1
- --------------------------------------------------------------------------------
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 MARCH 31, 2001
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 1-14236
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
documents and 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. Yes X No
--- ---
The number of shares of Common Stock, par value $.01 per share, of
FelCor Lodging Trust Incorporated outstanding on May 10, 2001 was 52,975,541.
- --------------------------------------------------------------------------------
2
FELCOR LODGING TRUST INCORPORATED
INDEX
Page
----
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................. 3
Consolidated Balance Sheets - March 31, 2001 (Unaudited)
and December 31, 2000.................................................................... 3
Consolidated Statements of Operations - For the Three Months
Ended March 31, 2001 and 2000 (Unaudited)................................................ 4
Consolidated Statements of Cash Flows -- For the Three Months
Ended March 31, 2001 and 2000 (Unaudited)................................................ 5
Notes to Consolidated Financial Statements.................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General/First Quarter Activities.............................................................. 16
Results of Operations......................................................................... 17
Liquidity and Capital Resources............................................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 24
PART II. - OTHER INFORMATION
Item 5. Other Information................................................................................ 27
Item 6. Exhibits and Reports on Form 8-K................................................................. 27
SIGNATURE................................................................................................... 28
2
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $512,395
at March 31, 2001 and $473,101 at December 31, 2000 ......................... $ 3,734,891 $ 3,750,275
Investment in unconsolidated entities .......................................... 150,960 128,593
Assets held for sale ........................................................... 58,733 129,294
Cash and cash equivalents ...................................................... 60,743 26,060
Accounts receivable ............................................................ 47,857 3,183
Due from Lessees ............................................................... 28,058
Note receivable from unconsolidated entity ..................................... 7,695
Deferred expenses, net of accumulated amortization of $8,394
at March 31, 2001 and $7,146 at December 31, 2000 ........................... 23,874 23,944
Prepaid assets ................................................................. 11,731 5,522
Other assets ................................................................... 8,015 979
----------- -----------
Total assets ....................................................... $ 4,096,804 $ 4,103,603
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt ........................................................................... $ 1,812,690 $ 1,838,241
Distributions payable .......................................................... 34,196 33,957
Accrued expenses and other liabilities ......................................... 144,900 94,232
Deferred rent .................................................................. 5,254
Minority interest in Operating Partnership, 9,014 and 8,597 units issued and
outstanding at March 31, 2001 and December 31, 2000, respectively ............ 255,577 252,294
Minority interest in other partnerships ........................................ 49,949 50,774
----------- -----------
Total liabilities .................................................. 2,302,566 2,269,498
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Preferred Stock, 5,981 shares issued and outstanding .... 149,515 149,515
Series B Redeemable Preferred Stock, 58 shares issued and outstanding ....... 143,750 143,750
Common stock, $.01 par value, 200,000 shares authorized, 69,892 and 69,415
shares issued, including shares in treasury, at March 31, 2001
and December 31, 2000, respectively ......................................... 699 694
Additional paid-in capital ..................................................... 2,064,469 2,064,909
Accumulated other comprehensive income ......................................... (4,844)
Distributions in excess of earnings ............................................ (243,490) (201,598)
----------- -----------
2,110,099 2,157,270
Less: Common stock in treasury, at cost, 16,498 shares and 16,906 shares
at March 31, 2001 and December 31, 2000, respectively ................... (315,861) (323,165)
----------- -----------
Total shareholders' equity ......................................... 1,794,238 1,834,105
----------- -----------
Total liabilities and shareholders' equity ......................... $ 4,096,804 $ 4,103,603
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
--------- ---------
Revenues:
Hotel operating revenue:
Room ....................................................... $ 192,227
Food and beverage .......................................... 27,652
Other operating departments ................................ 11,612
Percentage lease revenue ..................................... 51,531 $ 123,049
Retail space rental and other revenue ........................ 2,722 1,453
Equity in income from unconsolidated entities ................ 2,150 1,879
--------- ---------
Total revenues ...................................... 287,894 126,381
--------- ---------
Expenses:
Hotel operating expenses:
Room ....................................................... 38,230
Food and beverage .......................................... 20,104
Other operating departments ................................ 11,921
Management fees .............................................. 7,098
Other property operating costs ............................... 63,379
Property taxes, insurance and other .......................... 37,978 23,065
--------- ---------
Total operating expenses ............................ 178,710 23,065
--------- ---------
Operating income ................................................ 109,184 103,316
Corporate expenses ........................................... 2,884 3,399
Interest expense ............................................. 39,356 37,480
Depreciation ................................................. 39,808 40,400
Lease termination costs ...................................... 36,226
Minority interests ........................................... (450) 1,972
Other ........................................................ 639 1,138
--------- ---------
Income (loss) before nonrecurring items ......................... (9,279) 18,927
Gain on sale of assets ....................................... 2,473
--------- ---------
Net income (loss) ............................................... (6,806) 18,927
Preferred dividends ............................................. (6,150) (6,184)
--------- ---------
Net income (loss) applicable to common shareholders ............. $ (12,956) $ 12,743
========= =========
Per common share data:
Basic:
Net income (loss) applicable to common shareholders ........ $ (0.25) $ 0.21
========= =========
Weighted average common shares outstanding ................. 52,595 59,356
Diluted:
Net income (loss) applicable to common shareholders ........ $ (0.25) $ 0.21
========= =========
Weighted average common shares outstanding ................. 52,595 59,377
The accompanying notes are an integral part of these consolidated
financial statements.
4
5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income (loss) .............................................................. $ (6,806) $ 18,927
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ......................................................... 39,808 40,400
Gain on sale of assets ............................................... (2,473)
Amortization of deferred financing fees .............................. 1,248 1,134
Accretion of debt .................................................... (180) (224)
Amortization of unearned officers' and directors' compensation ....... 476 160
Equity in income from unconsolidated entities ........................ (2,150) (1,879)
Lease termination costs (non-cash) ................................... 36,189
Minority interests ................................................... (450) 1,972
Changes in assets and liabilities:
Due from Lessees ..................................................... (10,064) (15,146)
Deferred expenses .................................................... (1,178) (5,154)
Prepaid assets ....................................................... (3,125) 2,443
Other assets ......................................................... (9,537) (5,263)
Deferred rent ........................................................ 5,254 8,854
Accrued expenses and other liabilities ............................... (6,148) 5,981
--------- ---------
Net cash flow provided by operating activities ............. 40,864 52,205
--------- ---------
Cash flows provided by (used in) investing activities:
Improvements and additions to hotels ........................................... (13,923) (23,327)
Proceeds from sale of interest in hotels ....................................... 48,124
Operating cash received in acquisition of lessee ............................... 25,583
Proceeds from sale of assets ................................................... 3,414
Cash distributions from unconsolidated entities ................................ 1,565 4,519
--------- ---------
Net cash flow provided by (used in) investing activities ... 64,763 (18,808)
--------- ---------
Cash flows provided by (used in) financing activities:
Proceeds from borrowings ....................................................... 215,716 108,000
Repayment of borrowings ........................................................ (241,087) (41,888)
Purchase of treasury stock ..................................................... (3,926) (42,677)
Proceeds from exercise of stock option ......................................... 692
Distributions paid to minority interest ........................................ (2,581)
Distributions paid to limited partners ......................................... (4,729) (1,645)
Distributions paid to preferred shareholders ................................... (6,150) (6,184)
Distributions paid to common shareholders ...................................... (28,879) (34,372)
--------- ---------
Net cash flow used in financing activities ................. (70,944) (18,766)
--------- ---------
Net change in cash and cash equivalents .................................................. 34,683 14,631
Cash and cash equivalents at beginning of periods ........................................ 26,060 36,123
--------- ---------
Cash and cash equivalents at end of periods .............................................. $ 60,743 $ 50,754
========= =========
Supplemental cash flow information -
Interest paid .................................................................. $ 43,643 $ 28,012
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
5
6
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
FelCor Lodging Trust Incorporated ("FelCor") is the nation's second
largest hotel real estate investment trust ("REIT"). At March 31, 2001, it owned
interests in 186 hotels with nearly 50,000 rooms and suites (collectively, the
"Hotels") through its greater than 85% equity interest in FelCor Lodging Limited
Partnership (the "Operating Partnership"). FelCor, the Operating Partnership,
and their subsidiaries are referred to, collectively, as the "Company". At March
31, 2001, the Company owned 100% of the interest in 153 of the Hotels, a 90% or
greater interest in entities owning seven hotels, a 60% interest in an entity
owning two hotels and 50% interests in separate entities that own 24 hotels.
