- -------------------------------------------------------------------------------
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 SEPTEMBER 30, 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 November 9, 2001 was
52,981,141.
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FELCOR LODGING TRUST INCORPORATED
INDEX
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................. 3
Consolidated Balance Sheets - September 30, 2001 (Unaudited)
and December 31, 2000.................................................................... 3
Consolidated Statements of Operations - For the Three and Nine Months
Ended September 30, 2001 and 2000 (Unaudited)............................................ 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended September 30, 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............ 16
General/Third Quarter Activities.............................................................. 16
Results of Operations......................................................................... 19
Liquidity and Capital Resources............................................................... 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 28
PART II. - OTHER INFORMATION
Item 5. Other Information................................................................................ 29
Item 6. Exhibits and Reports on Form 8-K................................................................. 29
SIGNATURE.................................................................................................... 30
2
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER DECEMBER
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $592,401
at September 30, 2001 and $473,101 at December 31, 2000................................. $3,690,275 $3,750,275
Investment in unconsolidated entities...................................................... 152,056 128,593
Assets held for sale....................................................................... 48,822 129,294
Cash and cash equivalents.................................................................. 69,608 26,060
Cash held in escrow in connection with senior note offering................................ 318,903
Accounts receivable........................................................................ 72,202 31,241
Note receivable from unconsolidated entity................................................. 7,695
Deferred expenses, net of accumulated amortization of $10,300
at September 30, 2001 and $7,146 at December 31, 2000................................... 27,865 23,944
Other assets............................................................................... 24,196 6,501
------------- ------------
Total assets............................................................................... $4,403,927 $4,103,603
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt....................................................................................... $1,843,641 $1,838,241
Senior notes held in escrow and redeemed in October 2001................................... 300,000
Dividends declared but unpaid.............................................................. 34,199 33,957
Accrued expenses and other liabilities..................................................... 209,926 94,232
Minority interest in FelCor LP, 9,014 and 8,597 units issued and
outstanding at September 30, 2001 and December 31, 2000, respectively.................... 244,123 252,294
Minority interest in other partnerships.................................................... 49,742 50,774
------------- ------------
Total liabilities.......................................................................... 2,681,631 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, 69,418 and 69,415
shares issued, including shares in treasury, at September 30, 2001
and December 31, 2000, respectively..................................................... 694 694
Additional paid-in capital................................................................. 2,062,626 2,064,909
Accumulated other comprehensive income..................................................... (2,253)
Distributions in excess of earnings........................................................ (317,270) (201,598)
------------- ------------
2,037,062 2,157,270
Less: Common stock in treasury, at cost, 16,437 shares and 16,906 shares
at September 30, 2001 and December 31, 2000, respectively....................... (314,766) (323,165)
------------- ------------
Total shareholders' equity................................................................. 1,722,296 1,834,105
------------- ------------
Total liabilities and shareholders' equity................................................. $4,403,927 $4,103,603
============= ============
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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------
2001 2000 2001 2000
----------- ----------- ----------- ---------
Revenues:
Hotel operating revenue:
Room....................................................... $271,419 $636,762
Food and beverage.......................................... 47,508 100,658
Other operating departments................................ 18,259 43,049
Percentage lease revenue..................................... $132,240 115,137 $388,575
Retail space rental and other revenue........................ 573 602 2,455 2,426
----------- ----------- ----------- ---------
Total revenues.................................................. 337,759 132,842 898,061 391,001
----------- ----------- ----------- ---------
Expenses:
Hotel operating expenses:
Room....................................................... 70,832 154,236
Food and beverage.......................................... 40,725 79,866
Other operating departments................................ 8,348 19,270
Other property operating costs............................... 97,567 219,209
Management fees.............................................. 13,094 25,706
Taxes, insurance and lease expense........................... 31,438 23,915 107,898 71,503
Corporate expenses........................................... 2,937 2,778 9,309 8,890
Depreciation................................................. 39,273 39,535 118,786 121,015
Lease termination costs...................................... 378 36,604
Merger termination costs..................................... 19,919 19,919
----------- ----------- ----------- ----------
Total operating expenses........................................ 324,511 66,228 790,803 201,408
----------- ----------- ----------- ----------
Operating income................................................ 13,248 66,614 107,258 189,593
Interest expense, net:
Recurring financing.......................................... (39,803) (39,696) (118,338) (116,477)
Merger related financing..................................... (4,126) (5,212)
Swap termination expense........................................ (4,824)
Loss on assets held for sale.................................... (63,000)
----------- ----------- ----------- ----------
Income (loss) before equity in income from
unconsolidated entities, minority interests,
gain on sale of assets, and extraordinary items........... (30,681) 26,918 (21,116) 10,116
Equity in income from unconsolidated entities................ 722 7,162 7,050 12,810
Minority interests........................................... 4,780 (3,227) 1,910 (2,921)
Gain on sale of assets....................................... 462 3,378 3,417 4,253
----------- ----------- ----------- ----------
Income (loss) before extraordinary items........................ (24,717) 34,231 (8,739) 24,258
Extraordinary charge from write off of deferred
financing fees............................................ (1,045) (3,865) (1,270) (3,865)
----------- ----------- ----------- ----------
Net income (loss).............................................. (25,762) 30,366 (10,009) 20,393
Preferred dividends.......................................... (6,150) (6,155) (18,450) (18,513)
----------- ----------- ----------- ----------
Net income (loss) applicable to common shareholders............ $ (31,912) $ 24,211 $ (28,459) $ 1,880
=========== =========== =========== ==========
Per share data:
Basic
Net income (loss) applicable to common shareholders........ $ (0.60) $ 0.45 $ (0.54) $ 0.03
=========== =========== =========== ==========
Weighted average common shares outstanding................. 52,634 54,336 52,623 56,059
Diluted
Net income (loss) applicable to common shareholders........ $ (0.60) $ 0.44 $ (0.54) $ 0.03
=========== =========== =========== ==========
Weighted average common shares outstanding................. 52,982 54,579 52,991 56,290
The accompanying notes are an integral part of these consolidated financial
statements.
4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
------------- -----------
Cash flows from operating activities:
Net income (loss)............................................................. $ (10,009) $ 20,393
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation........................................................ 118,786 121,015
Gain on sale of assets.............................................. (3,417) (4,253)
Amortization of deferred financing fees............................. 3,997 3,434
Accretion of debt................................................... (50) (640)
Amortization of unearned officers' and directors' compensation...... 1,440 1,043
Equity in income from unconsolidated entities....................... (7,050) (12,810)
Extraordinary write off of deferred financing fees.................. 1,270 3,865
Lease termination costs............................................. 36,304
Loss on assets held for sale........................................ 63,000
Minority interests.................................................. (1,910) 2,921
Changes in assets and liabilities:
Accounts receivable................................................. (8,956) (16,053)
Deferred expenses................................................... (9,122) (15,508)
Other assets........................................................ (1,838) (2,780)
Deferred rent....................................................... 22,268
Accrued expenses and other liabilities.............................. 17,548 23,555
----------- -----------
Net cash flow provided by operating activities............ 136,993 209,450
----------- -----------
Cash flows provided by (used in) investing activities:
Improvements and additions to hotels.......................................... (48,103) (65,861)
Proceeds from sale of interest in hotels...................................... 47,644
Operating cash received in acquisition of lessees............................. 29,731
Proceeds from sale of assets.................................................. 11,429 24,915
Cash distributions from unconsolidated entities............................... 7,024 21,047
----------- -----------
Net cash flow provided by (used in) investing activities.. 47,725 (19,899)
----------- -----------
Cash flows provided by (used in) financing activities:
Restricted cash............................................................... (318,903)
Proceeds from borrowings...................................................... 937,155 937,424
Repayment of borrowings....................................................... (631,705) (917,437)
Purchase of treasury stock.................................................... (4,046) (69,860)
Proceeds from exercise of stock option........................................ 678
Buyback of assumed stock options.............................................. (1,861)
Distributions paid to minority interest....................................... (3,963) (4,474)
Distributions paid to limited partners........................................ (14,784) (10,012)
Distributions paid to preferred shareholders.................................. (18,450) (18,542)
Distributions paid to common shareholders..................................... (87,152) (94,907)
----------- -----------
Net cash flow used in financing activities................ (141,170) (179,669)
----------- -----------
Net change in cash and cash equivalents................................................. 43,548 9,882
Cash and cash equivalents at beginning of periods....................................... 26,060 36,123
----------- -----------
Cash and cash equivalents at end of periods............................................. $ 69,608 $ 46,005
=========== ===========
Supplemental cash flow information --
Interest paid................................................................. $118,409 $107,929
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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"). On September 30, 2001, it
