareholder value, as part of our strategic plan (as in the past and as market conditions allow), we intend to sell lower-growth hotels that no longer meet our investment criteria, thereby freeing our capital for redeployment (e.g., reduce overall leverage, acquire other hotels and invest in remaining FelCor properties).  We regularly evaluate demand and supply trends for each hotel, portfolio concentration risk and future capital needs.  We expect to identify additional hotels for sale as the hotel transaction and capital markets and hotel cash flows continue to improve.

8.           Discontinued Operations

Discontinued operations include results of operations of two hotels sold in December 2009.  The following table summarizes the condensed financial information for those hotels (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30
	2010			2009			2010			2009
Hotel operating revenue	$	9		$	6,309		$	44		$	12,578
Operating expenses		(2	)		(5,823	)		(2	)		(12,946	)(a)
Income (loss) from discontinued operations	$	7		$	486		$	42		$	(368	)

(a)   Includes impairment charges of $1.4 million.

15

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.           Income (Loss) Per Share

The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Numerator:
Net income (loss) attributable to FelCor	$	21,614		$	(11,195	)	$	(40,774	)	$	(32,259	)
Discontinued operations attributable to FelCor		(7	)		(484	)		(42	)		366
Income (loss) from continuing operations attributable to FelCor		21,607			(11,679	)		(40,816	)		(31,893	)
Less: Preferred dividends		(9,678	)		(9,678	)		(19,356	)		(19,356	)
Less: Undistributed earnings allocated to unvested restricted stock		(352	)		-			-			-
Numerator for continuing operations attributable to FelCor common stockholders		11,577			(21,357	)		(60,172	)		(51,249	)
Discontinued operations attributable to FelCor		7			484			42			(366	)
Numerator for basic and diluted income (loss) attributable to FelCor common stockholders	$	11,584		$	(20,873	)	$	(60,130	)	$	(51,615	)
Denominator:
Denominator for basic and diluted income (loss) per share		66,531	(a)		63,101			65,014			63,132
Basic and diluted income (loss) per share data:
Income (loss) from continuing operations	$	0.17		$	(0.34	)	$	(0.93	)	$	(0.81	)
Discontinued operations	$	-		$	0.01		$	-		$	(0.01	)
Net income (loss)	$	0.17		$	(0.33	)	$	(0.92	)	$	(0.82	)

(a) Reflects issuance of 31.6 million shares on June 22, 2010.

Securities that could potentially dilute earnings per share in the future that were not included in the computation of diluted income (loss) per share, because they would have been antidilutive for the periods presented, are as follows (in thousands):

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2010	2009	2010		2009
Series A convertible preferred shares	9,985	9,985		9,985		9,985

Series A preferred dividends that would be excluded from net income (loss) attributable to FelCor common stockholders, if these Series A preferred shares were dilutive, were $6.3 million for the three months ended June 30, 2010 and 2009, and $12.6 million for the six months ended June 30, 2010 and 2009.

16

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.            Suspension of Dividends

We suspended payment of our common dividend in December 2008 and our preferred dividend in March 2009 (we paid $9.7 million of preferred dividends in January 2009).  Our ability to pay cash dividends is limited by the indenture governing our senior secured notes whenever we fail to meet a defined financial ratio threshold, as in the current circumstances; consequently, we do not expect to pay any common or preferred cash dividends during 2010.  Dividends are not paid unless declared by our Board of Directors; however, any unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to reinstatement of our common dividend.  Our Board of Directors will determine whether to declare future dividends based upon various factors, including operating resu lts, economic conditions, other operating trends, our financial condition including the outcome of refinancing debt maturities and capital requirements, as well as minimum REIT distribution requirements.  We had accrued $56.9 million and $37.6 million in dividends payable on our Series A and Series C preferred stock at June 30, 2010 and December 31, 2009, respectively.

11.           Noncontrolling Interests

We record the noncontrolling interests of other consolidated partnerships as a separate component of equity in the condensed consolidated balance sheets.  Additionally, the condensed consolidated statements of operations separately present earnings and other comprehensive income attributable to controlling and non-controlling interests.  We adjust the noncontrolling interests of FelCor LP each period so that the carrying value equals the greater of its carrying value based on the accumulation of historical cost or its redemption value.  The historical cost of the noncontrolling interests of FelCor LP is based on the proportional relationship between the carrying value of equity associated with our common stockholders relative to that of the unitholders of FelCo r LP.  Net income (loss) is allocated to the noncontrolling partners of FelCor LP based on their weighted average ownership percentage during the period.  At June 30, 2010, approximately $1.5 million of cash or FelCor common stock, at our option, would be paid to the noncontrolling interests of FelCor LP if the partnership were terminated.  This balance is calculated based on the 294,960 partnership units held by third parties, valued at the June 30, 2010 closing price for our common stock ($4.99/share), which we have assumed would be equal to the value provided to outside partners upon liquidation of FelCor LP on that date.

The changes in redeemable noncontrolling interests for the six months ended June 30, 2010 and 2009 are shown below (in thousands):

	Six Months Ended June 30,
	2010			2009
Balance at beginning of period	$	1,062		$	545
Redemption value allocation		687			411
Comprehensive income (loss):
Foreign exchange translation		(3	)		11
Net loss		(274	)		(239	)
Balance at end of period	$	1,472		$	728

17

FELCOR LODGING TRUST INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.           Fair Value of Financial Instruments

Disclosures about fair value of our financial instruments are based on pertinent information available to management as of June 30, 2010.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize on disposition of the financial instruments.  The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Our estimates of the fair value of (i) accounts receivable, accounts payable and accrued expenses approximate carrying value due to the relatively short maturity of these instruments; (ii) our publicly-traded debt is based on observable market data; and (iii) our debt that is not traded publicly is based on estimated effective borrowing rates for debt with similar terms, loan to estimated fair value and remaining maturities (the estimated fair value of all our debt was $1.7 billion at June 30, 2010).

13.           Recently Adopted Accounting Standards

The FASB recently amended its guidance surrounding a company’s analysis to determine whether any of its variable interests constitute controlling financial interests in a variable interest entity.  This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance.  The new guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  The guidance was effective for us beginning January 1, 2010, and accordingly, we have reevaluated our interests in our entities to determine that the entities are reflected properly in the financial statements as investments or consolidated entities.  Based on our evaluation, we have conclud ed that we do not have any variable interest entities that are impacted by this new accounting standard.