On January 1, 2001, the REIT Modernization Act ("RMA") went into
effect. Among other things, the RMA permits a REIT to form taxable subsidiaries
that lease hotels from the REIT, provided that the hotels continue to be managed
by unrelated third parties. Effective January 1, 2001, the Company completed
transactions that resulted in its newly formed taxable subsidiaries acquiring
leases for 96 hotels that were leased to either DJONT Operations, L.L.C. and its
consolidated subsidiaries (collectively "DJONT") or subsidiaries of Bass plc
("Bass"). By acquiring these leases through its taxable subsidiaries, the
Company has acquired the economic benefits and risks of these hotel operations
and will report hotel revenues and expenses rather than percentage lease
revenues. Additionally, in March 2001, the Company entered into an agreement to
acquire its remaining 88 hotel leases held by Bass. This transaction will be
effective July 1, 2001.
The following table provides a schedule of the Hotels by brand,
broken out between those hotels operated under a lease with Bass and those
hotels whose operations are consolidated for purposes of the Company's financial
statements at March 31, 2001:
BASS
BRAND CONSOLIDATED LEASED TOTAL
----- ------------ ------ -----
Hilton(R)Brands:
Embassy Suites(R) 59 59
Doubletree(R)and Doubletree Guest Suites(R) 14 14
Hampton Inn(R) 4 5 9
Hilton Suites(R) 1 1
Homewood Suites(R) 1 1
Bass Brands:
Holiday Inn(R) 1 43 44
Crowne Plaza(R)and Crowne Plaza Suites(R) 18 18
Holiday Inn Select(R) 10 10
Holiday Inn Express(R) 5 5
Starwood Brands:
Sheraton(R)and Sheraton Suites(R) 10 10
Westin(R) 1 1
Other Brands 8 6 14
---- ---- ----
Total Hotels 98 88 186
==== ==== ====
The Hotels are located in the United States (35 states) and Canada,
with a concentration in Texas (41 hotels), California (19 hotels), Florida (18
hotels) and Georgia (15 hotels).
6
7
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION -- (CONTINUED)
At March 31, 2001, (i) subsidiaries of Bass managed 91 of the
Hotels, (ii) subsidiaries of Hilton managed 72 of the Hotels, (iii) subsidiaries
of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood") managed 11 of the
Hotels, (iv) subsidiaries of Interstate Hotels Corporation ("IHC") managed eight
of the Hotels and (v) three independent management companies managed the four
remaining Hotels
Effective January 1, 2001, with the enactment of the RMA, the
Company acquired and contributed to a newly formed taxable REIT subsidiary, all
the equity interests in DJONT. In consideration for the acquisition, the
Operating Partnership issued an aggregate of 416,667 units of limited
partnership interest valued at approximately $10 million which, together with
DJONT's accumulated shareholders' deficit of $24.5 million, was expensed as a
lease termination cost in the first quarter of 2001.
Effective January 1, 2001, the Company completed the acquisition of
12 of the leases which were held by Bass. In consideration for the acquisition
of such leases, the Company issued to Bass 413,585 shares of FelCor common stock
valued at approximately $10 million. Of this $10 million in consideration for
acquisition of these leases, approximately $8.3 million associated with 11 of
the hotels had been previously accrued in connection with the hotels designated
as held for sale and $1.7 million was expensed as lease termination costs in the
first quarter of 2001. Of the 12 hotels, one has been sold, eight have been
contributed to a joint venture with IHC, two remain to be sold and one will be
retained. In March 2001, the Company contributed the eight hotels managed by IHC
to a joint venture with IHC. In March 2001, the Company entered into an
agreement with Bass to acquire the remaining 88 leases effective July 1, 2001.
In consideration for the acquisition of such leases, the Company will enter into
long-term management agreements with Bass with regard to these hotels and issue
to Bass 100 shares of FelCor common stock. A portion of the management fees with
respect to the 88 hotels to be managed by Bass under long-term management
agreements will be considered to be lease termination costs and the Company will
record a lease termination expense of approximately $125 million in the third
quarter of 2001. At that time, the Company will record a corresponding liability
of approximately $125 million that will be amortized over the term of the
applicable management agreements.
Certain reclassifications have been made to prior period financial
information to conform to the current period's presentation with no effect to
previously reported net income or shareholder's equity.
The financial information for the three months ended March 31, 2001
and 2000, is unaudited but includes all adjustments (consisting only of normal
recurring accruals) which the Company considers necessary for a fair
presentation of the results for the periods. The financial information should be
read in conjunction with the consolidated financial statements for the year
ended December 31, 2000, included in the Company's Annual Report on Form 10-K
("Form 10-K"). Operating results for the three months ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 2001.
2. DEFERRED RENT
The Company recorded deferred income under Staff Accounting Bulletin
No. 101 (SAB 101) of $5.3 million for the quarter ended March 31, 2001 on the
Bass leased hotels. This deferred rent will be recognized as Percentage Lease
Revenue upon acquisition of the Bass leases.
7
8
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ASSETS HELD FOR SALE
In the second quarter of 2000, the Company identified 25 hotels that
it considered non-strategic and announced its intention to sell such hotels by
June 30, 2001. In connection with the decision to sell these hotels, the Company
recorded, at June 30, 2000, a reserve of $63 million representing the difference
between the net book value of these hotels and the estimated net proceeds. No
depreciation expense has been recorded on these hotels since June 30, 2000.
Percentage lease revenue related to the assets held for sale, less costs
associated with those assets, were included in the Company's results of
operations for the three months ended March 31, 2001 and 2000, and represented
income of $5.8 million and $3.2 million, respectively.
In March 2001, the Company contributed eight of the hotels held for
sale to an entity in which the Company owns a 50% equity interest and a
subsidiary of IHC holds the other 50% equity interest. The Company contributed
assets with a book value of approximately $77 million, received net cash
proceeds of $48 million and retained a $17 million preferred interest.
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50% interests in separate entities owning 24
hotels at March 31, 2001, and 16 hotels at March 31, 2000, a parcel of
undeveloped land, and a condominium management company. The Company also holds a
50% interest in an entity that develops condominiums for sale. The Company
accounts for its investments in these unconsolidated entities under the equity
method.