owned interests in 184 hotels in the United States and Canada with nearly 50,000
rooms and suites (collectively, the "Hotels") through its greater than 85%
equity interest in FelCor Lodging Limited Partnership ("FelCor LP"). FelCor,
FelCor LP, and their subsidiaries are referred to, collectively, as the
"Company". At September 30, 2001, the Company owned 100% of the interest in 151
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 entities that own
24 Hotels. Fourteen of the Company's Hotels are designated as held for sale.
On May 9, 2001, the Company entered into an Agreement and Plan of
Merger with MeriStar Hospitality Corporation ("MeriStar"). On September 21,
2001, the Company and MeriStar announced the termination of the merger. The
decision to terminate the merger resulted from the September 11 terrorist
attacks and their subsequent adverse impact on the financial markets. As a
result of the merger termination the Company recorded expenses aggregating $19.9
million in the third quarter of 2001 associated with the termination of the
merger and identified $4.1 million and $5.2 million for the three and nine
months, respectively, of non-recurring merger financing costs.
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 Six
Continents Hotels, formerly Bass Hotels and Resorts ("Six Continents").
Effective July 1, 2001, the Company acquired the remaining 88 Hotel leases held
by Six Continents. By acquiring these leases through its taxable subsidiaries,
the Company acquired the economic benefits and risks of the operations of these
Hotels and began reporting hotel revenues and expenses rather than percentage
lease revenues.
The following table provides a schedule of the Hotels by brand at
September 30, 2001:
BRAND
-----
Hilton(R) Brands:
Embassy Suites(R).................................. 59
Doubletree(R)and Doubletree Guest Suites(R)........ 14
Hampton Inn(R)..................................... 7
Hilton Suites(R)................................... 1
Homewood Suites(R)................................. 1
Six Continents Brands:
Holiday Inn(R)..................................... 44
Crowne Plaza(R)and Crowne Plaza Suites(R).......... 18
Holiday Inn Select(R).............................. 10
Holiday Inn Express(R)............................. 5
Starwood Brands:
Sheraton(R)and Sheraton Suites(R).................. 10
Westin(R).......................................... 1
Other Brands.......................................... 14
-----
Total Hotels.......................................... 184
=====
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 (14 hotels).
6
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 ORGANIZATION -- (CONTINUED)
At September 30, 2001, (i) Six Continents managed 89 of the Hotels,
(ii) Hilton managed 72 of the Hotels, (iii) Starwood Hotels & Resorts Worldwide,
Inc. ("Starwood") managed 11 of the Hotels, (iv) Interstate Hotels Corporation
("IHC") managed eight of the Hotels and (v) three independent management
companies managed the four remaining Hotels.
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 and nine months ended September
30, 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 and nine months ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 2001.
2. ACQUISITION OF HOTEL LEASES
Effective January 1, 2001, the Company acquired all the equity
interests in DJONT, which leased 85 of the Hotels. In consideration for the
acquisition, FelCor LP 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.
Effective January 1, 2001, the Company completed the acquisition of 12
of the leases that were held by Six Continents. In consideration for the
acquisition and termination of these leases, together with the related
management agreements, the Company issued to Six Continents 413,585 shares of
FelCor common stock valued at approximately $10 million. Of this $10 million in
consideration, approximately $1.7 million was expensed as lease termination
costs in the first quarter of 2001 and $8.3 million was expensed at June 30,
2001, in connection with the designation of certain of these Hotels as held for
sale. Of the 12 hotels, three have been sold, eight have been contributed to a
joint venture with IHC, and one will be retained.
7
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITION OF HOTEL LEASES -- (CONTINUED)
The Company purchased certain assets and assumed certain liabilities in
connection with the acquisition of the leases on these 96 Hotels. The fair
values of the acquired assets and liabilities at January 1, 2001, are as follows
(in thousands):
Cash and cash equivalents $ 25,300
Accounts receivable 30,214
Other assets...... 17,318
--------
Total assets acquired 72,832
--------
Accounts payable 18,656
Due to FelCor Lodging Trust 30,687
Accrued expenses and other liabilities 40,072
-------
Total liabilities assumed 89,415
-------
Liabilities assumed in excess of assets acquired 16,583
Value of common stock and FelCor LP units issued 19,721
-------
Lease termination costs $ 36,304
=======
Effective July 1, 2001, the Company acquired leases for 88 Hotels from
Six Continents. In consideration for the acquisition, FelCor issued to Six
Continents 100 shares of its common stock and the Company entered into long-term
management agreements with Six Continents with regard to such Hotels. The
management fees payable to Six Continents include compensation to Six Continents
for both management services and the acquisition of the 88 leases and, as such,
are higher than those paid by the Company to other managers for comparable
services. Management fees under these management contracts will be expensed as
earned.
The Company purchased certain assets and acquired certain liabilities
with the acquisition of the 88 hotel leases. The fair value of the assets and
liabilities assumed at July 1, 2001 are as follows (in thousands):
Cash and cash equivalents.............................. $ 4,431
Accounts receivable.................................... 30,964
Other assets........................................... 6,941
-------
Total assets acquired.............................. $42,336
=======
Accounts payable....................................... $ 7,660
Accrued expenses and liabilities....................... 34,676
-------
Total liabilities assumed.......................... $42,336
=======
8
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. 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 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, having a notional value of $250
million, as an asset of $248,000 with a corresponding credit to accumulated
other comprehensive income reported in shareholders' equity.
As of September 30, 2001, the Company held one interest rate swap
agreement with a notional value of $50 million. The fixed interest rate paid on
this swap was 5.56% and the floating swap rate received was 3.58% with a
maturity of July 2003. The fair value of the Company's interest rate swap
agreement at September 30, 2001 was a liability of $2.2 million, which was
recorded in accrued expenses and accumulated other comprehensive income reported
in shareholders' equity. Assuming no changes in the index rates over the next
twelve months, the swap currently held by the Company would result in additional
interest expense of approximately $990,000.
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. It is the objective of FelCor to use interest rate hedges to manage
its fixed and floating interest rate position and not to be engaged in the
speculation of interest rates. FelCor manages interest rate risk based on the
varying circumstances of anticipated borrowings, and existing floating and fixed
rate debt, including the Company's revolving line of credit. FelCor will
generally seek to pursue interest rate risk mitigation strategies that will
result in the least amount of reported earnings volatility under generally
accepted accounting principles, while still meeting strategic economic
objectives and maintaining adequate liquidity and flexibility. Instruments that
meet these hedging criteria are formally designated as hedges at the inception
of the derivative contract
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.
4. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
approved SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 142 will be effective for fiscal years beginning after December 15,
2001 and will require (1) intangible assets (as defined in SFAS No. 141) to be
reclassified into goodwill, (2) goodwill amortization to cease, and (3) the
testing of goodwill for impairment at transition and at interim periods (if an
event or circumstance would result in an impairment). The Company does not
believe that SFAS No. 142 will have a material impact on the Company's results
of operations and financial position.
9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS --
(CONTINUED)
On August 15, 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of the
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 will be effective for financial statements
issued for fiscal years beginning after June 15, 2002. An entity is required to
recognize the cumulative effect of initially applying SFAS No. 143 as a change
in accounting principal.
On October 3, 2001 the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121 by removing goodwill from its scope, by defining a probability-weighted cash
flow estimation approach and establishing a "primary-asset" approach to
determine the cash flow estimation period for a group of assets. It also
replaces the provisions of APB Opinion No. 30, "Reporting the Effects of
Disposal of a Segment of a Business" for the disposal of segments of a business.
SFAS No. 144 will be effective for fiscal years beginning after December 15,
2001 and is to be applied prospectively.
The Company has not determined what impact, if any, SFAS No. 143 or 144
will have on the Company's results of operations or financial position.
5. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50% interests in joint venture entities that owned
and operated 24 Hotels at September 30, 2001, and 16 Hotels at September 30,
2000. The Company also owned a 50% interest in entities that owned an
undeveloped parcel of land, provided condominium management services and
developed and sold condominiums in Myrtle Beach, South Carolina. 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):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
BALANCE SHEET INFORMATION:
Investment in hotels................................... $365,430 $294,941
Non-recourse mortgage debt............................. $265,641 $225,302
Equity................................................. $115,846 $ 82,986
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------------
2001 2000 2001 2000
--------- ----------- ---------- ---------
STATEMENTS OF OPERATIONS INFORMATION:
Total revenues......................................... $ 16,126 $ 24,030 $ 55,823 $ 63,204
Net income............................................. $ 2,344 $ 11,881 $ 16,468 $ 25,530
Net income attributable to the Company................. $ 1,257 $ 7,697 $ 8,656 $ 14,416
Amortization of cost in excess of book value........... (535) (535) (1,606) (1,606)
---------- ----------- ---------- ---------
Equity in income from unconsolidated entities.......... $ 722 $ 7,162 $ 7,050 $ 12,810
========== =========== ========== =========
10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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. In
connection with the decision to sell these hotels, the Company recorded, at June
30, 2000, an expense of $63 million representing the difference between the net
book value of these hotels and their estimated net sale proceeds. No
depreciation expense has been recorded on these hotels since June 30, 2000.
In March 2001, the Company contributed eight of the hotels held for
sale to entities 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, and received net cash
proceeds of $52 million. The Company retained an $8 million membership interest
and a $17 million preferred interest.
In June 2001, the Company sold the 140-room Hampton Inn located in
Marietta, Georgia, for a net sales price of $7.1 million. In September 2001, the
Company sold the 119-room Hampton Inn located in Jackson, Mississippi for a net
sales price of $4 million. The Company is actively marketing the remaining 14
hotels held for sale. Revenues related to the assets held for sale, less costs
associated with those assets, were included in the Company's results of
operations for the nine months ended September 30, 2001 and 2000, and
represented income of $8.6 million and $8.9 million (net of $3.4 million in
depreciation expense for 2000), respectively.
7. DEBT
Debt at September 30, 2001, and December 31, 2000, consisted of the
following (in thousands):
SEPTEMBER DECEMBER 31,
COLLATERAL INTEREST RATE MATURITY DATE 2001 2000
---------- ------------- ------------- --------- ------------
FLOATING RATE DEBT:
- -------------------
Line of credit None LIBOR + 200bp October 2004 $ 112,000
Mortgage debt 3 hotels LIBOR + 200bp February 2003 61,909
Promissory note None LIBOR + 200bp June 2016 $ 650 650
------------ -----------
Total floating rate debt 650 174,559
------------ -----------
FIXED RATE DEBT:
- -------------------
Line of credit - swapped None 7.56% October 2004 49,900 250,000
Publicly-traded term notes None 7.38% October 2004 174,601 174,505
Publicly-traded term notes None 7.63% October 2007 124,394 124,320
Publicly-traded term notes None 9.50% September 2008 101,640
Publicly-traded term notes None 9.50% September 2008 395,244 394,731
Publicly-traded term notes None 8.50% June 2011 297,593
Mortgage debt 15 hotels 7.24% November 2007 138,218 140,148
Mortgage debt 7 hotels 7.54% April 2009 96,426 97,604
Mortgage debt 6 hotels 7.55% June 2009 72,512 73,389
Mortgage debt 7 hotels 8.73% May 2010 142,713 144,032
Mortgage debt 8 hotels 8.70% May 2010 183,324 184,829
Other 13 hotels 6.96% - 7.23% 2000 - 2005 66,426 80,124
------------- -----------
Total fixed rate debt 1,842,991 1,663,682
------------ -----------
Total debt $1,843,641 $1,838,241
= ========== ===========
Senior notes held in escrow
and redeemed October 2001 None 8.50% June 2011 $ 300,000
===========
One month and three month LIBOR at September 30, 2001, was 2.637% and 2.597%,
respectively.
11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT -- (CONTINUED)
At September 30, 2001, the Company's unsecured line of credit was
matched with an interest rate swap agreement, which effectively converted the
floating rate on the line of credit to a fixed rate. The existing interest swap
matures July 2003. 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.
Interest expense is reported net of interest income of $2.3 million and
$1.3 million for the nine months ended September 30, 2001 and 2000,
respectively, and capitalized interest of $657,000 and $758,000, respectively.
Non-recurring interest expense associated with the merger was $4.1
million and $5.2 million for the three and nine months ended September 30, 2001,
respectively, this is presented net of $2.4 million and $3.2 million of interest
income for the three and nine months ended September 30, 2000, 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 91/8%. The
proceeds were used initially to pay down the Company's line of credit. On
September 13, 2001, the Company announced the commencement of offers to exchange
the $100 million in privately placed senior notes for notes with identical terms
that are registered under the Securities Act of 1933. This exchange offer was
completed in October 2001.
On June 4, 2001, the Company completed the private placement of $600
million in 8 1/2% senior unsecured notes that mature in June 2011. Approximately
$315 million of the proceeds were placed in escrow pending the closing or
termination of the merger with MeriStar. The remaining proceeds were used to pay
down the line of credit and other floating rate debt. In connection with the pay
down of the line of credit, the Company terminated interest rate swaps with a
notional value of $200 million, resulting in a one-time $4.8 million swap
termination cost, which was expensed in the second quarter. An extraordinary
charge of $225,000 was also recorded in the second quarter to write-off
unamortized deferred financing costs associated with the prepayment of this
floating rate debt. On September 13, 2001, the Company announced the
commencement of offers to exchange the $600 million in privately placed senior
notes for notes with identical terms that are registered under the Securities
Act of 1933. This exchange offer was completed in October 2001. As the result of
the termination of the merger with MeriStar, in accordance with the requirements
of the indenture governing these notes, the Company redeemed $300 million in
principal amount of these notes in October, 2001. The redemption price was 101%
of the principal amount redeemed plus accrued interest. The redemption price was
paid out of the $315 million held in escrow.
On July 26, 2001, the Company renewed and extended its $615 million
unsecured line of credit. The line of credit has a term of up to five years,
including extensions, a floating interest rate, and a tiered interest rate
spread over LIBOR based on the Company's leverage ratio. An extraordinary charge
of $1 million was recorded to write-off unamortized deferred financing costs
associated with the renewal of the Company's line of credit.