18

Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

Hotel occupancy in 2010 has improved based on higher demand and moderating supply growth, after reaching historic lows in 2009.  While our hotels have experienced higher demand recently, consumers and business travelers continued to take advantage of the historically lower occupancy and a short-term shift in pricing power.  However, as occupancies continue to improve and corporate travel demand increases, we expect a sustained improvement in average daily rates, or ADR.

In June, our consolidated hotels experienced a 0.2% increase in ADR, the first increase in ADR since September 2008.  We expect demand growth to continue to outstrip supply growth, resulting in further improvements in ADR.  This should strengthen margins and improve earnings in future periods.

In the first six months of 2010, revenue per available room, or RevPAR, at our hotels increased 2.6%, compared to the first six months of 2009.  Occupancy at our hotels increased by 7.8%, compared to the prior year, but this was offset by a 4.8% decrease in ADR.  The combination of increased occupancy and lower ADR further compressed hotel margins, because our hotels have more guests who are paying less.  We continue to work closely with our brand-managers on extensive cost containment initiatives to minimize margin erosion at our hotels.  Many of our hotels have been able to reduce labor costs permanently, and all of our hotels have trimmed non-critical functions.  To this end, while overall costs have increased because of increased occupancy, our hotels have been able to reduce hotel de partmental expenses per occupied room by 2.5% and limited loss in margins to 94 basis points, compared to the same period last year.

In June 2010, we completed a public offering of 31,625,000 shares of our common stock at $5.50 per share.  The net proceeds from the offering, after underwriting discounts and commissions, were approximately $167 million.  These proceeds together with cash on hand were used to repay $177 million of secured debt for $130 million, representing a 27% discount, and will be used to fund our $98.5 million acquisition of the Fairmont Copley Plaza in Boston, which is expected to close in the third quarter of 2010.

In May 2010, we obtained a new $212 million loan, secured by nine hotels, that matures in 2015.  The new loan bears interest at LIBOR (subject to a 3.0% floor) plus 5.1%.  The proceeds were used to repay $210 million in loans that were secured by 11 hotels and scheduled to mature in May 2010.  The terms of this financing are significantly more favorable than the refinanced debt, and we unencumbered two previously mortgaged hotels.  Two remaining loans (totaling $32 million) matured in May 2010.   The cash flows for the hotels that secure those loans do not cover debt service, and we stopped funding the shortfalls in December 2009.  We have been unable to negotiate an acceptable debt modification or reduction that made sense for our stockholders, with regard to these loans.  We are in the process of transferring these two hotels to the lenders in full satisfaction of the debt.

With these transactions, we have resolved all of our significant debt maturities until the end of 2011.

We suspended our common dividend in December 2008 and our preferred dividend in March 2009.  Although dividends are not paid unless declared by our Board of Directors, unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to payment of any common dividends.  Our senior notes currently restrict us from paying any dividends so long as we remain below certain financial ratio thresholds, except to the extent necessary to satisfy the REIT distribution requirement.  Our Board of Directors will determine whether to declare future dividends based upon various factors, including operating results, economic conditions, other operating trends, our financial condition and capital requirements, as well as minimum REIT distribution requirements.

19

Results of Operations

Comparison of the Three Months ended June 30, 2010 and 2009

For the three months ended June 30, 2010, we recorded $11.9 million, or $0.17 per share, of net income attributable to common stockholders compared to $20.9 million, or $0.33 per share, of net loss attributable to common stockholders for the same period in 2009.  A $46.1 million gain from debt extinguishment, which was partially offset by a $14.4 million increase in net interest expense, was the most significant item contributing to the improvement in income compared to 2009.

In the second quarter of 2010:

· Total revenue was $250.3 million, a 6.0% increase compared to the same period in 2009.  The increase in revenue is attributed principally to a 5.6% increase in RevPAR, which reflects a 7.6% increase in occupancy and a 1.9% decrease in ADR.

· Hotel departmental expenses increased $5.5 million compared to the same period in 2009 due to higher occupancies.  As a percentage of total revenue, hotel departmental expenses remained essentially flat compared to the same period in 2009.  The increase in occupancy between periods occurred in the face of decreasing ADR, but declining ADR was partially mitigated by lower hotel departmental expenses per occupied room.

· Other property related costs increased $3.5 million due to higher occupancies.  As a percentage of total revenue, they remained essentially flat compared to the same period in 2009.

· Management and franchise fees increased $841,000 compared to the same period in 2009 due to higher revenues. As a percent of total revenue, management and franchise fees remained unchanged.

· Taxes, insurance and lease expense increased $2.3 million and increased as a percentage of total revenue from 10.4% to 10.8% compared to the same period in 2009.  This primarily reflects a $1.0 million increase in operating lease expense (computed as a percentage of hotel revenues in excess of base rent) and a $1.2 million increase in real estate and other taxes (primarily as a result of 2009 reductions in property taxes on some of our properties).

· Corporate expenses increased $1.3 million and increased as a percentage of total revenue from 2.2% to 2.6%.  This principally reflects increased corporate bonus accruals that resulted from stronger than anticipated performance.

· Depreciation and amortization expense increased $1.0 million compared to the same period in 2009, which reflects increased depreciation related to hotel capital expenditures completed in 2009.

· Other expenses decreased $1.0 million compared to the same period in 2009, primarily due to the following non-recurring expenses incurred in 2009: hotel-level severance expenses, restaurant lease termination costs, and brand conversion costs at the San Francisco Marriott Union Square.

· Net interest expense increased $14.4 million compared to the same period in 2009.  This increase primarily reflects additional interest from our $636 million senior secured notes issued in October 2009.

· Extinguishment of debt.  During the quarter ended June 30, 2010, we repaid $177 million of mortgage debt secured by two hotels for $130 million and recorded a related $46.1 million gain on extinguishment of debt.

20

Comparison of the Six Months ended June 30, 2010 and 2009

For the six months ended June 30, 2010, we recorded $60.1 million, or $0.92 per share of net loss attributable to common stockholders compared to $51.6 million, or $0.82 per share of net loss attributable to common stockholders for the same period in 2009.  The increase in the current year loss compared to the same period in 2009 is attributable primarily to a $29.3 million increase in net interest expense, a $21.1 million impairment charge, and reduced margins all offset by a $46.1 million gain from debt extinguishment.