Summarized unaudited combined financial information for 100% of
these unconsolidated entities is as follows (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Balance sheet information:
Investment in hotels ............................... $ 359,008 $ 294,941
Non-recourse mortgage debt ......................... $ 268,615 $ 225,302
Equity ............................................. $ 113,707 $ 82,986
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
--------- ---------
STATEMENTS OF OPERATIONS INFORMATION:
Total revenues ........................................ $ 17,250 $ 17,929
Net income ............................................ $ 5,315 $ 5,360
Net income attributable to the Company ................ $ 2,685 $ 2,414
Amortization of cost in excess of book value .......... (535) (535)
--------- ---------
Equity in income from unconsolidated entities ......... $ 2,150 $ 1,879
========= =========
8
9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT
Debt at March 31, 2001, and December 31, 2000, consisted of the
following (in thousands):
MARCH DECEMBER 31,
COLLATERAL INTEREST RATE MATURITY DATE 2001 2000
---------- ------------- ------------- ---------- ------------
FLOATING RATE DEBT:
Line of credit None LIBOR + 200bp August 2003 $ 112,000
Mortgage debt 3 hotels LIBOR + 200bp February 2003 $ 61,744 61,909
Promissory note None LIBOR + 200bp June 2016 650 650
---------- ----------
Total floating rate debt 62,394 174,559
---------- ----------
FIXED RATE DEBT:
Line of credit - swapped None 7.66% August 2003 248,900 250,000
Publicly-traded term notes None 7.38% October 2004 174,537 174,505
Publicly-traded term notes None 7.63% October 2007 124,345 124,320
Publicly-traded term notes None 9.50% September 2008 101,757
Publicly-traded term notes None 9.50% October 2008 394,902 394,731
Mortgage debt 15 hotels 7.24% November 2007 139,479 140,148
Mortgage debt 7 hotels 7.54% April 2009 97,219 97,604
Mortgage debt 6 hotels 7.55% June 2009 73,102 73,389
Mortgage debt 7 hotels 8.73% May 2010 143,602 144,032
Mortgage debt 8 hotels 8.70% May 2010 184,280 184,829
Other 13 hotels 6.96% - 7.23% 2000 - 2005 68,173 80,124
---------- ----------
Total fixed rate debt 1,750,296 1,663,682
---------- ----------
Total debt $1,812,690 $1,838,241
========== ==========
One month LIBOR at March 31, 2001, was 5.078%.
The Company's line of credit is matched with interest rate swap
agreements which effectively convert the variable rate on the line of credit to
a fixed rate.
The line of credit contains various affirmative and negative
covenants including limitations on total indebtedness, total secured
indebtedness, and cash distributions, as well as the obligation to maintain
certain minimum tangible net worth and certain minimum interest and debt service
coverage ratios. At March 31, 2001, the Company was in compliance with all such
covenants.
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to or less restrictive than the line of
credit. Most of the mortgage debt is non-recourse to the Company (with certain
exceptions) and contains provisions allowing for the substitution of collateral
upon satisfaction of certain conditions. Most of the mortgage debt is
prepayable; subject, however, to various prepayment penalties, yield
maintenance, or defeasance obligations.
Interest expense is reported net of interest income of $737,000 and
$424,000 at March 31, 2001 and 2000, respectively and capitalized interest of
$119,000 and $223,000, respectively.
On January 11, 2001, the Company completed the private placement of
$100 million in 9 1/2% senior unsecured notes that mature in September 2008.
These notes were issued at a premium to yield an effective rate of 9 1/8%. The
proceeds were used initially to pay down the company's line of credit.
6. ADOPTION OF SFAS 133
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments. Specifically, SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet and to measure
those instruments at fair value. Additionally, the fair value adjustments will
affect either shareholders' equity or net
9
10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ADOPTION OF SFAS 133 -- (CONTINUED)
income depending on whether the derivative instrument qualifies as a hedge for
accounting purposes and the nature of the hedging activity.
Upon adoption of SFAS 133, on January 1, 2001, the Company recorded
the fair value of its interest rate swap agreements as an asset of $248,000 with
a corresponding credit to accumulated other comprehensive income reported in
shareholders equity.
As of March 31, 2001, the fair value of derivative instruments
resulted in a liability of $4.8 million which was recorded in accrued expenses
and other liabilities. Assuming no changes in the index rates over the next
twelve months, the swaps currently held by the Company would result in
additional interest expense of $1 million.
In the normal course of business, the Company is exposed to the
effect of interest rate changes. The Company limits these risks by following
established risk management policies and procedures including the use of
derivatives. Derivatives are used primarily to fix the rate on floating-rate
debt and manage the cost of borrowing obligations. The Company requires that
hedging derivative instruments are effective in reducing the interest rate risk
exposure that they are designated to hedge. Instruments that meet these hedging
criteria are formally designated as hedges at the inception of the derivative
contract. The Company does not use derivatives for trading or speculative
purposes, and the Company has a policy of only entering into contracts with
major financial institutions.
To determine the fair values of its derivative instruments, the
Company uses a variety of methods and assumptions that are based on market
conditions and risks existing at each balance sheet date. All methods of
assessing fair value result in a general approximation of value, and such value
may never actually be realized.
The Company's financing facilities consist of a $600 million
variable rate line of credit. To reduce overall interest cost, the Company
currently uses six interest rate swap agreements, to effectively convert a
portion of its variable-rate debt to fixed-rate debt. The differences to be paid
or received by the Company under the terms of the interest rate swap agreements
are accrued as interest rates change and recognized as an adjustment to interest
expense.
10
11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ADOPTION OF SFAS 133 -- (CONTINUED)
The following table summarizes the notional values and fair values
of the Company's derivative financial instruments. The notional value at March
31, 2001 provides an indication of the extent of the Company's involvement in
these instruments at that time, but does not represent exposure to credit,
interest rate or market risks.
As of March 31, 2001 (in millions):
SWAP RATE
RECEIVED
NOTIONAL FIXED INTEREST (VARIABLE) AT FAIR VALUE
TYPE VALUE RATE PAID 3/31/01 MATURITY ASSET (LIABILITY)
---- -------- -------------- ------------- -------- -----------------
Interest rate swap $ 25 5.5575% 5.2813% July 2001(a) $(0.4)
Interest rate swap 25 5.5480% 5.2813% July 2001(a) (0.4)
Interest rate swap 75 5.5550% 5.2813% July 2001(a) (1.3)
Interest rate swap 100 5.7955% 5.2813% July 2003 (2.1)
Interest rate swap 25 5.8260% 5.2813% July 2003 (0.6)
----- -----
$ 250 $(4.8)
===== =====
(a) The variable rate payor has the option to terminate this swap
in July 2001; if not so terminated, it matures in July 2003.
SFAS No. 130, "Reporting Comprehensive Income" establishes standards
for reporting and displaying comprehensive income and its components. Total
comprehensive loss for the three months ended March 31, 2001 is calculated as
follows (in thousands):
THREE MONTHS ENDED
MARCH 31, 2001
------------------
Net loss ......................................... $ (6,806)
Unrealized loss on interest rate swap
agreements .................................... (5,092)
--------
Total comprehensive loss ................... $(11,898)
========
7. INCOME TAXES
Prior to January 1, 2001, the Company, as a REIT, was not subject to
federal income taxes. Under the RMA that became effective January 1, 2001, the
Company leases certain of its hotels to wholly-owned taxable REIT subsidiaries
that are subject to federal and state income taxes. The Company accounts for
income taxes in accordance with the provisions of SFAS No. 109, "Accounting for
Income Taxes." Under SFAS 109, the Company accounts for income taxes using the
asset and liability method under which deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The Company has a deferred tax asset of
approximately $1.2 million, prior to any valuation allowance, relating to losses
of the taxable REIT subsidiaries during the three months ended March 31, 2001.