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
September 30, 2001, the Company was in compliance with all such covenants.
12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEBT -- (CONTINUED)
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 and contains
provisions allowing for the substitution of collateral upon satisfaction of
certain conditions. Most of the mortgage debt is prepayable; subject to various
prepayment penalties, yield maintenance, or defeasance obligations.
On November 8, 2001, the Company and its lenders executed an amendment
to its unsecured line of credit to obtain relaxed financial covenants generally
through September 2002. The relaxed financial covenants were necessary as a
result of the decline in operating results subsequent to the September 11
terrorist attacks and softening economy.
8. DEFERRED RENT
The Company deferred lease income, under Staff Accounting Bulletin
No. 101 ("SAB 101"), of $3.7 million and $22.3 million for the three and nine
months ended September 30, 2000, respectively. For the three and nine months
ended September 30, 2001, SAB 101 had no financial statement impact on the
Company.
9. 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. Approximately 179,000 of FelCor's common shares were purchased in
the open market from January 1, 2001 through March 27, 2001, for approximately
$4.0 million. FelCor has not repurchased any additional shares in the open
market since March 27, 2001. Since the inception of the stock repurchase
program, FelCor has repurchased approximately 10.5 million shares of its common
stock for approximately $189.1 million. The Company has no current plans to
repurchase additional shares of common stock in the foreseeable future.
10. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" establishes standards
for reporting and displaying comprehensive income and its components. The
Company's total comprehensive loss for the three and nine months ended September
30, 2001 is calculated as follows (in thousands):
SEPTEMBER 30, 2001
-------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ---------------------
Net loss........................................................ $(25,762) $(10,009)
Unrealized loss on interest rate swap agreements................ (1,272) (2,171)
Foreign currency translation adjustment......................... (82) (82)
--------- ---------
Total comprehensive loss........................................ $(27,116) $(12,262)
========= =========
11. INCOME TAXES
Under the RMA, which 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
13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES -- (CONTINUED)
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. At September 30, 2001, the Company had a deferred tax asset of
approximately $3.2 million, prior to any valuation allowance, relating to losses
of the taxable REIT subsidiaries during the nine months ended September 30,
2001. Management has provided a 100% valuation allowance against this asset due
to the uncertainty of realization and, accordingly, no provision or benefit for
income taxes is reflected in the accompanying Consolidated Statements of
Operations.
12. GAIN ON SALE OF ASSETS
In the second quarter of 2001, the Company received $3.9 million from
the condemnation of three parcels of land and recorded a gain of $3.0 million.
In the third quarter of 2001, the Company sold a parcel of land adjacent to one
of its Hotels in Atlanta and recorded a gain of $462,000.
13. .EARNINGS PER SHARE
.The following table sets forth the computation of basic and diluted
earnings per share for the three and nine months ended September 30, 2001 and
2000 (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- -------- ---------- ---------
Numerator:
Income (loss) before extraordinary items...................... $(24,717) $34,231 $ (8,739) $24,258
Less: Preferred dividends.................................. (6,150) (6,155) (18,450) (18,513)
---------- --------- ---------- ---------
Income (loss) available to common shareholders................ (30,867) 28,076 (27,189) 5,745
Extraordinary charge....................................... (1,045) (3,865) (1,270) (3,865)
---------- --------- ---------- ---------
Net income (loss) applicable to common
shareholders............................................... $(31,912) $24,211 $(28,459) $ 1,880
========== ========= ========== =========
Denominator:
Denominator for basic earnings per share -
weighted average shares..................................... 52,634 54,336 52,623 56,059
Effect of dilutive securities:
Stock options................................................. 1 12 21
Restricted shares............................................. 347 231 347 231
---------- --------- ---------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions................................................. 52,982 54,579 52,991 56,290
========== ========= ========== =========
Earnings (loss) per share data:
Basic
Net income (loss) before extraordinary item................... $ (0.58) $ 0.52 $ (0.52) $ 0.10
Extraordinary item............................................ (0.02) (0.07) (0.02) (0.07)
---------- --------- ---------- ---------
Net income (loss)............................................. $ (0.60) $ 0.45 $ (0.54) $ 0.03
========== ========= ========== =========
Diluted
Net income (loss) before extraordinary item................... $ (0.58) $ 0.51 $ (0.52) $ 0.10
Extraordinary item............................................ (0.02) (0.07) (0.02) (0.07)
---------- --------- ---------- ---------
Net income (loss) ............................................ $ (0.60) $ 0.44 $ (0.54) $ 0.03
========== ========= ========== =========
The Series A preferred shares and the majority of stock options granted
are anti-dilutive and are not included in the calculation of diluted earnings
per share.
14
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the nine months ended
September 30, 2001 and 2000 is based in part upon the Consolidated Statements of
Operations of the Company, DJONT and Six Continents for the nine months ended
September 30, 2001 and 2000.
The pro forma information for the nine months ended September 30, 2001
and 2000 assumes that all the following occurred on January 1 of the fiscal
period presented:
o The Company's acquisition of DJONT, effective January 1, 2001, for
416,667 units of limited partnership interest in FelCor LP valued at
approximately $10 million;
o The Company's acquisition of 12 hotel leases from Six Continents on
January 1, 2001, for 413,585 shares of FelCor common stock valued at
approximately $10 million;
o The Company's acquisition of the remaining 88 leases held by Six
Continents, on July 1, 2001;
In the opinion of the Company's management, all material adjustments
necessary to reflect the effects of the preceding transactions have been made.
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of what the actual results of operations would
have been had and the transactions described above occurred on the indicated
dates, nor do they purport to represent the Company's results of operations for
future periods.
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
2001 2000
------------- -------------
Total revenue.............................................................. $ 1,140,063 $ 1,267,248
============= =============
Net income (loss) applicable to common shareholders........................ $ (1,100) $ 17,724
============= =============
Basic:
Net income (loss) applicable to common shareholders..................... $ (0.02) $ 0.31
============= =============
Weighted average common shares outstanding.............................. 52,623 56,473
============= =============
Diluted:
Net income (loss) applicable to common shareholders..................... $ $
(0.02) 0.31
============= =============
Weighted average common shares outstanding.............................. 52,991 56,703
============= =============
15. SUBSEQUENT EVENTS
On November 8, 2001, the Company amended its line of credit. Prior to
the amendment, the Company met all its existing covenants under its unsecured
line of credit. However, it was necessary to amend the line of credit in
anticipation of the continued negative RevPAR environment. The amendment allows
for the relaxation of certain financial covenants through September 30, 2002,
including the unsecured interest coverage, fixed charge coverage, and total
leverage tests. Pricing remains on the same floating rate basis with a tiered
spread based on the Company's leverage ratio, but with added tiers to reflect
the higher permitted leverage. At the maximum permitted leverage under the line,
the Company would pay a spread of 325 basis points LIBOR (over 90-day was 2.01%
as of the close of business, November 13, 2001). Commitments remain at $615
million, with $110 million outstanding under the facility, and approximately $85
million in cash and cash equivalents as of November 13, 2001.
Management currently anticipates that the Company will meet its
financial covenants under the RevPAR guidance provided by the Company at its
third quarter earnings conference call on November 1, 2001. The guidance that
was provided for RevPAR in the fourth quarter 2001 was a decline of 20% to 25%,
while in 2002 RevPAR was expected to be within a range from flat to a decline of
5%. The Company anticipates a gradual sequential recovery in 2002, by quarter,
with easier comparable periods in the second half of the year. The Company
currently anticipates a first half RevPAR decline of approximately 10% with the
first quarter being more challenging than the second quarter of 2002.