During the six months ended June 30, 2010:

· Total revenue was $476.7 million, a 2.7% increase compared to the same period in 2009.  The increase in revenue is attributed principally to a 2.6% increase in RevPAR, which reflects a 7.8% increase in occupancy and a 4.8% decrease in ADR.

· Hotel departmental expenses increased $8.0 million compared to the same period in 2009 due to increased occupancies.  As a percentage of total revenue, hotel departmental expenses increased from 34.6% to 35.4% compared to the same period in 2009.  This increase in expense compared to revenue reflects costs associated with the increased occupancy in the face of decreasing ADR.

· Other property related costs increased $3.8 million due to increased occupancies.  As a percentage of total revenue they remained unchanged compared to the same period in 2009.

· Management and franchise fees increased $235,000 compared to the same period in 2009 due to higher revenues. As a percent of total revenue, management and franchise fees remained essentially unchanged.

· Taxes, insurance and lease expense increased $2.3 million and increased as a percentage of total revenue from 10.6% to 10.8% compared to the same period in 2009.  This primarily reflects a $429,000 increase in operating lease expense (computed as a percentage of hotel revenues in excess of base rent) and a $1.7 million increase in real estate and other taxes (primarily as a result 2009 favorable resolutions of assessed values on some of our properties).

· Corporate expenses increased $5.0 million and increased as a percentage of total revenue from 2.4% to 3.4%.  This increase primarily reflects a temporary change in how our long term compensation program is implemented and increased corporate bonus accruals.  Because of the impact of the recession on the trading price of our common stock, our Board of Directors determined that issuing restricted stock at exceptionally low trading prices would be unduly dilutive to our stockholders.  In lieu of issuing restricted stock, restricted cash, with which employees could purchase stock, was granted.  Because those grants were subject to payroll tax withholding, amounts withheld were recognized as an expense in the first quarter of 2010, rather than expensed over the normal three-year vesting period.  Another contri buting factor is an increase in corporate bonus accruals that resulted from stronger than anticipated performance.

· Depreciation and amortization expense increased $2.0 million compared to the same period in 2009, which reflects increased depreciation related to hotel capital expenditures completed in 2009.

· Impairment charge.  During the quarter ended March 31, 2010, we determined that we would be unable to negotiate satisfactory modifications or reductions on loans secured by two hotels that make sense for our stockholders.  Therefore, we recorded a $21.1 million impairment charge in connection with our decision to transfer these hotels to the lenders in full satisfaction of the debt secured by that hotel.  These hotels’ cash flows did not cover debt service, and we stopped funding shortfalls in December 2009.  We consider these hotels as part of continuing operations until the hotels are transferred, and the debt satisfied, whereupon we expect to record gains on extinguishment of debt aggregating approximately $12 million.

· Other expenses decreased $1.1 million compared to the same period in 2009, primarily due to the following non-recurring expenses incurred in 2009: hotel-level severance expenses, restaurant lease termination costs and brand conversion costs at the San Francisco Marriott Union Square.

21

· Net interest expense increased $29.3 million compared to the same period in 2009.  This increase primarily reflects additional interest from our $636 million senior secured notes issued in October 2009.

· Extinguishment of debt.  During the quarter ended June 30, 2010, we repaid $177 million of mortgage debt secured by two hotels, for $130 million and recorded a related $46.1 million gain on extinguishment of debt.

· Discontinued operations relates to two hotels sold in December 2009.  We recorded a $1.4 million impairment charge in the first quarter of 2009 with respect to one of those hotels.

Non-GAAP Financial Measures

We refer in this report to certain “non-GAAP financial measures.”  These measures, including Hotel EBITDA and Hotel EBITDA margin, are measures of our financial performance that are not calculated and presented in accordance with GAAP.  The following tables reconcile these non-GAAP measures to the most comparable GAAP financial measure.  Immediately following the reconciliations, we include a discussion of why we believe these measures are useful supplemental measures of our performance and the limitations of such measures.

The following tables detail our computation of Hotel EBITDA, Hotel EBITDA margin, hotel operating expenses and the reconciliation of hotel operating expenses to total operating expenses with respect to our Consolidated Hotels at the dates presented.

Hotel EBITDA and Hotel EBITDA Margin

(dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Total revenues	$	250,336		$	236,257		$	476,740		$	464,276
Other revenue		(1,007	)		(988	)		(1,372	)		(1,274	)
Hotel operating revenue		249,329			235,269			475,368			463,002
Hotel operating expenses		(183,342	)		(172,373	)		(358,337	)		(344,649	)
Hotel EBITDA	$	65,987		$	62,896		$	117,031		$	118,353
Hotel EBITDA margin(a)		26.5%			26.7%			24.6%			25.6%

(a) Hotel EBITDA as a percentage of hotel operating revenue.

Reconciliation of Total Operating Expenses to Hotel Operating Expenses

(dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Total operating expenses	$	237,525		$	224,074		$	489,192		$	447,945
Unconsolidated taxes, insurance and lease expense		1,866			2,084			3,754			4,018
Consolidated hotel lease expense		(11,769	)		(10,853	)		(21,263	)		(20,913	)
Corporate expenses		(6,510	)		(5,236	)		(16,357	)		(11,358	)
Depreciation and amortization		(36,969	)		(35,935	)		(74,567	)		(72,586	)
Impairment loss		-			-			(21,060	)		-
Other expenses		(801	)		(1,761	)		(1,362	)		(2,457	)
Hotel operating expenses	$	183,342		$	172,373		$	358,337		$	344,649

22

The following tables reconcile net income (loss) to Hotel EBITDA and the ratio of operating income (loss) to total revenue to Hotel EBITDA margin.