Management has provided a 100% valuation allowance against this asset due to
uncertainty of realization and accordingly, no provision or benefit from income
taxes is reflected in the accompanying Consolidated Statements of Operations.
11
12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. GAIN ON SALE OF ASSETS
During the first quarter of 2001 the Company received $3.4 million
for the condemnation of two parcels of land and recorded a gain of $2.5 million.
9. PURCHASE OF DJONT
Effective January 1, 2001, the Company acquired all the equity
interests in DJONT. In consideration for the acquisition, the Operating
Partnership issued 416,667 units of limited partnership interest valued at
approximately $10 million which, together with DJONT's accumulated shareholders'
deficit of $24.5 million, was expensed as lease termination cost in the first
quarter of 2001.
The Company purchased certain assets and assumed certain liabilities
with this acquisition. The fair values of the acquired assets and liabilities at
January 1, 2001, are as follows (in thousands):
Cash and cash equivalents ............................. $ 25,583
Accounts receivable ................................... 30,689
Investment in real estate ............................. 10,954
Other assets .......................................... 10,358
--------
Total assets acquired...................... 77,584
--------
Accounts payable ...................................... 18,656
Due to FelCor Lodging Trust ........................... 39,466
Accrued expenses and other liabilities ................ 43,999
--------
Total liabilities assumed ................. 102,121
--------
Liabilities assumed in excess of assets acquired ...... 24,537
Value of Operating Partnership units issued ........... 9,896
--------
Lease termination costs .......................... $ 34,433
========
10. SEGMENT INFORMATION
Following the purchase of certain of the Company's leases at January
1, 2001, the Company has determined that its reportable segments are those that
are consistent with the Company's method of internal reporting, which segments
its business in 2001, by consolidated hotels and those hotels leased by Bass.
For the three months ended March 31, 2000, the Company segmented its
business between its two lessees, DJONT and Bass.
12
13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENT INFORMATION -- (CONTINUED)
The following tables present information for the reportable segments
for the three months ended March 31, 2001 and 2000 (in thousands):
CORPORATE
BASS SEGMENT NOT ALLOCABLE CONSOLIDATED
THREE MONTHS ENDED MARCH 31, 2001 CONSOLIDATED LEASED TOTAL TO SEGMENTS TOTAL
--------------------------------- ------------ --------- --------- ------------- ------------
Total revenues $ 235,030 $ 51,531 $ 286,561 $ 1,333 $ 287,894
Net income (loss) $ 29,718 $ 3,702 $ 33,420 $ (40,226) $ (6,806)
Funds from operations $ 87,564 $ 29,436 $ 117,000 $ (45,577) $ 71,423
Weighted average common shares and
units outstanding(1) 66,767
LEASED CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
THREE MONTHS ENDED MARCH 31, 2000 DJONT BASS TOTAL TO SEGMENTS TOTAL
--------------------------------- --------- --------- --------- ------------- ------------
Total revenues $ 68,408 $ 56,520 $ 124,928 $ 1,453 $ 126,381
Net income (loss) $ 36,699 $ 22,726 $ 59,425 $ (40,498) $ 18,927
Funds from operations $ 63,892 $ 47,262 $ 111,154 $ (42,659) $ 68,495
Weighted average common shares and
units outstanding(1) 68,740
(1) Weighted average common shares and units outstanding are computed
including dilutive options, unvested stock grants, and assuming
conversion of Series A preferred stock to common stock.
11. TREASURY STOCK REPURCHASE PROGRAM
On January 4, 2000, FelCor announced that its Board of Directors had
approved a $200 million increase in its stock repurchase program, authorizing
the Company to purchase up to an aggregate of $300 million of its outstanding
common shares. During the three months ended March 31, 2001, FelCor had
repurchased approximately 179,000 shares of FelCor common stock for
approximately $4.0 million.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 2001 and 2000 (in
thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
-------- --------
Numerator:
Net income (loss) applicable to common shareholders .......... $(12,956) $ 12,743
======== ========
Denominator:
Denominator for basic earnings per share -
weighted average shares ................................. 52,595 59,356
Effect of dilutive securities:
Restricted shares ..................................... 21
-------- --------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions ....... 52,595 59,377
======== ========
Earnings (loss) per share data:
Basic ........................................................ $ (0.25) $ 0.21
Diluted ...................................................... $ (0.25) $ 0.21
The Series A preferred shares and most of the options granted are
anti-dilutive and not included in the calculation of diluted earnings per share.
Additionally, for the quarter ended March 31, 2001 the effect of diluted
securities is not reflected due to losses incurred in the quarter.
13
14
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Statements of Operations for the
three months ended March 31, 2001 and 2000 are presented as if the acquisition
of DJONT and the acquisition of all the leases held by Bass occurred on January
1, 2000 and excludes the related lease termination costs of approximately
$161.2 million.
The following unaudited Pro Forma Consolidated Statements of
Operations for the periods presented are not necessarily indicative of what
actual results of operations of the Company would have been assuming such
transactions had been completed at the beginning of the respective periods
presented, nor does it purport to represent the results of operations for future
periods.
PRO FORMA
THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
--------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenues:
Hotel operating revenue:
Room and suite revenue ................................ $ 322,929 $ 322,240
Food and beverage revenue ............................. 62,592 62,951
Other operating departments ........................... 15,973 18,700
Retail space rental and other revenue ................... 6,093 5,027
Equity in income from unconsolidated entities ........... 2,150 1,996
--------- ---------
Total revenue .................................. 409,737 410,914
--------- ---------
Expenses:
Operating Expenses:
Room .................................................. 69,583 68,113
Food and beverage ..................................... 47,577 47,732
Other operating departments ........................... 15,543 15,532
Management fees ......................................... 13,510 14,653
Other property operating costs .......................... 110,395 106,566
Property taxes, insurance and other ..................... 38,469 40,162
--------- ---------
Total operating expenses ....................... 295,077 292,758
--------- ---------
Operating Income ........................................... 114,660 118,156
Corporate expenses ...................................... 2,884 3,399
Interest expense ........................................ 41,740 39,980
Depreciation ............................................ 39,808 40,533
Minority interests ...................................... 5,252 2,947
Other ................................................... 771 1,850
--------- ---------
Income before nonrecurring items ........................... 24,205 29,447
Gain on sale of assets .................................. 2,473
---------S ---------
Net income ................................................. 26,678 29,447
Preferred dividends ........................................ (6,150) (6,184)
--------- ---------
Net income applicable to common shareholders ............... $ 20,528 $ 23,263
========= =========
Diluted Earnings per share:
Net income applicable to common shareholders ... $ 0.39 $ 0.39
========= =========
Weighted average common shares outstanding ..... 53,063 59,791
14
15
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS
On May 10, 2001, the Company announced that, on May 9, 2001, it
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
MeriStar Hospitality Corporation ("MeriStar"). Pursuant to the Merger Agreement,
MeriStar will be merged with and into the Company. Under the terms of the merger
plan, which was approved by the boards of both companies, holders of MeriStar
common shares will receive, for each common share, $4.60 in cash and 0.784
shares of common stock of the Company. The Company also will either assume or
refinance $1.6 billion in MeriStar debt. A separate publicly traded company,
MeriStar Hotels & Resorts, will continue to manage the hotels acquired from
MeriStar in the merger.