On November 13, 2001, the Company's line of credit represents
approximately 5% of its debt, with $110 million outstanding. The Company also
maintains flexibility in working with its lenders, with its $85 million of cash
and equivalents on hand, $2.5 billion of unencumbered assets, and a breakeven
occupancy, after debt service and preferred equity distributions, of
approximately 50%. The $505 million of capacity under the line of credit is
expected to be available to take advantage of opportunities that may present
themselves as the industry begins to recover in late 2002 and 2003.
The Company does not expect that the amendment to its line of credit
will have an adverse impact on its business plan, which emphasizes capital
preservation and maintenance of appropriate leverage in this challenging
operating environment.
15
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 Notes 1 and 2 of
Notes to Consolidated Financial Statements of FelCor Lodging Trust Incorporated
appearing elsewhere herein.
During the first quarter of 2001, the Company's taxable REIT
subsidiaries acquired the leases covering 96 of its Hotels and acquired the
remaining 88 Hotel leases on July 1, 2001. As the result of the acquisition of
these leases, the Company began reporting hotel revenues and expenses, whereas
prior to the acquisition of the leases percentage lease revenue was reported.
FINANCIAL COMPARISON
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------- ----------------------------------------
2001 2000 % CHANGE 2001 2000 % CHANGE
--------- ------- ---------- ---------- --------- -----------
(IN MILLIONS, (IN MILLIONS)
EXCEPT REVPAR) EXCEPT REVPAR)
Revenue Per Available Room
("RevPAR")...................... $ 62.03 $ 75.14 (17.4) $ 69.62 $ 75.38 (7.8)
Funds From Operations ("FFO") ...... $ 33.1 $ 76.8 (57.0) $ 169.8 $ 226.2 (24.9)
Earnings Before Interest, Taxes,
Depreciation and Amortization
("EBITDA") ...................... $ 80.1 $ 123.0 (34.9) $ 308.8 $ 361.7 (14.6)
Net income (loss) .................. $ (25.8)(1) $ 30.4 (184.8)(1) $ (10.0)(2) $ 20.4 (149.1)(2)
(1) The net loss for the three months ended September 30, 2001 includes
$25.5 million of non-recurring expenses made up of merger termination
costs of $19.9 million, merger related financing costs of $4.1 million,
lease termination costs of approximately $378,000 and $1.0 million of
extraordinary loss from the write-off of deferred loan costs.
(2) The net loss for the nine months ended September 30, 2001 includes $63
million of non-recurring expenses made up of merger termination costs
of $19.9 million, merger related financing costs of $5.2 million, lease
termination costs of approximately $36.6 million and $1.3 million of
extraordinary loss from the write-off of deferred loan costs.
MERGER TERMINATION
On May 9, 2001, the Company entered into an Agreement and Plan of
Merger with MeriStar and MeriStar LP. On September 21, 2001, the Company and
MeriStar jointly announced the termination of the merger. The decision to
terminate the merger resulted from the September 11 terrorist attacks and their
subsequent adverse impact on the financial markets. As a result of the merger
termination, the Company recorded expenses aggregating $19.9 million in the
third quarter of 2001 associated with the termination of the merger and
identified non-recurring merger financing costs of $4.1 million for the quarter
ended September 30, 2001 and $5.2 million for the nine months ended September
30, 2001.
The registration statement on Form S-4 that the Company filed with the
SEC in connection with the merger has been withdrawn.
16
ACQUISITION OF HOTEL LEASES
The Company completed the acquisition of DJONT (which leased 85 of the
Company's Hotels) effective January 1, 2001. In consideration for the
acquisition, FelCor LP 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.
On January 1, 2001, the Company acquired the leases on 12 of the
Company's Hotels, together with the associated management contracts, 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, three have been sold, eight have been contributed to
a joint venture with IHC and one will be retained.
Effective July 1, 2001, the Company acquired the remaining 88 Hotel
leases held by Six Continents in exchange for long-term management agreements,.
In exchange for the assignment of the leases to a wholly-owned TRS of the
Company, FelCor issued 100 shares of its common stock and entered into long-term
management agreements with Six Continents covering the 88 Hotels. The management
fees payable to Six Continents under the new management agreements on the 88
Hotels were structured so that the historical cash flows for the year ended
December 31, 2000, for both FelCor and Six Continents, would have been
approximately the same had the management agreements replaced the leases on
January 1, 2000. These management fees, which are higher than those paid by the
Company to other managers for comparable services, include compensation to Six
Continents for both management services and the acquisition of the 88 leases.
Beginning with the third quarter of 2001, the Company's financial statements
reflected the hotel revenues and expenses of these additional 88 Hotels.
Unlike the leases, where the rent payable to the Company would vary
only as a result of changes in hotel revenues, the Company's future cash flow
and net income from the Hotels also will vary as a result of changes in the
operating margins of the Hotels. FelCor entered into the transactions to acquire
the leases based upon its belief that, in the long term, lodging demand will
exceed new supply and that operational efficiencies will increase industry-wide
for a variety of reasons, including the impact of new technologies allowing
lower-cost delivery of services and providing new revenue sources that are not
labor-intensive, such as in-room entertainment and direct and in-room marketing
to guests.
The recent economic slowdown combined with the sharp reduction in
travel following the terrorist attacks of September 11, have resulted in
declines in RevPAR and in an erosion in operating margins during the three and
nine months ended September 30, 2001, as compared to the same periods of 2000.
So long as the operating margins for the Hotels remain below the levels
experienced during 2000, the Company expects the hotel operating results to be
generally less favorable to it than the leases would have been.
HIGHLIGHTS:
FIRST QUARTER
o The Company 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 $52
million. In addition to its 50% equity interest in the joint
venture, the Company retains a $17 million preferred interest.
o Project capital expenditures for improvements totaled $9.7
million during the quarter. An additional $6.3 million was spent
on maintenance capital expenditures.
SECOND QUARTER
o In June, the Company sold the 140-room Hampton Inn(R)hotel
located in Marietta, Georgia, for net sales proceeds of $7.1
million. This hotel had been previously designated as held for
sale and no gain or loss was recorded on this sale.
o Project capital expenditures for improvements totaled $8.3
million during the quarter. An additional $7.8 million was spent
on maintenance capital expenditures.
17
THIRD QUARTER
o In September, the Company sold the 119-room Hampton Inn located
in Jackson, Mississippi, for net sale proceeds of $4.0 million.
This hotel had been previously designated as held for sale and no
gain or loss was recorded on this sale.
o Project capital improvements totaled $8.9 million during the
quarter. An additional $8.8 million was spent on maintenance
capital expenditures.
CAPITALIZATION:
FIRST QUARTER
o On January 11, 2001, the Company completed the private placement
of $100 million of senior unsecured notes that mature in
September, 2008 and bear interest at an effective rate of 91/8 %.
The proceeds were used initially to pay down the Company's line
of credit.
o FelCor repurchased approximately 179,000 shares of its common
stock for approximately $4.0 million.
o FelCor 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.
SECOND QUARTER
o On June 4, 2001, the Company issued $600 million of 10-year, 8
1/2% senior unsecured notes. Approximately $315 million of the
proceeds were placed in escrow pending the completion or
termination of the merger with MeriStar. Non-recurring merger
related financing costs related to the escrowed funds, reduced
earnings by $1.1 million. The remaining proceeds were used
initially to pay down the Company's line of credit and other
floating rate debt. In connection with the prepayment of floating
rate debt, the Company terminated $200 million of interest rate
swaps resulting in a one-time $4.8 million swap termination cost.
o FelCor declared second 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.