Reconciliation of Net Income (Loss) to Hotel EBITDA

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net income (loss)	$	21,990		$	(10,968	)	$	(40,952	)	$	(32,390	)
Discontinued operations		(7	)		(486	)		(42	)		368
Equity in loss (income) from unconsolidated entities		(286	)		261			1,188			3,685
Consolidated hotel lease expense		11,769			10,853			21,263			20,913
Unconsolidated taxes, insurance and lease expense		(1,866	)		(2,084	)		(3,754	)		(4,018	)
Interest expense, net		37,174			22,782			73,414			44,074
Extinguishment of debt		(46,060	)		594			(46,060	)		594
Corporate expenses		6,510			5,236			16,357			11,358
Depreciation and amortization		36,969			35,935			74,567			72,586
Impairment loss		-			-			21,060			-
Other expenses		801			1,761			1,362			2,457
Other revenue		(1,007	)		(988	)		(1,372	)		(1,274	)
Hotel EBITDA	$	65,987		$	62,896		$	117,031		$	118,353

Reconciliation of Ratio of Operating Income (Loss) to Total Revenues to Hotel EBITDA Margin

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010		2009
Ratio of operating income (loss) to total revenues		5.1	%		5.2	%	(2.6	)%	3.5	%
Other revenue		(0.4	)		(0.4	)	(0.3	)	(0.3	)
Unconsolidated taxes, insurance and lease expense		(0.7	)		(0.9	)	(0.8	)	(0.9	)
Consolidated hotel lease expense		4.7			4.6		4.5		4.5
Other expenses		0.4			0.7		0.3		0.6
Corporate expenses		2.6			2.2		3.4		2.5
Depreciation and amortization		14.8			15.3		15.7		15.7
Impairment loss		-			-		4.4		-
Hotel EBITDA margin		26.5	%		26.7	%	24.6	%	25.6	%

Hotel EBITDA and Hotel EBITDA Margin

Hotel EBITDA and Hotel EBITDA margin are commonly used measures of performance in the hotel industry and give investors a more complete understanding of the operating results over which our individual hotels and operating managers have direct control.  We believe that Hotel EBITDA and Hotel EBITDA margin are useful to investors by providing greater transparency with respect to two significant measures used by us in our financial and operational decision-making.  Additionally, using these measures facilitates comparisons with other hotel REITs and hotel owners.  We present Hotel EBITDA and Hotel EBITDA margin by eliminating from continuing operations all revenues and expenses not directly associated with hotel operations including but not limited to corporate-level expenses; impairment losses; gains or losses on disposition of assets; and gains and losses related to extinguishment of debt.  We eliminate corporate-level costs and expenses because we believe property-level results provide investors with supplemental information into the ongoing operational performance of our hotels and the effectiveness of management on a property-level basis.  We exclude the effect of impairment losses, gains or losses on disposition of assets, and gains or losses related to extinguishment of debt because we believe that including these is not consistent with reflecting the ongoing performance of our remaining assets.  We also eliminate consolidated percentage rent paid to unconsolidated entities, which is effectively eliminated by noncontrolling interests and equity in income from unconsolidated subsidiaries, and include the cost of unconsolidated taxes, insurance and lease expense, to reflect the entire operating costs applicable to our hotels.  Hotel EBITDA and Hotel EBITDA margins are p resented on a same-store basis.

23

Limitations of Non-GAAP Measures

Our management and Board of Directors use Hotel EBITDA and Hotel EBITDA margin to evaluate the performance of our hotels and to facilitate comparisons between us and other hotel owners, in evaluating hotel-level performance and the operating efficiency of our hotel managers.

The use of these non-GAAP financial measures has certain limitations.  Hotel EBITDA and Hotel EBITDA margin, as presented by us, may not be comparable to these measures as calculated by other companies.  These measures do not reflect certain expenses that we incurred and will incur, such as depreciation and amortization, interest and capital expenditures.  Management compensates for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance.  Our reconciliations to the most comparable GAAP financial measures, and our consolidated statements of operations and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures.

These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP.  They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP.  Hotel EBITDA and Hotel EBITDA margin reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure.  Management strongly encourages investors to review our financial information in its entirety and not to rely on a single financial measure.

Pro Rata Share of Rooms Owned

The following table sets forth, at June 30, 2010, the pro rata share of hotel rooms owned by us after giving consideration to the portion of rooms attributed to our partners in our consolidated and unconsolidated joint ventures:

	Hotels	Room Count at June 30, 2010
Consolidated Hotels	83		23,854
Unconsolidated hotel operations	1		171
Total hotels	84		24,025
50% joint ventures	14		(1,794	)
60% joint venture	1		(214	)
82% joint venture	1		(40	)
90% joint ventures	3		(68	)
Pro rata rooms attributed to joint venture partners			(2,116	)
Pro rata share of rooms owned			21,909

24

Hotel Portfolio Composition

 The following table illustrates the distribution of our 83 Consolidated Hotels by brand, market and location at June 30, 2010.

Brand	Hotels	Rooms	% of Total Rooms	% of 2009 Hotel EBITDA(a)
Embassy Suites Hotels	47	12,132	51	60
Holiday Inn	15	5,154	22	18
Sheraton and Westin	9	3,217	13	9
Doubletree	7	1,471	6	7
Renaissance and Marriott	3	1,321	6	3
Hilton	2	559	2	3
Market
South Florida	5	1,439	6	8
Los Angeles area	4	899	4	6
Atlanta	5	1,462	6	6
Orlando	4	1,038	4	4
Philadelphia	2	729	3	4
Minneapolis	3	736	3	4
San Francisco area	6	2,138	9	4
Dallas	4	1,333	6	4
Central California Coast	2	408	2	4
San Antonio	3	874	4	3
Myrtle Beach	2	640	3	3
Boston	2	532	2	3
San Diego	1	600	3	3
Northern New Jersey	3	756	3	3
Other	37	10,270	42	41
Location
Suburban	35	8,781	37	32
Urban	20	6,358	27	27
Airport	18	5,788	24	24
Resort	10	2,927	12	17

(a) Hotel EBITDA is a non-GAAP financial measure.  A detailed reconciliation and further discussion of Hotel EBITDA is contained in the “Non-GAAP Financial Measures” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this Quarterly Report on Form 10-Q.

25

Hotel Operating Statistics

The following tables set forth occupancy, ADR and RevPAR for the three and six months ended June 30, 2010 and 2009, and the percentage changes thereto between the periods presented, for our Consolidated Hotels.