The transaction will also involve the merger of MeriStar's
subsidiary operating limited partnership with and into the Operating
Partnership. The holders of common partnership units in MeriStar's partnership
will receive, for each common unit, $4.60 in cash and 0.784 common partnership
units in the Operating Partnership. Preferred units in MeriStar's partnership
will receive similar preferred units in the Operating Partnership or a
combination of cash and units.
The proposed mergers are subject to shareholder approval and other
customary conditions. The equity portion of the transaction is structured to
qualify as a tax free merger with respect to the share consideration. FelCor
will continue to operate as a real estate investment trust. Thomas J. Corcoran,
Jr. will continue as FelCor's President and CEO. Paul W. Whetsell and Stephen D.
Jorns, directors of MeriStar, have agreed to join FelCor's Board of Directors.
The Company will maintain its existing headquarters facilities in Irving, Texas.
The merger is expected to close in August of 2001.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For background information relating to the Company and the
definitions of certain capitalized terms used herein, reference is made to Note
1 of Notes to Consolidated Financial Statements of FelCor Lodging Trust
Incorporated appearing elsewhere herein.
As a result of the acquisition by the Company's taxable REIT
subsidiaries of leases for 96 of its hotels in the first quarter of 2001, the
Company is reporting hotel revenues and expenses with respect to such hotels,
whereas in the past percentage lease revenue was reported.
FINANCIAL COMPARISON
FIRST QUARTER 2001 (COMPARED TO FIRST QUARTER 2000)
HISTORICAL COMPARISON:
o Revenues increased 128% to $287.9 million from $126.4
million
o Total hotel portfolio RevPAR increased 2.0% (186 hotels)
o EBITDA increased 4.4% to $117.3 million from $112.4 million
PRO FORMA COMPARISON:
o Revenues decreased $1.2 million to $409.7 million from
$410.9 million
o Operating income decreased 3% to $114.7 million from $118.2
million
o Net income decreased 9% to $26.7 million from $29.4 million
ACQUISITION OF TENANTS:
o The Company completed the acquisition of DJONT (which leased
85 of the Company's hotels) effective January 1, 2001. In
consideration for the acquisition, the Operating Partnership
issued approximately 417,000 units of limited partnership
interest, valued at approximately $10 million which,
together with DJONT's accumulated deficit of $24.5 million,
was recorded as a lease termination cost in the first
quarter of 2001.
o The Company acquired leases from Bass on 12 of the Company's
hotels for approximately 414,000 shares of common stock,
valued at approximately $10 million, of which $1.7 million
was included in lease termination costs and the remainder
had been previously accrued for in the reserve related to
hotels held for sale. Of these hotels, one has been sold,
eight have been contributed to a joint venture with IHC, two
remain to be sold and one will be retained.
o The Company and Bass agreed to the terms on which the
Company will acquire the remaining 88 Hotel leases held by
Bass in exchange for long-term management agreements. The
transaction will be effective July 1, 2001. Beginning with
the third quarter of 2001, the Company's financial
statements will reflect hotel revenues and expenses of these
additional 88 hotels.
ADDITIONAL FIRST QUARTER HIGHLIGHTS:
o Contributed seven Marriott(R)-branded hotels and one
Hilton(R)-branded hotel to a 50/50 joint venture between the
Company and IHC. Net cash proceeds to the Company were $48
million. In addition to its 50% equity interest in the joint
venture, the Company retains a $17 million preferred
interest.
o Renovation expenditures on the Company's hotel portfolio
totaled $9.7 million during the quarter. An additional $6.3
million was spent on maintenance capital expenditures during
the quarter.
16
17
CAPITALIZATION:
o On January 11, 2001, the Company completed the private
placement of $100 million of senior unsecured notes that
mature in December, 2008 and bear interest at an effective
rate of 9 1/8 %. The proceeds were used initially to pay
down the Company's line of credit.
o During the first quarter 2001, the Company repurchased
approximately 179,000 shares of common stock for
approximately $4.0 million.
o The Company declared first quarter dividends of $0.55 per
share on its common stock, $0.4875 per share on its $1.95
Series A Cumulative Convertible Preferred Stock and $0.5625
per depositary share evidencing its 9% Series B Cumulative
Redeemable Preferred Stock.
RESULTS OF OPERATIONS
The Company
Three Months Ended March 31, 2001 and 2000
Until January 1, 2001, the Company leased 184 hotels to either DJONT
or Bass and reported the lease revenue from the percentage lease agreements.
Effective January 1, 2001, upon acquisition of 96 of these leases by the
Company's taxable REIT subsidiaries, the Company assumed all operating risks and
rewards at these 96 hotels. As a result, the Consolidated Statement of
Operations for the quarter ending March 31, 2001, include the revenue and
expenses of these 96 hotels and percentage lease revenues related to the 88
hotels that continue to be leased by Bass. Therefore, the operating results of
the Company for the three months ended March 31, 2001, are not directly
comparable to the same period in 2000. Total revenue for the first quarter of
2001 increased $161.5 million over 2000, principally related to hotel revenues
for the Hotels on which the Company had reported percentage lease revenue in
previous periods. The Hotels contributed approximately $231.3 million in hotel
revenue in the first quarter of 2001, compared to $67.6 million in percentage
rent revenue in the same period of 2000. At March 31, 2001, the Company had
hotel leases with Bass for 88 hotels which are reflected in percentage lease
revenues. Other items affecting revenue, compared to the first quarter 2000 are:
o RevPAR for the 96 hotels increased 3.6% for quarter (reflected in
hotel revenue)
o RevPAR for the Bass hotels decreased 0.2% for the quarter (reflected
in percent rent)
o Deferred rent - in the first quarter of 2001, the Company deferred
approximately $5.3 million of rent (for the Bass leases) in
accordance with SAB 101, compared to $8.9 million in the first
quarter of 2000 (for both Bass and DJONT leases). The rent deferred
in 2001 will be recognized when these leases are acquired by FelCor
effective July 1, 2001.
Total operating expenses increased by $155.6 million for the three
months ended March 31, 2001 over the same three month period in 2000. This
increase is primarily a result of including hotel operating expenses of $157.5
million, which were not included in the same period of 2000. Also included in
total operating expenses are property taxes, insurance and land leases, which
decreased by $1.7 million in the three months ended March 31, 2001, compared to
the prior year. The majority of this decrease related to additional property tax
and franchise tax expenses which were recorded in the first quarter of the prior
year.
17
18
Net income decreased $25.7 million in the three months ended March
31, 2001 compared to the same period in 2000. Major items affecting the change
in net income are lease termination costs, interest expense, minority interest
and gain on sale of assets.
The Company recorded a one-time lease termination expense of $36.2
million related to the acquisition of DJONT and the termination of one of the
leases held by Bass. Interest expense increased $1.9 million principally from
increased interest rates in 2001 compared to the same period in 2000. Minority
interests decreased by $2.4 million, which principally reflects the Operating
Partnership's share of the lease termination costs. Included in net income for
the current period is a gain on sales of assets related to condemnation proceeds
received.