THIRD QUARTER
o In July 2001, the Company renewed its line of credit in the
amount of $615 million and extended its maturity to July 2006,
including extension options.
o On September 13, 2001, the Company announced exchange offers for
its $100 million 9 1/2% senior notes due 2008 and its $600 million
8 1/2% senior notes due 2011 under which it offered to exchange
the privately placed senior notes for notes with identical terms
that are registered under the Securities Act of 1933. These
offerings were completed in October 2001.
o On September 21, 2001, the Company and MeriStar jointly announced
an agreement to terminate their merger. Merger termination costs
of $19.9 million were recorded in the quarter. As a result of the
merger termination, in accordance with the requirements of the
indenture governing the Company's outstanding $600 million in 8
1/2% Senior Notes Due 2011, the Company redeemed $300 million in
principal amount of these Notes. The redemption price was at 101%
of the principal amount being redeemed plus accrued interest and
was paid out of the $315 million previously escrowed.
Non-recurring merger related financing costs, relating to the
escrowed funds, reduced earnings by $4.1 million.
o FelCor declared third 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.
18
RESULTS OF OPERATIONS
The Company
Three Months Ended September 30, 2001 and 2000
Through December 31, 2000, the Company leased 184 Hotels to either
DJONT or Six Continents and reported lease revenue from percentage lease
agreements. Effective January 1, 2001, the Company, through its TRSs, acquired
96 of these Hotel leases and, effective July 1, 2001, acquired the leases on the
remaining 88 Hotels. As the result of acquiring these leases, the Company
reported hotel operating revenues and expenses with regard to the Hotels for the
three months ended September 30, 2001. Accordingly, the operating results for
this period are not directly comparable to the same period in 2000, where the
Company reported only percentage lease revenue from the Hotels.
Total revenue for the quarter ended September 30, 2001 increased $204.9
million over the same period in 2000. The increase is principally associated
with reporting hotel operating revenues for the Hotels, compared to the
percentage lease revenue reported by the Company in the prior year.
On a pro forma basis, assuming that the leases had been acquired
January 1, 2000, total revenue would have decreased $81.6 million in the third
quarter of 2001, compared to the same period in 2000. The decrease in pro forma
total revenue is principally attributed to a 17.4% decrease in RevPAR. The
recent economic slowdown combined with the sharp reduction in travel following
the terrorist attacks of September 11, were the principal reasons for this
decrease in RevPAR.
Total operating expenses increased by $258.3 million for the three
months ended September 30, 2001 over the same three month period in 2000. This
increase primarily resulted from the inclusion of hotel operating expenses,
management fees and other property related costs that were not included in the
same period of 2000, prior to the Company's acquisition of the Hotel leases.
Also included in total operating expenses are merger termination costs, lease
termination costs, depreciation, and taxes, insurance and lease expenses. The
Company wrote off approximately $19.9 million of costs associated with the
termination of the MeriStar merger and approximately $378,000 in expenses
related to the acquisition of its leases. Taxes, insurance and lease expense
increased by $7.5 million in the three months ended September 30, 2001, compared
to the prior year period. The majority of this increase consists of percentage
lease expense paid to unconsolidated joint ventures from which the hotels are
leased by DJONT.
Net income decreased $56.1 million for the three months ended September
30, 2001, compared to the same period in 2000. Major items affecting the change
in net income are the changes in revenues and operating expenses discussed
above, non-recurring merger financing costs, equity in income of unconsolidated
entities, gain on sale of assets, extraordinary items and minority interest.
In the quarter ended September 30, 2001, the Company recognized $4.1
million of non-recurring merger financing costs related to the $300 million in
senior debt which was repaid in October 2001 from the $315 million in previously
escrowed funds.
Equity in income of unconsolidated entities decreased by $6.4 million
compared to the same quarterly period in 2000. The principal reasons for the
decrease in 2001 were (i) a one time gain of $3.7 million was recorded in 2000
from the development and sale of condominiums by an entity in which the Company
owns a 50% equity interest and (ii) the decline in percentage lease revenue of
unconsolidated entities related to a 29.6% decline in RevPAR for these hotels.
Gain on sale of assets decreased by $2.9 million compared to the third quarter
of 2000 as the result of the one time sale of assets in 2000. Minority interest
in FelCor LP improved by $8.0 million, principally as a result of the operating
loss in the current quarter. Extraordinary charge from write off of deferred
loan costs decreased by $2.8 million. The decrease resulted from approximately
$3.9 million written off in 2000 related to deferred loan costs associated with
debt which was retired prior to maturity compared to only $1.0 million being
written off in 2001 associated with the renewal and extension of the Company's
unsecured line of credit.
19
Nine Months Ended September 30, 2001 and 2000
Through December 31, 2000, the Company leased 184 Hotels to either
DJONT or Six Continents and reported lease revenue from percentage lease
agreements. Effective January 1, 2001, the Company, through its TRSs, acquired
96 of these Hotels and, effective July 1, 2001, acquired the leases on the
remaining 88 Hotels. As the result of acquiring these leases, the Company
reported hotel operating revenue and expenses with regard to the Hotels
beginning in 2001. Accordingly, the operating results for this period are not
directly comparable to the same period in 2000, where the Company reported only
percentage lease revenue from the Hotels.
Total revenue for the nine months ended September 30, 2001 increased
$507.1 million over the same period in 2000. The increase is principally
associated with hotel operating revenues for the Hotels compared to the
percentage lease revenue reported by the Company in the prior year.
On a pro forma basis, assuming that the leases had been acquired
January 1, 2000, total revenue would have decreased $127.2 million for the nine
months ended September 30, 2001, compared to the same nine month period in 2000.
The decrease in total revenue, on a pro forma basis, is principally attributed
to a decrease in RevPAR of 7.8%. The recent economic slowdown combined with the
sharp reduction in travel following the terrorist attacks of September 11, were
the principal reasons for this decrease in RevPAR.
Total operating expenses increased by $589.4 million for the nine
months ended September 30, 2001 over the same nine month period in 2000. This
increase primarily resulted from the inclusion of hotel operating expenses,
management fees and other property related costs that were not included in the
same period of 2000, prior to the Company's acquisition of the Hotel leases.
Also included in total operating expenses are merger termination costs,
depreciation expense and taxes, insurance and lease expenses. The Company wrote
off approximately $19.9 million of costs associated with the termination of the
MeriStar merger and approximately $36.6 million in expenses related to the
acquisition of its leases. Taxes, insurance and lease expense increased by $36.4
million in the nine months ended September 30, 2001, compared to the prior year
period. The majority of this increase consists of percentage lease expense paid
to unconsolidated joint ventures from which the hotels are leased by DJONT.
Net income decreased $30.4 million for the nine months ended September
30, 2001 compared to the same period in 2000. Major items affecting the change
in net income are the changes in revenues and operating expenses discussed
above, non-recurring merger financing costs, equity in income of unconsolidated
entities, gain on sale of assets, interest expense, extraordinary items and
minority interest.
Interest expense had a net increase of $1.9 million, principally
related to the issuance of $600 million in senior debt in June 2001. In the nine
months ended September 30, 2001 the Company recognized $5.2 million of
non-recurring merger financing costs related to the $300 million senior debt
which was repaid in October from the $315 million in previously escrowed funds.
Equity in income of unconsolidated entities decreased by $5.8 million
compared to the same period in 2000. The principal reasons for the decrease in
2001 were (i) a one time gain of $3.7 million was recorded in 2000 from the
development and sale of condominiums by an entity in which the Company owns a
50% equity interest and (ii) the decline in percentage lease revenue of
unconsolidated entities related to the 8.2% decline in RevPAR for these hotels.