Operating Statistics by Brand

	Occupancy (%)
	Three Months Ended June 30,				Six Months Ended June 30,
	2010	2009	%Variance		2010	2009	%Variance
Embassy Suites Hotels	75.1	70.1	7.2		72.7	68.3	6.4
Holiday Inn	76.9	71.8	7.0		72.3	67.2	7.6
Sheraton and Westin	69.0	64.2	7.5		66.2	59.6	11.0
Doubletree	77.0	67.5	14.1		73.5	65.5	12.2
Renaissance and Marriott	67.8	62.0	9.3		66.6	59.2	12.5
Hilton	73.0	70.6	3.4		59.7	59.0	1.1
Total hotels	74.4	69.1	7.6		71.1	66.0	7.8
	ADR ($)
	Three Months Ended June 30,				Six Months Ended June 30,
	2010	2009	%Variance		2010	2009	%Variance
Embassy Suites Hotels	123.82	127.79	(3.1	)	126.21	133.05	(5.1	)
Holiday Inn	116.56	115.01	1.4		110.86	112.90	(1.8	)
Sheraton and Westin	108.02	110.54	(2.3	)	106.52	114.01	(6.6	)
Doubletree	117.30	125.47	(6.5	)	117.99	132.08	(10.7	)
Renaissance and Marriott	168.37	168.11	0.2		175.96	184.08	(4.4	)
Hilton	123.45	119.80	3.0		112.80	110.95	1.7
Total hotels	121.86	124.26	(1.9	)	121.96	128.10	(4.8	)
	RevPAR ($)
	Three Months Ended June 30,				Six Months Ended June 30,
	2010	2009	%Variance		2010	2009	%Variance
Embassy Suites Hotels	93.00	89.52	3.9		91.72	90.86	0.9
Holiday Inn	89.64	82.63	8.5		80.13	75.88	5.6
Sheraton and Westin	74.53	70.98	5.0		70.54	68.01	3.7
Doubletree	90.33	84.66	6.7		86.75	86.55	0.2
Renaissance and Marriott	114.15	104.23	9.5		117.12	108.89	7.6
Hilton	90.17	84.62	6.6		67.32	65.48	2.8
Total hotels	90.62	85.85	5.6		86.77	84.58	2.6

26

Operating Statistics for Our Top Markets

	Occupancy (%)
	Three Months Ended June 30,				Six Months Ended June 30,
	2010	2009	% Variance		2010	2009		%Variance
South Florida	75.6	73.5	2.9		80.3	76.4		5.2
Los Angeles area	77.7	74.2	4.7		74.1	71.4		3.7
Atlanta	75.0	73.7	1.7		75.1	69.7		7.8
Orlando	74.0	75.9	(2.5	)	77.4	75.5		2.6
Philadelphia	80.4	74.5	7.9		70.5	62.0		13.6
Minneapolis	76.6	65.6	16.7		71.8	63.2		13.6
San Francisco area	78.8	70.8	11.3		72.1	63.4		13.7
Dallas	66.2	60.8	9.0		65.8	60.1		9.5
Central California Coast	80.4	76.9	4.5		75.1	76.7		(2.2	)
San Antonio	76.7	73.9	3.8		75.7	71.8		5.5
Myrtle Beach	73.4	69.8	5.2		58.9	59.1		(0.4	)
Boston	85.2	80.0	6.4		81.2	75.3		7.7
San Diego	78.8	74.1	6.4		75.2	69.1		8.8
Northern New Jersey	76.1	62.7	21.4		68.1	61.2		11.3
	ADR ($)
	Three Months Ended June 30,				Six Months Ended June 30,
	2010	2009	% Variance		2010		2009	%Variance
South Florida	114.69	121.55	(5.6	)	140.49		146.86	(4.3	)
Los Angeles area	136.03	133.85	1.6		134.27		136.06	(1.3	)
Atlanta	102.89	105.19	(2.2	)	104.18		108.01	(3.6	)
Orlando	107.18	114.20	(6.1	)	110.97		122.78	(9.6	)
Philadelphia	131.80	143.10	(7.9	)	123.10		137.76	(10.6	)
Minneapolis	126.25	127.91	(1.3	)	126.01		129.45	(2.7	)
San Francisco area	129.18	126.45	2.2		126.28		123.90	1.9
Dallas	110.87	115.04	(3.6	)	111.92		120.89	(7.4	)
Central California Coast	157.51	154.55	1.9		148.58		145.60	2.0
San Antonio	98.55	106.08	(7.1	)	98.44		105.87	(7.0	)
Myrtle Beach	144.16	145.05	(0.6	)	126.35		126.13	0.2
Boston	142.16	137.63	3.3		131.78		132.21	(0.3	)
San Diego	118.10	127.62	(7.5	)	116.68		129.78	(10.1	)
Northern New Jersey	132.81	144.27	(7.9	)	132.57		147.86	(10.3	)
	RevPAR ($)
	Three Months Ended June 30,				Six Months Ended June 30,
	2010	2009	% Variance		2010		2009	%Variance
South Florida	86.68	89.30	(2.9	)	112.86		112.15	0.6
Los Angeles area	105.64	99.26	6.4		99.47		97.16	2.4
Atlanta	77.13	77.55	(0.5	)	78.24		75.28	3.9
Orlando	79.29	86.65	(8.5	)	85.93		92.71	(7.3	)
Philadelphia	105.94	106.65	(0.7	)	86.74		85.47	1.5
Minneapolis	96.68	83.93	15.2		90.51		81.88	10.5
San Francisco area	101.79	89.51	13.7		91.00		78.52	15.9
Dallas	73.43	69.89	5.1		73.66		72.65	1.4
Central California Coast	126.61	118.84	6.5		111.55		111.72	(0.2	)
San Antonio	75.62	78.43	(3.6	)	74.55		75.97	(1.9	)
Myrtle Beach	105.87	101.28	4.5		74.38		74.53	(0.2	)
Boston	121.06	110.15	9.9		106.95		99.61	7.4
San Diego	93.04	94.51	(1.6	)	87.71		89.65	(2.2	)
Northern New Jersey	101.13	90.50	11.7		90.24		90.43	(0.2	)

27

Hotel Portfolio

The following table sets forth certain descriptive information regarding the 84 hotels in which we held ownership interest at June 30, 2010.