Pro forma three months ended March 31, 2001 and 2000
Pro forma revenues decreased $1.2 million in the first quarter of
2001 compared to 2000. This decrease in revenues largely reflects two hotels
which were sold in 2000 and included in 2000 first quarter revenues. This was
somewhat offset by a 2% increase in RevPAR for the remaining hotels.
Pro forma operating expenses increased $2.3 million in the first
quarter of 2001 compared to the same period in 2000. Major increases in pro
forma expenses for the first quarter of 2001 include utility expenses which
increased $3.9 million and marketing expenses which increased $1.9 million.
These pro forma increases were somewhat offset by the two hotels sold in 2000.
Pro forma net income decreased $2.7 million from the pro forma first
quarter of 2000. This decrease was largely a result of the decrease in pro forma
operating income previously discussed.
Funds From Operations
The Company considers Funds From Operations ("FFO") and earnings
before interest, taxes, depreciation and amortization ("EBITDA") to be key
measures of a REIT's performance and should be considered along with, but not as
an alternative to, net income and cash flow as a measure of the Company's
operating performance and liquidity.
The White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") defines FFO as net income or loss (computed in accordance with GAAP),
excluding gains or losses from extraordinary and sales of properties, plus real
estate related depreciation and amortization, after comparable adjustments for
the Company's portion of these items related to unconsolidated entities and
joint ventures. The Company believes that FFO and EBITDA are helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, they provide investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures, to pay
dividends and to fund other cash needs. The Company computes FFO in accordance
with standards established by NAREIT, except that the Company adds back rent
deferred under SAB 101 and lease termination costs to derive FFO. This may not
be comparable to FFO reported by other REITs that do not define the term in
accordance with the current NAREIT definition, that interpret the current NAREIT
definition differently than the Company or that do not adjust FFO for rent
deferred under SAB 101 and lease termination costs. FFO and EBITDA do not
represent cash generated from operating activities as determined by GAAP, and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company 's liquidity, nor does it necessarily reflect the funds
available to fund the Company's cash needs, including its ability to make cash
distributions. FFO and EBITDA may include funds that may not be available for
management's discretionary use due to functional requirements to conserve funds
for capital expenditures and property acquisitions, and other commitments and
uncertainties.
18
19
The following table details the computation of Funds From Operations
(in thousands):
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2001 2000
----------- -----------
FUNDS FROM OPERATIONS (FFO):
Net income (loss) ............................................ $ (6,806) $ 18,927
Deferred rent .......................................... 5,254 8,854
Lease termination costs ................................ 36,226
Series B preferred dividends ........................... (3,234) (3,234)
Depreciation ........................................... 39,808 40,400
Depreciation from unconsolidated entities .............. 2,381 2,544
Minority interest in Operating Partnership ............. (2,206) 1,004
----------- -----------
FFO .......................................................... $ 71,423 $ 68,495
=========== ===========
Weighted average common shares and units outstanding(1) ...... 66,767 68,740
=========== ===========
(1) Weighted average common shares and units outstanding are computed
including dilutive options, unvested stock grants, and assuming
conversion of Series A preferred stock to common stock.
The following table details the computation of EBITDA (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
-------- --------
EBITDA:
Funds from Operations ........................................... $ 71,423 $ 68,495
Interest expense ........................................... 40,093 37,904
Interest expense of unconsolidated subsidiaries ............ 2,111 2,620
Amortization expense ....................................... 476 162
Series B preferred dividends ............................... 3,234 3,234
-------- --------
EBITDA .......................................................... $117,337 $112,415
======== ========
19
20
The Hotels
Changes in the Hotels' room revenues significantly affect the
Company after the acquisition of its leases, as well as historically, because
room revenue has been the major component in the computation of percentage lease
income.
The following table sets forth historical occupied rooms
("Occupancy"), average daily rate ("ADR") and RevPAR at March 31, 2001 and 2000,
and the percentage changes therein between the quarters presented for the Hotels
in which the Company had an ownership interest at March 31, 2001
OCCUPANCY
-----------------------------------
FIRST QUARTER
-----------------------------------
NUMBER OF HOTELS 2001 2000 VARIANCE
---------------- ------ ------ ---------
Embassy Suites hotels 59 71.5% 73.6% (2.1) pts
Holiday-branded hotels 51 69.2% 68.8% 0.4 pts
Crowne Plaza hotels 18 64.7% 69.9% (5.2) pts
Doubletree-branded hotels 11 72.1% 68.1% 4.0 pts
Sheraton-branded hotels 10 68.5% 71.8% (3.3) pts
Other hotels 23 67.3% 66.7% 0.6 pts
---
Total Hotels excluding hotels held for sale 172 69.2% 70.4% (1.2) pts
Hotels held for sale 14 49.3% 49.6% (0.3) pts
---
Total Hotels 186 68.4% 69.5% (1.1) pts
===
ADR
-----------------------------------
FIRST QUARTER
-----------------------------------
NUMBER OF HOTELS 2001 2000 VARIANCE
---------------- ------ ------ ---------
Embassy Suites hotels 59 $137.90 $129.23 6.7%
Holiday-branded hotels 51 $ 86.67 $ 85.63 1.2%
Crowne Plaza hotels 18 $105.83 $102.02 3.7%
Doubletree-branded hotels 11 $117.31 $111.13 5.6%
Sheraton-branded hotels 10 $118.23 $114.70 3.1%
Other hotels 23 $ 86.57 $ 86.89 (0.4)%
---
Total Hotels excluding hotels held for sale 172 $109.56 $105.63 3.7%
Hotels held for sale 14 $ 72.77 $ 69.43 4.8%
---
Total Hotels 186 $108.38 $104.48 3.7%
===
REVPAR
-----------------------------------
FIRST QUARTER
-----------------------------------
NUMBER OF HOTELS 2001 2000 VARIANCE
---------------- ------ ------ ---------
Embassy Suites hotels 59 $98.58 $95.08 3.7%
Holiday-branded hotels 51 $59.97 $58.92 1.8%
Crowne Plaza hotels 18 $68.44 $71.33 (4.1)%
Doubletree-branded hotels 11 $84.57 $75.67 11.8%
Sheraton-branded hotels 10 $80.95 $82.31 (1.6)%
Other hotels 23 $58.28 $57.92 0.6%
---
Total Hotels excluding hotels held for sale 172 $75.87 $74.39 2.0%
Hotels held for sale 14 $35.89 $34.41 4.3%
---
Total Hotels 186 $74.09 $72.60 2.0%
===
Comparison of the Hotels' Operating Statistics for the Three Months Ended
March 31, 2001 and 2000
For the three months ended March 31, 2001, the Company's Hotels'
RevPAR increased, compared to the same period in 2000, by 2.0%. The Hotels' ADR
increased 3.7% and Occupancy decreased 1.1 percentage points.