Gain on sale of assets decreased by $836,000 compared to the same nine months of
2000as the result of the one time sale of assets in 2000, offset in part by
condemnation proceeds received in 2001. Minority interest in FelCor LP improved
by $5.1 million, principally as a result of the operating loss in the current
nine month period. Extraordinary charge from write off of deferred loan costs
decreased by $2.6 million. The decrease resulted from approximately $3.9 million
written off in 2000 related to deferred loan costs associated with debt which
was retired prior to maturity compared to $1.3 million written off in 2001
associated with the renewal and extension of the Company's unsecured line of
credit.
20
Funds From Operations and EBITDA
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 items 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 lease
termination costs, merger termination costs, non-recurring merger financing
costs and interest rate swap termination expense 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 lease
termination costs, merger termination costs, non-recurring merger financing
costs and interest rate swap termination expense. 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.
The following table details the computation of FFO (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- ----------
FUNDS FROM OPERATIONS (FFO)(1):
Net income (loss).......................................... $(25,762) $30,366 $(10,009) $ 20,393
Deferred rent......................................... 3,664 22,268
Gain on sale of hotel................................. (2,460) (2,460)
Extraordinary charge.................................. 1,045 3,865 1,270 3,865
Loss on assets held for sale........................ 63,000
Swap termination expense.............................. 4,824
Lease termination costs............................... 378 36,604
Merger costs:
Termination costs................................ 19,919 19,919
Non-recurring financing costs.................... 4,126 5,212
Series B preferred dividends.......................... (3,235) (3,235) (9,703) (9,703)
Depreciation.......................................... 39,273 39,535 118,786 121,015
Depreciation from unconsolidated entities............. 2,755 2,493 7,777 7,629
Minority interest in FelCor LP........................ (5,430) 2,620 (4,842) 221
----------- ---------- ---------- ----------
FFO........................................................ $33,069 $76,848 $169,838 $226,228
=========== ========== ========== ==========
Weighted average common shares and units
outstanding (2) ................................... 66,632 66,851 66,641 67,601
=========== ========== =========== ==========
21
The following table details the computation of EBITDA (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- ----------
EBITDA(1):
Funds from Operations.......................................... $33,069 $76,848 $169,838 $226,228
Interest expense.......................................... 40,695 40,168 120,591 117,812
Interest expense of unconsolidated entities............... 2,523 2,162 7,265 6,949
Amortization expense...................................... 555 569 1,439 1,043
Series B preferred dividends.............................. 3,235 3,235 9,703 9,703
----------- ---------- ----------- ----------
EBITDA......................................................... $80,077 $122,982 $308,836 $361,735
=========== ========== =========== ==========
(1) FFO and EBITDA are adjusted for non-recurring items.
(2) 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.
22
Hotel Operating Statistics
The following table sets forth historical occupied rooms ("Occupancy"),
average daily rate ("ADR") and RevPAR at September 30, 2001 and 2000, and the
percentage changes therein between the periods presented for the Hotels in which
the Company had an ownership interest at September 30, 2001:
OCCUPANCY (%)
--------------------------------------------------------------------
THIRD QUARTER YEAR TO DATE
--------------------------------- ---------------------------------
% %
2001 2000 VARIANCE 2001 2000 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 65.6 75.8 (13.5) 69.3 76.0 (8.8)
Holiday-branded hotels 65.4 72.7 (10.1) 67.9 71.1 (4.6)
Crowne Plaza hotels 57.7 72.8 (20.8) 62.7 72.6 (13.6)
Doubletree-branded hotels 60.2 70.0 (14.0) 67.6 71.0 (4.7)
Sheraton-branded hotels 59.5 71.3 (16.5) 65.7 73.0 (10.0)
Other hotels 57.6 65.0 (11.3) 61.6 65.2 (5.6)
Total hotels 63.0 72.7 (13.2) 66.9 72.3 (7.5)
ADR (DOLLARS)
--------------------------------------------------------------------
THIRD QUARTER YEAR TO DATE
--------------------------------- ---------------------------------
% %
2001 2000 VARIANCE 2001 2000 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 122.69 126.84 (3.3) 130.64 127.61 2.4
Holiday-branded hotels 82.92 87.00 (4.7) 84.78 86.35 (1.8)
Crowne Plaza hotels 98.11 105.07 (6.6) 103.84 104.89 (1.0)
Doubletree-branded hotels 97.17 101.60 (4.4) 105.95 104.79 1.1
Sheraton-branded hotels 101.75 108.99 (6.6) 110.77 111.91 (1.0)
Other hotels 73.99 78.41 (5.6) 79.40 81.84 (3.0)
Total hotels 98.41 103.42 (4.8) 103.94 104.25 (0.3)
REVPAR (DOLLARS)
--------------------------------------------------------------------
THIRD QUARTER YEAR TO DATE
--------------------------------- ---------------------------------
% %
2001 2000 VARIANCE 2001 2000 VARIANCE
---- ---- -------- ---- ---- --------
Embassy Suites hotels 80.44 96.15 (16.3) 90.53 96.93 (6.6)
Holiday-branded hotels 54.22 63.29 (14.3) 57.54 61.41 (6.3)
Crowne Plaza hotels 56.59 76.48 (26.0) 65.15 76.18 (14.5)
Doubletree-branded hotels 58.48 71.10 (17.8) 71.67 74.35 (3.6)
Sheraton-branded hotels 60.55 77.70 (22.1) 72.76 81.69 (10.9)
Other hotels 42.61 50.93 (16.3) 48.89 53.37 (8.4)
Total hotels 62.03 75.14 (17.4) 69.52 75.38 (7.8)
23
RevPAR PERFORMANCE FOR SELECTED STATES
Texas, California, Florida and Georgia contained the largest
concentration of the Company's Hotels. The RevPAR changes during the periods
ended September 30, 2001 (versus comparable periods of 2000) from the Company's
Hotels in these states are as follows:
RevPAR (DOLLARS)
---------------------------------------------------------------
THIRD QUARTER YEAR TO DATE
--------------------------------- ----------------------------
% %
2001 2000 VARIANCE 2001 2000 VARIANCE
---- ---- -------- ---- ---- --------
Texas 47.45 56.65 (16.2) 55.00 60.03 (8.4)
California 92.48 122.76 (24.7) 98.99 113.44 (12.7)
Florida 51.02 60.31 (15.4) 69.28 73.73 (6.0)
Georgia 57.97 69.44 (16.5) 66.89 70.26 (4.8)
BRAND DISTRIBUTION
NUMBER NUMBER PERCENTAGE OF
OF HOTELS OF ROOMS ROOM REVENUE
---------- -------- --------------
Embassy Suites 59 14,843 39.8
Holiday-branded hotels 59 16,922 28.7
Crowne Plaza 18 5,963 11.5
Doubletree-branded hotels 14 2,779 5.9
Sheraton-branded 10 3,269 7.0
Other hotels 24 4,848 7.1
---- ------- ------
Total 184 48,624 100.0
==== ======= ======
SELECTED STATE DISTRIBUTION
NUMBER NUMBER PERCENTAGE OF
OF HOTELS OF ROOMS ROOM REVENUE
--------- --------- --------------
Texas 41 11,138 18.2
California 19 6,027 17.7
Florida 18 5,658 11.6
Georgia 14 3,868 7.7
---- ------ -----
Total for four states 92 26,691 55.2
==== ====== =====
24
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 from
the results of operations of the Hotels. For the nine months ended September 30,
2001, net cash flow provided by operating activities, consisting primarily of
hotel operations, was $137.0 million and FFO was $169.8 million.