		Brand		State		Rooms	% Owned(a)
Consolidated Hotels
Birmingham	Embassy Suites Hotel		AL		242
Phoenix – Biltmore	Embassy Suites Hotel		AZ		232
Phoenix – Crescent	Sheraton		AZ		342
Phoenix – Tempe	Embassy Suites Hotel		AZ		224
Anaheim – North	Embassy Suites Hotel		CA		222
Dana Point – Doheny Beach	Doubletree Guest Suites		CA		196
Indian Wells – Esmeralda Resort & Spa	Renaissance Resort		CA		560
Los Angeles – International Airport/South	Embassy Suites Hotel		CA		349
Milpitas – Silicon Valley	Embassy Suites Hotel		CA		266
Napa Valley	Embassy Suites Hotel		CA		205
Oxnard – Mandalay Beach – Hotel & Resort	Embassy Suites Hotel		CA		248
San Diego – On the Bay	Holiday Inn		CA		600
San Francisco – Airport/Burlingame	Embassy Suites Hotel		CA		340
San Francisco – Airport/South San Francisco	Embassy Suites Hotel		CA		312
San Francisco – Fisherman’s Wharf	Holiday Inn		CA		585
San Francisco – Union Square	Marriott		CA		400
San Rafael – Marin County	Embassy Suites Hotel		CA		235		50%
Santa Barbara – Goleta	Holiday Inn		CA		160
Santa Monica Beach – at the Pier	Holiday Inn		CA		132
Wilmington	Doubletree		DE		244		90%
Boca Raton	Embassy Suites Hotel		FL		263
Deerfield Beach – Resort & Spa	Embassy Suites Hotel		FL		244
Ft. Lauderdale – 17th Street	Embassy Suites Hotel		FL		361
Ft. Lauderdale – Cypress Creek	Sheraton Suites		FL		253
Jacksonville – Baymeadows	Embassy Suites Hotel		FL		277
Miami – International Airport	Embassy Suites Hotel		FL		318
Orlando – International Airport	Holiday Inn		FL		288
Orlando – International Drive South/Convention	Embassy Suites Hotel		FL		244
Orlando– North	Embassy Suites Hotel		FL		277
Orlando – Walt Disney World Resort	Doubletree Guest Suites		FL		229
St. Petersburg – Vinoy Resort & Golf Club	Renaissance Resort		FL		361
Tampa – Tampa Bay	Doubletree Guest Suites		FL		203
Atlanta – Airport	Embassy Suites Hotel		GA		232
Atlanta – Buckhead	Embassy Suites Hotel		GA		316
Atlanta – Galleria	Sheraton Suites		GA		278
Atlanta – Gateway – Atlanta Airport	Sheraton		GA		395
Atlanta – Perimeter Center	Embassy Suites Hotel		GA		241		50%
Chicago – Lombard/Oak Brook	Embassy Suites Hotel		IL		262		50%
Chicago – North Shore/Deerfield	Embassy Suites Hotel		IL		237
Chicago – Gateway – O’Hare	Sheraton Suites		IL		296
Indianapolis – North	Embassy Suites Hotel		IN		221		82%
Kansas City – Overland Park	Embassy Suites Hotel		KS		199		50%
Lexington – Lexington Green	Hilton Suites		KY		174
Baton Rouge	Embassy Suites Hotel		LA		223

28

Hotel Portfolio (continued)

		Brand		State			Rooms		% Owned(a)
New Orleans – Convention Center	Embassy Suites Hotel		LA		370
New Orleans – French Quarter	Holiday Inn		LA		374
Boston – at Beacon Hill	Holiday Inn		MA		303
Boston – Marlborough	Embassy Suites Hotel		MA		229
Baltimore – at BWI Airport	Embassy Suites Hotel		MD		251			90%
Bloomington	Embassy Suites Hotel		MN		218
Minneapolis – Airport	Embassy Suites Hotel		MN		310
St. Paul – Downtown	Embassy Suites Hotel		MN		208
Kansas City – Plaza	Embassy Suites Hotel		MO		266			50%
Charlotte	Embassy Suites Hotel		NC		274			50%
Charlotte – SouthPark	Doubletree Guest Suites		NC		208
Raleigh/Durham	Doubletree Guest Suites		NC		203
Raleigh – Crabtree	Embassy Suites Hotel		NC		225			50%
Parsippany	Embassy Suites Hotel		NJ		274			50%
Piscataway – Somerset	Embassy Suites Hotel		NJ		221
Secaucus – Meadowlands	Embassy Suites Hotel		NJ		261			50%
Philadelphia – Historic District	Holiday Inn		PA		364
Philadelphia – Society Hill	Sheraton		PA		365
Pittsburgh – at University Center (Oakland)	Holiday Inn		PA		251
Charleston – Mills House	Holiday Inn		SC		214
Myrtle Beach – Oceanfront Resort	Embassy Suites Hotel		SC		255
Myrtle Beach Resort	Hilton		SC		385
Nashville – Airport – Opryland Area	Embassy Suites Hotel		TN		296
Nashville – Opryland – Airport (Briley Parkway)	Holiday Inn		TN		383
Austin	Doubletree Guest Suites		TX		188			90%
Austin – Central	Embassy Suites Hotel		TX		260			50%
Corpus Christi	Embassy Suites Hotel		TX		150
Dallas – DFW International Airport South	Embassy Suites Hotel		TX		305
Dallas – Love Field	Embassy Suites Hotel		TX		248
Dallas – Market Center	Embassy Suites Hotel		TX		244
Dallas – Park Central	Westin		TX		536			60%
Houston – Medical Center	Holiday Inn		TX		287
San Antonio – International Airport	Embassy Suites Hotel		TX		261			50%
San Antonio – International Airport	Holiday Inn		TX		397
San Antonio – NW I-10	Embassy Suites Hotel		TX		216			50%
Burlington Hotel & Conference Center	Sheraton		VT		309
Vienna – Premiere at Tysons Corner	Sheraton		VA		443			50%
Canada
Toronto – Airport	Holiday Inn		Ontario		446
Toronto – Yorkdale	Holiday Inn		Ontario		370
Unconsolidated Hotel
New Orleans – French Quarter – Chateau LeMoyne	Holiday Inn		LA			171		50%

(a) We own 100% of the real estate interests unless otherwise noted.