20
21
Hotel RevPAR changes for the first quarter 2001 (versus first
quarter 2000) are as follows:
REVPAR PERCENTAGE OF
CHANGE ROOM REVENUE
------ -------------
DJONT hotels (93 hotels) 3.6% 56.6%
Bass hotels (77 hotels) (0.1)% 40.6%
Other hotels (2 hotels) 1.9% 0.6%
Hotels held for sale (14 hotels) 4.3% 2.2%
Total hotels (186 hotels) 2.0% 100.0%
The DJONT hotels are predominately Embassy Suites,
Doubletree-branded and Sheraton hotels. The following table shows first quarter
2001 Hotel RevPAR changes for the DJONT hotels, excluding hotels held for sale,
by brand for DJONT hotels, compared to the same period in 2000:
REVPAR PERCENTAGE OF TOTAL
CHANGE DJONT ROOM REVENUE
------ -------------------
Embassy Suites (59 hotels) 3.7% 71.5%
Doubletree-branded (11 hotels) 11.8% 8.8%
Sheraton (10 hotels) (1.6)% 13.6%
The Company's Embassy Suites hotels, which constitute nearly 41% of
the Hotel room revenues during the first quarter of 2001, increased ADR by 6.7%
while Occupancy decreased by 2.1 percentage points over the same three month
period in 2000. With the 3.7% RevPAR increase, the Company's Embassy Suites
outperformed the entire Upper Upscale segment, which grew 1.1%, as reported by
Smith Travel Research. The Company's Doubletree-branded hotels had an 11.8%
RevPAR gain for the quarter with ADR and Occupancy increases of 5.6% and 4.0
percentage points, respectively. The Company believes that the addition of
Hilton's frequent guest program in 2000 has had a positive impact on both ADR
and Occupancy at the Doubletree hotels.
The Bass hotels are predominately Holiday Inn and Crowne Plaza
hotels. The following table shows first quarter 2001 Hotel RevPAR change for the
Bass hotels, excluding hotels held for sale, by brand compared to the same
period in 2000.
REVPAR PERCENTAGE OF BASS
CHANGE ROOM REVENUE
------ ------------------
Holiday Inn (51 hotels) 1.8% 62.0%
Crowne Plaza (18 hotels) (4.1)% 28.9%
The Company's 51 Holiday Inn-branded hotels, excluding hotels held
for sale, had a RevPAR increase of 1.8%, with ADR increasing 1.1%, while
Occupancy remained constant during the three months ended March 31, 2001
compared to the same period in 2000. The 18 Crowne Plaza hotels had a decrease
in RevPAR of 4.1% for the quarter compared to the same period last year. ADR for
the Company's Crowne Plaza hotels increased 3.7% in the first quarter of 2001
compared to the same period in 2000, while Occupancy decreased 5.2 percentage
points. Much of the decrease in Occupancy for the Crowne Plaza hotels is
attributed to a change in the reservation code used by travel agents for Crowne
Plaza. The Company believes that the change will ultimately be beneficial to the
brand but caused a detrimental effect for the first quarter of 2001.
21
22
Hotels in Texas, California, Florida and Georgia, excluding hotels
held for sale, accounted for approximately 57.4% of hotel room revenues in the
quarter. The RevPAR changes during the first quarter 2001 (versus first quarter
2000) from the Hotels in these states are as follows:
REVPAR PERCENTAGE OF TOTAL
CHANGE ROOM REVENUE
------ -------------------
Texas (41 hotels) 1.4% 19.0%
California (19 hotels) 1.4% 17.0%
Florida (16 hotels) 1.7% 13.3%
Georgia (15 hotels) 1.9% 8.1%
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash
requirements, including distributions to shareholders and repayments of
indebtedness, is its share of the Operating Partnership's cash flow from the
Percentage Leases for the 88 hotels leased by Bass and results of operations
from the remaining 98 hotels. For the three months ended March 31, 2001, net
cash flow provided by operating activities consisting primarily of hotel
operations from consolidated hotels and percentage lease revenues, was $40.9
million and Funds From Operations was $71.4 million.
As a result of the effectiveness of the REIT Modernization Act,
which, among other things, allows the Company to own its leases in taxable REIT
subsidiaries, and the acquisition of the Hotel leases in 2001, the Company began
reporting the income and expenses of operating hotels as it acquired its
lessees, rather than lease income from the Percentage Leases. Any profits or
losses from the TRS entities holding the hotel leases, after applicable
corporate taxes will be reflected in the Company's results of operations. Pro
forma consolidated statements of operations for the three months ended March 31,
2001 and 2000, which reflect the acquisition of the hotel leases, are contained
in the Notes to the Consolidated Financial Statements of FelCor Lodging Trust
Incorporated, appearing elsewhere herein.
On January 11, 2001, the Company completed the private placement of
$100 million in 9 1/2% senior unsecured notes that mature in September 2008.
These notes were issued at a premium to yield an effective rate of 91/8%. The
proceeds were used initially to pay down the Company's line of credit.
In March 2001, the Company contributed eight of the hotels held for
sale to an entity in which the Company holds a 50% equity interest, and a
subsidiary of IHC holds the other 50% equity interest. Another subsidiary of IHC
manages each of these hotels.
The Company may incur indebtedness to make property acquisitions, to
purchase shares of its capital stock, or to meet distribution requirements
imposed on a REIT under the Internal Revenue Code, to the extent that working
capital and cash flow from the Company's investments are insufficient for such
purposes.
The board of directors has authorized FelCor to repurchase up to
$300 million of its outstanding common shares. Stock repurchases, may, at the
discretion of the Company's management, be made from time to time at prevailing
prices in the open market or through privately negotiated transactions. The
Company expects to fund the repurchase of stock through the use of cash,
existing credit facilities, proceeds from the sale of assets and debt
refinancings. Beginning in January 2001, through March 31, 2001, FelCor
repurchased approximately 179,000 shares of its outstanding common stock on the
open market for approximately $4.0 million.
22
23
At March 31, 2001, the Company had $60.7 million of cash and cash
equivalents and had utilized $249 million of the $600 million available under
its line of credit. Certain significant credit and debt statistics at March 31,
2001, are as follows:
o Interest coverage ratio of 2.8x
o Borrowing capacity of $351 million under the line of credit
o Consolidated debt equal to 39.7% of investment in hotels, at cost
o Fixed interest rate debt equal to 97% of total debt
o Weighted average maturity of fixed interest rate debt of
approximately seven years
o Mortgage debt to total assets of 19%
o Debt of approximately $9.4 million maturing in 2001
The Company's line of credit contains various affirmative and
negative covenants, including limitations on total indebtedness, total secured
indebtedness, restricted payments (such as stock repurchases and cash
distributions), as well as the obligation to maintain certain minimum tangible
net worth and certain minimum interest and debt service coverage ratios. At
March 31, 2001, the Company was in compliance with all such covenants.
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to or less restrictive than the line of
credit. Most of the mortgage debt is nonrecourse to the Company (with certain
exceptions) and contains provisions allowing for the substitution of collateral
upon satisfaction of certain conditions. Most of the mortgage debt is
prepayable, subject, however, to various prepayment penalties, yield
maintenance, or defeasance obligations.
The Company had interest rate swap agreements with a total notional
amount of $250 million that were outstanding at March 31, 2001 and which were
designated as cash flow hedges. These interest rate swap agreements modify a
portion of the interest characteristics of the Company's outstanding debt under
its line of credit without an exchange of the underlying principal amount and
effectively convert variable rate debt to a fixed rate. The fixed rates to be
paid, and the variable rate to be received by the Company at March 31, 2001 are
summarized in the following table:
SWAP RATE
RECEIVED
SWAP RATE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) 3/31/01 MATURITY
--------------- ------------ ------------- -----------
$ 25 million 5.5575% 5.2813% July 2001(a)
25 million 5.5480% 5.2813% July 2001(a)
75 million 5.5550% 5.2813% July 2001(a)
100 million 5.7955% 5.2813% July 2003
25 million 5.8260% 5.2813% July 2003
--------------
$ 250 million
==============
(a) The variable rate payor has the option to terminate this swap
in July 2001; if not so terminated, it matures July 2003.
The Company spent approximately $9.7 million during the quarter on
upgrading, renovating and/or rebranding its Hotels during the three months ended
March 31, 2001. It had completed renovations at four hotels during the quarter,
and had six additional hotels undergoing renovation at the end of the quarter.
In the event of a significant economic downturn, the Company believes that its
Hotels will continue to benefit from the Company's extensive capital expenditure
programs. Most future renovation and redevelopment expenditures are
discretionary and are expected to be funded from the Company's cash flow.
23
24
Merger
On May 10, 2001 the Company announced that, on May 9, 2001, it
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
MeriStar Hospitality Corporation ("MeriStar"). Pursuant to the Merger Agreement,
MeriStar will be merged with and into the Company. Under the terms of the merger
plan, which was approved by the boards of both companies, holders of MeriStar
common shares will receive, for each common share, $4.60 in cash and 0.784
shares of common stock of FelCor. The Company also will either assume or
refinance $1.6 billion in MeriStar debt. A separate publicly traded company,
MeriStar Hotels & Resorts, will continue to manage the hotels acquired from
MeriStar in the merger.
The transaction will also involve the merger of MeriStar's
subsidiary operating limited partnership with and into the Operating
Partnership. The holders of common partnership units in MeriStar's partnership
will receive, for each common unit, $4.60 in cash and 0.784 common partnership
units in the Operating Partnership. Preferred units in MeriStar's partnership
will receive similar preferred units in the Operating Partnership or a
combination of cash and units.
The proposed mergers are subject to shareholder approval and other
customary conditions. The equity portion of the transaction is structured to
qualify as a tax free merger with respect to the share consideration. FelCor
will continue to operate as a real estate investment trust.
The Company expects to finance the cash portion of the merger
consideration from cash on hand and borrowing. The merger is expected to close
in August of 2001.
Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is to changes in interest
rates on its floating rate debt. The Company manages the risk of increasing
interest rates on its floating rate debt through the use of interest rate swaps,
which effectively convert variable rate debt to a fixed rate, by locking the
interest rates paid. The Company had entered into interest rate swap contracts
relating to debt of $250 million at March 31, 2001.
The following table provides information about the Company's
financial instruments that are sensitive to changes in interest rates, including
interest rate swaps and debt obligations. For debt obligations at March 31,
2001, the table presents scheduled maturities and weighted average interest
rates, by maturity dates. For interest rate swaps, the table presents notional
amounts and weighted average interest rates, by contractual maturity dates.
Weighted average variable rates are based on implied forward rates in the yield
curve as of March 31, 2001. The Fair Value of the Company's fixed rate debt
indicates the estimated principal amount of debt having the same debt service
requirements which could have been borrowed at March 31, 2001 at then current
market interest rates. The Fair Value of the Company's variable to fixed
interest rate swaps indicates the estimated amount that would have been paid by
the Company had they been terminated at March 31, 2001.
24
25
EXPECTED MATURITY DATE
(IN THOUSANDS)
REMAINDER
OF
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
--------- ------- -------- -------- ------- ---------- ---------- ----------
LIABILITIES
Debt:
Fixed rate $ 8,820 $13,039 $ 34,906 $189,228 $43,129 $1,216,732 $1,505,854 $1,437,307
Average interest rate 8.19% 8.19% 8.09% 7.44% 8.67% 8.65%
Variable rate $ 546 $ 785 $309,313 $ 650 $ 311,294 $ 311,294
Average interest rate 7.08% 6.67% 6.99% 8.26%
Discount accretion $ (4,458)
Total debt $1,812,690
INTEREST RATE DERIVATIVES
Interest rate swaps:
Variable to fixed $125,000 $125,000 $ 250,000 $ (4,844)
Average pay rate 5.55% 5.80%
Average receive rate 5.08% 5.29%
Swap contracts, such as those described above, contain a credit
risk, in that the counterparties may be unable to fulfill the terms of the
agreement. The Company minimizes that risk by evaluating the creditworthiness of
its counterparties, who are limited to major banks and financial institutions,
and does not anticipate nonperformance by the counterparties.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates daily to reflect the effects of inflation. Competitive pressures may,
however, limit the Lessees' ability to raise room rates.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
each year. This seasonality can be expected to cause fluctuations in the
Company's earnings, particularly during the fourth quarter. To the extent that
cash flow from operations is insufficient during any quarter, due to temporary
or seasonal fluctuations in revenues, the Company expects to utilize cash on
hand or borrowings under its line of credit to make distributions to its equity
holders.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Quarterly Report on Form 10-Q include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Important factors that could cause actual results to differ materially
from the Company's current expectations are disclosed herein and in the
Company's other filings under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, (collectively, "Cautionary
Disclosures"). The forward looking statements included herein, and all
subsequent written and oral forward looking statements attributable to the
Company or persons acting on its behalf, are expressly qualified in their
entirety by the Cautionary Statements.
25
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to
FelCor is incorporated herein by reference to the discussion under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" contained elsewhere in this
Quarterly Report on Form 10-Q for the three months ended March 31, 2001.
26
27
PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to certain other transactions by the
Company through March 31, 2001, see Note 1 of Notes to Consolidated Financial
Statements of FelCor Lodging Trust Incorporated contained in Item 1 of Part I of
this Quarterly Report on Form 10-Q. Such information is incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1.18 Eighteenth Amendment to Amended and Restated
Agreement of Limited Partnership of FelCor
Lodging Limited Partnership (the
"Partnership") dated as of January 1, 2001,
by and among the Registrant, RGC Leasing,
Inc., a Nevada corporation ("RGC") and all
of the persons and entities who are or shall
in the future become limited partners of the
Partnership.
10.27 Contribution Agreement dated as of January
1, 2001, by and among the Registrant, the
Partnership, FelCor, Inc., RGC and DJONT
Operations, L.L.C.
10.28 Leasehold Acquisition Agreement dated as of
March 30, 2001, by and among Bass (U.S.A.)
Incorporated, in its individual capacity and
on behalf of its subsidiaries and
affiliates, and the Registrant, in its
individual capacity and on behalf of its
subsidiaries and affiliates.
(b) Reports on Form 8-K:
Registrant did not file any reports on Form 8-K during the first
quarter of 2001.
27
28
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.
Dated: May 15, 2001
FELCOR LODGING TRUST INCORPORATED
By: /s/ Lester C. Johnson
------------------------------------
Lester C. Johnson
Senior Vice President and Controller
(Principal Financial Officer
and Principal Accounting Officer)
28
29
EXHIBIT INDEX
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1.18 Eighteenth Amendment to Amended and Restated
Agreement of Limited Partnership of FelCor
Lodging Limited Partnership (the
"Partnership") dated as of January 1, 2001,
by and among the Registrant, RGC Leasing,
Inc., a Nevada corporation ("RGC") and all
of the persons and entities who are or shall
in the future become limited partners of the
Partnership.
10.27 Contribution Agreement dated as of January
1, 2001, by and among the Registrant, the
Partnership, FelCor, Inc., RGC and DJONT
Operations, L.L.C.
10.28 Leasehold Acquisition Agreement dated as of
March 30, 2001, by and among Bass (U.S.A.)
Incorporated, in its individual capacity and
on behalf of its subsidiaries and
affiliates, and the Registrant, in its
individual capacity and on behalf of its
subsidiaries and affiliates.
29