29

Liquidity and Capital Resources

Operating Activities

Cash provided by operating activities (primarily hotel operations) for the six months ended June 30, 2010, was $41.2 million, which reflects a $5.3 million decrease from the same period in 2009.  This decrease is due primarily to an increase in interest paid (largely resulting from a 270 basis point increase in average interest rates) offset by an increase in accrued expenses and other liabilities.  At June 30, 2010, we had $281.5 million of cash, including approximately $47.5 million held under management agreements to meet working capital needs.

Travel spending fell sharply during the global recession.  Lodging demand was weak in 2009, which adversely affected our Consolidated Hotels RevPAR.  In the first six months of 2010, occupancy strengthened but was partially offset by weak ADR.  We expect our 2010 RevPAR will increase from 2.5% to 4.5% compared to 2009, which assumes a continued recovery in occupancy and ADR growth in the second half of the year.  We expect 2010 cash from operating activities of $36 million to $44 million.

We are subject to increases in hotel operating expenses, including wage and benefit costs, repair and maintenance expenses, utilities and insurance expenses that can fluctuate disproportionately to revenues.  Some of these operating expenses are difficult to predict and control, which lends volatility to our operating results.  We have implemented extensive cost containment initiatives at our hotels, including reducing headcount and improving productivity and energy efficiency.  If RevPAR decreases and/or Hotel EBITDA margins shrink, our operations, earnings and/or cash flow could be materially adversely affected.

Investing Activities

During the first six months of 2010 cash used in investing activities increased $3.3 million compared to the same period in 2009, due primarily to increased contributions to unconsolidated ventures (we contributed $23 million to pay-off our share of a joint venture’s mortgage debt), which was largely offset by lower spending on hotel capital expenditures.  We made extensive capital investments in our hotels from 2006 to 2008, and all of our hotels have been renovated.  We expect to spend a normal amount of capital going forward to maintain the quality of our hotels.  As a result, we were able to limit capital spending significantly in 2009, and we expect to spend a limited amount of capital in 2010 without compromising the value and quality o f our hotels.  In the first six months of 2010, we completed approximately $18.4 million of capital improvements at our hotels, and we expect to spend approximately $42 million in 2010 in total.

In order to enhance long-term shareholder value, as part of our strategic plan (as in the past and as market conditions allow), we intend to sell lower-growth hotels that no longer meet our investment criteria, thereby freeing our capital for redeployment (e.g., reduce overall leverage, acquire other hotels and invest in remaining FelCor properties).  We regularly evaluate demand and supply trends for each hotel, portfolio concentration risk and future capital needs.  We expect to identify additional hotels for sale as the hotel transaction and capital markets and hotel cash flows continue to improve.

Financing Activities

During the first six months of 2010, cash provided by financing activities decreased by $41.2 million compared to the same period in 2009, due primarily to first quarter 2009 funds borrowed under our since terminated line of credit, partially offset by proceeds from our June 2010 public common stock offering.  We expect to pay approximately $13 million in normally occurring principal payments in 2010, which payments will be funded from operating cash flow and cash on hand.

30

We suspended payment of our common dividend in December 2008 and our preferred dividend in March 2009 (we paid approximately $10 million of preferred dividends in January 2009).  Our ability to pay cash dividends is limited by the indenture governing our senior secured notes whenever we fail to meet a defined financial ratio threshold, as in the current circumstances; consequently, we do not expect to pay any common or preferred cash dividends during 2010.  Dividends are not paid unless declared by our Board of Directors; however, any unpaid preferred dividends continue to accrue, and accrued and current preferred dividends must be paid in full prior to reinstatement of our common dividend.  Our Board of Directors will determine whether to declare future dividends based upon various factors, including o perating results, economic conditions, other operating trends, our financial condition including the outcome of refinancing debt maturities and capital requirements, as well as minimum REIT distribution requirements.

Capital markets, and our access to financing on reasonably acceptable terms, have historically been affected by external events and circumstances, such as recessions, major bank failures, rising unemployment, shrinking GDP, acts of terrorism, etc.  Events or circumstances of similar magnitude or impact could adversely affect the availability and cost of our capital going forward.

Common Stock Offering.  In June 2010, we completed a public offering of 31,625,000 shares of our common stock at $5.50 per share.  The net proceeds from the offering, after underwriting discounts and commissions, were approximately $167 million.  These proceeds together with cash on hand were used to repay $177 million of secured debt for $130 million, representing a 27% discount, and will be used to fund our $98.5 million acquisition of the Fairmont Copley Plaza in Boston, which is expected to close in the third quarter of 2010.

Secured Debt.  At June 30, 2010, we had a total of $1.5 billion of consolidated secured debt with 63 encumbered consolidated hotels with a $1.7 billion aggregate net book value (including 14 hotels that are collateral for our senior secured notes).

In June 2010, we repaid $177 million of secured debt scheduled to mature in 2012 for $130 million, plus accrued interest, representing a 27% discount to the principal balance.  This allowed us to reduce our leverage substantially and unencumber two hotels.

In May 2010, we obtained a new five-year loan for approximately $212 million secured by nine hotels.  The loan proceeds were used to repay $210 million in loans scheduled to mature in May 2010, secured by 11 hotels (including the nine hotels securing the new loan).  The new loan bears interest at LIBOR (subject to a 3% floor) plus 5.10%.  The terms of this new financing are significantly more favorable than the refinanced debt, and we unencumbered two previously mortgaged hotels.  In February 2010, we extended the maturity of a loan secured by a hotel from May 2010 to May 2013.  Two remaining loans (totaling $32 million) matured in May 2010.  The cash flows for the hotels that secure those loans do not cover debt service, and we st opped funding the shortfalls in December 2009.  We have been unable to negotiate an acceptable debt modification or reduction that made sense for our stockholders, with regard to these loans.  We are in the process of transferring these two hotels to the lenders in full satisfaction of the debt.

With these transactions, we have resolved all of our significant debt maturities until the end of 2011.

Except in the case of our senior secured notes, our mortgage debt is generally recourse solely to the specific hotels securing the debt except in case of fraud, misapplication of funds and certain other limited recourse carve-out provisions, which could extend recourse to us.  Much of our secured debt allows us to substitute collateral under certain conditions and is prepayable, subject to various prepayment, yield maintenance or defeasance obligations.

Some of our secured debt includes lock-box arrangements under certain circumstances. We are generally permitted to retain an amount required to cover our budgeted hotel operating expenses, taxes, debt service, insurance and capital expenditure reserves, but the remaining revenues flow through a lock-box if a specified debt service coverage ratio is not met.  With the exception of one hotel, all of our hotels subject to lock-box provisions currently exceed the applicable minimum debt service coverage ratios.

31

Senior Notes.  In October 2009, we issued $636 million in aggregate principal amount of our 10% senior secured notes due 2014.  These notes require that we satisfy total leverage, secured leverage and interest coverage tests in order to: (i) incur additional indebtedness except to refinance maturing debt with replacement debt, as defined under our indentures; (ii) pay dividends in excess of the minimum distributions required to meet the REIT qualification test; (iii) repurchase capital stock; or (iv) merge.  We are currently prohibited from paying dividends on our preferred or common stock, except to the extent necessary to satisfy the REIT qualification requirement that we distribute currently at least 90% of our taxable income.  These notes are guaranteed by us, and payment of those obligations is secured by a pledge of the limited partner interests in FelCor LP owned by FelCor, a combination of first lien mortgages and related security interests and/or negative pledges on up to 14 hotels, and pledges of equity interests in certain subsidiaries of FelCor LP.  In addition, we redeemed all of our floating-rate senior notes and all but $87 million of our 8½% senior notes and amended the indenture governing the latter to eliminate substantially all of the restrictive covenants, guarantees, collateral and certain events of default provisions. 

Interest Rate Caps.  To fulfill requirements under certain loans, we entered into interest rate cap agreements with aggregate notional amounts of $639.2 million at June 30, 2010 and $427.2 million at December 31, 2009.  These interest rate caps were not designated as hedges and had insignificant fair values at both June 30, 2010 and December 31, 2009, resulting in no significant net earnings impact.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation.  Competition may, however, require us to reduce room rates in the near term and may limit our ability to raise room rates in the future.  We are also subject to the risk that inflation will cause increases in hotel operating expenses disproportionately to revenues.  If competition requires us to reduce room rates or limits our ability to raise room rates in the future, we may not be able to adjust our room rates to reflect the effects of inflation in full, in which case our operating results and liquidity could be adversely affected.

Seasonality

The lodging business is seasonal in nature.  Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors and other considerations affecting travel.  To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuation s in revenues, we may utilize cash on hand or borrowings to satisfy our obligations.

Disclosure Regarding Forward-Looking Statements

This report and the documents incorporated by reference in this report include forward-looking statements that involve a number of risks and uncertainties.  Forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” or other variations of these terms (including their use in the negative), or by discussions of strategies, plans or intentions.  A number of factors could cause actual results to differ materially from those anticipated by these forward-looking statements.  Certain of these risks and uncertainties are described in greater detail under “Risk Factors” ; in our Annual Report on Form 10-K or in our other filings with the Securities and Exchange Commission, or the SEC.

These forward-looking statements are necessarily dependent upon assumptions and estimates that may prove to be incorrect. Accordingly, while we believe that the plans, intentions and expectations reflected in these forward-looking statements are reasonable, we cannot assure you that deviations from these plans, intentions or expectations will not be material.  The forward-looking statements included in this report, and all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are expressly qualified in their entirety by the risk factors and cautionary statements discussed in our filings to the SEC.  We undertake no obligation to publicly update any forward-looking statements to reflect future circumstances or changes i n our expectations.

32

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

At June 30, 2010, approximately 59% of our consolidated debt had fixed interest rates.

The following table provides information about our financial instruments that are sensitive to changes in interest rates.  For debt obligations, the table presents scheduled maturities and weighted average interest rates, by maturity dates.  The fair value of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at the date presented, at then current market interest rates.

Expected Maturity Date

at June 30, 2010

(dollars in thousands)

	Expected Maturity Date
	2010		2011		2012		2013		2014		Thereafter		Total			Fair Value
Liabilities
Fixed-rate:
Debt	$	35,992	$	105,834	$	4,550	$	32,696	$	804,980	$	9,376	$	993,428			1,032,666
Average interest rate		8.57%		8.62%		7.68%		8.61%		9.61%		5.81%		9.39%
Floating-rate:
Debt		1,000		449,916		1,832		1,986		2,153		204,887		661,774			640,636
Average interest rate(a)		5.50%		3.57%		8.10%		8.10%		8.17%		8.17%		5.04%
Total debt	$	36,992	$	555,750	$	6,382	$	34,682	$	807,133	$	214,263	$	1,655,202
Average interest rate		8.48%		4.53%		7.80%		8.58%		9.60%		8.07%		7.65%
Net discount														(58,567	)
Total debt													$	1,596,635

(a) The average floating interest rate represents the implied forward rates in the yield curve at June 30, 2010.

Item 4.  Controls and Procedures.

(a)           Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934) as of the end of the period covered by this report (the “Evaluation Date”).  Based on this evaluation, our chief executive officer and chief financial officer concluded, as of the Evaluation Date, that our disclosure controls and procedures were effective, such that the information relating to us required to be disclosed in our reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and f orms, and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

(b)           Changes in internal control over financial reporting.

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934) during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

33

PART II -- OTHER INFORMATION

Item 3.                      Defaults Upon Senior Securities.

In March 2009, we suspended payment of dividends on our Series A Cumulative Convertible Preferred Stock (“Series A Preferred”) and our 8% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred”).  The aggregate quarterly Series A Preferred and Series C Preferred dividends are $6.3 million and $3.4 million, respectively.  As of the date of this Quarterly Report, the aggregate Series A Preferred and Series C Preferred dividends in arrears are $37.7 million and $19.3 million, respectively.

Except to the extent required to satisfy minimum REIT distribution requirements, we are restricted by the indenture governing our senior secured notes from making any cash distributions on our common and preferred stock.  We are currently below the minimum thresholds set forth in the indenture for which discretionary cash distributions are permitted.

Item 6.                      Exhibits.

           The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K:

Exhibit Number	Description of Exhibit
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

34

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		FELCOR LODGING TRUST INCORPORATED
Date:  August 4, 2010	By:	/s/ Lester C. Johnson
		Name: Title:	Lester C. Johnson Senior Vice President, Chief Accounting Officer

35