As a result of the effectiveness of the RMA, the Company obtained the
right to lease the Hotels to TRSs of the Company. Accordingly, January and July
2001, the Company acquired its existing lessees or leases in consolidated
taxable REIT subsidiaries and began reporting the revenues and expenses of Hotel
operations, rather than reporting only the lease income from the percentage
leases. Any profits or losses from the TRS entities holding the Hotel leases,
after applicable corporate taxes, are reflected in the Company's results of
operations.
Prior to January 1, 2001, substantially all of the Company's Hotels
were leased to third parties under leases providing for the payment of rent
based, in part, upon revenues from the Hotels. Accordingly, the Company's risks
were essentially limited to changes in Hotel revenues and to the lessees'
ability to pay the rent due under the leases. On January 1, 2001, the Company
acquired the leaseholds of 96 of its hotels and on July 1, 2001, the Company
acquired the remaining 88 Hotel leases. As a result of these acquisitions, the
Company also became subject to the risk of fluctuating hotel operating margins
at its Hotels, including but not limited to wage and benefit costs, repair and
maintenance expenses, utilities, liability insurance, and other operating
expenses which can fluctuate disproportionately to revenues. These operating
expenses are more difficult to predict and control than percentage lease
revenue, resulting in an increased risk of volatility in the Company's results
of operations. The recent economic slowdown and the terrorist attacks of
September 11 resulted both in declines in RevPAR and an erosion in operating
margins during the nine months ended September 30, 2001, compared to the same
period of 2000. If the decline in hotel RevPAR and/or operating margins worsen
or continue for a protracted time, it could have a material adverse effect on
the Company's operations and earnings.
The Company made the decision to acquire its leases, and the potential
profits from the operation of its Hotels, based upon its belief that, in the
long term, lodging demand will exceed new supply and that operating efficiencies
will increase industry-wide for a variety of reasons, including the impact of
new technologies allowing lower-cost delivery of services and providing new
revenue sources that are not labor- intensive, such as in-room entertainment and
direct in-room marketing to guests.
On May 9, 2001, the Company entered into an Agreement and Plan of
Merger with MeriStar and MeriStar LP. On September 21, 2001, the Company and
MeriStar announced the termination of the merger. The decision to terminate the
merger resulted from the September 11 terrorist attacks and the subsequent
adverse impact on the financial markets. As the result of the merger
termination, the Company recorded expenses aggregating $19.9 million associated
with the merger and recognized $5.2 million of non-recurring merger financing
costs.
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. On
September 13, 2001, the Company announced the commencement of offers to exchange
the $100 million of privately placement senior notes for notes with identical
terms that are registered under the Securities Act of 1933. This exchange offer
was completed in October 2001.
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.
25
On June 4, 2001, the Company completed the private placement of $600
million in 8 1/2% senior unsecured notes that mature in 2011. Approximately $315
million of the proceeds were placed in escrow, pending the closing or
termination of the merger with MeriStar. As the result of the merger
termination, in accordance with the requirements of the indenture governing
these notes, in October 2001, the Company redeemed $300 million in principal
amount of these notes. The redemption price was 101% of the principal amount
redeemed plus accrued interest and was paid out of the $315 million in escrowed
funds. On September 13, 2001, the Company announced the commencement of offers
to exchange the privately placed notes for notes with identical terms that are
registered under the Securities Act of 1933. This exchange offer was completed
in October 2001.
In June 2001, in connection with the issuance of fixed rate senior
notes and the subsequent prepayment of floating rate debt, the Company
terminated $200 million of interest rate swaps, resulting in a one-time $4.8
million swap termination cost recorded in the second quarter.
In July 2001, the Company entered into an amended and restated
revolving credit facility in the amount of $615 million and extended the
maturity date to October 2004, before extension options.
On November 8, 2001, the Company amended its line of credit. Prior to
the amendment, the Company met all its existing covenants under its unsecured
line of credit. However, it was necessary to amend the line of credit in
anticipation of the continued negative RevPAR environment. The amendment allows
for the relaxation of certain financial covenants through September 30, 2002,
including the unsecured interest coverage, fixed charge coverage, and total
leverage tests. Pricing remains on the same floating rate basis with a tiered
spread based on the Company's leverage ratio, but with added tiers to reflect
the higher permitted leverage. At the maximum permitted leverage under the line,
the Company would pay a spread of 325 basis points LIBOR (over 90-day was 2.01%
as of the close of business, November 13, 2001). Commitments remain at $615
million, with $110 million outstanding under the facility, and approximately $85
million in cash and cash equivalents as of November 13, 2001.
Management currently anticipates that the Company will meet its
financial covenants under the RevPAR guidance provided by the Company at its
third quarter earnings conference call on November 1, 2001. The guidance that
was provided for RevPAR in the fourth quarter 2001 was a decline of 20% to 25%,
while in 2002 RevPAR was expected to be within a range from flat to a decline of
5%. The Company anticipates a gradual sequential recovery in 2002, by quarter,
with easier comparable periods in the second half of the year. The Company
currently anticipates a first half RevPAR decline of approximately 10% with the
first quarter being more challenging than the second quarter of 2002.
On November 13, 2001, the Company's line of credit represents
approximately 5% of its debt, with $110 million outstanding. The Company also
maintains flexibility in working with its lenders, with its $85 million of cash
and equivalents on hand, $2.5 billion of unencumbered assets, and a breakeven
occupancy, after debt service and preferred equity distributions, of
approximately 50%. The $505 million of capacity under the line of credit is
expected to be available to take advantage of opportunities that may present
themselves as the industry begins to recover in late 2002 and 2003.
The Company does not expect that the amendment to its line of credit
will have an adverse impact on its business plan, which emphasizes capital
preservation and maintenance of appropriate leverage in this challenging
operating environment.
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.
Beginning in January 2001, through March 27, 2001, FelCor repurchased
approximately 179,000 shares of its outstanding common stock on the open market
for approximately $4.0 million. Subsequent to March 27, 2001, FelCor has not
repurchased any additional shares of its common stock and it does not currently
anticipate that it will repurchase additional stock in the near future.
The Company intends to limit its future distributions to equity holders
to available cash flow, if any. Accordingly, distributions to equity holders may
be significantly reduced or possibly eliminated in future periods.
At September 30, 2001, the Company had $69.6 million of cash and cash
equivalents. Certain significant credit and debt statistics at September 30,
2001, are as follows:
o Interest coverage ratio of 2.4x for the twelve month period ended
September 30, 2001
o Borrowing capacity of $565.1 million under its line of credit
o Consolidated debt equal to 39.4% of its investment in hotels, at cost
o Fixed interest rate debt equal to 100% of total debt
o Weighted average maturity of fixed interest rate debt of approximately
7 years
o Mortgage debt to total assets of 17.1%
o Debt of approximately $3.2 million maturing in 2001
o Debt of approximately $13.0 million maturing in 2002
o Debt of approximately $35.0 million maturing in 2003
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
September 30, 2001, the Company was in compliance with all such covenants.
26
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 Company's mortgage debt is nonrecourse to the Company 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 one interest rate swap agreement with a notional amount
of $50 million at September 30, 2001, which was designated as a cash flow hedge.
The interest rate swap agreement modifies 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 converts
variable rate debt to a fixed rate. The fixed rate to be paid, based on the swap
agreement is 5.56%, and the variable rate to be received by the Company at
September 30, 2001 is 3.58%. The swap agreement matures in July 2003.
The Company spent approximately $50.3 million on upgrading and
renovating its Hotels during the nine months ended September 30, 2001.
Notwithstanding the current significant economic downturn, the Company believes
that its Hotels will continue to benefit from the Company's extensive capital
expenditure programs in previous years. Most future renovation and redevelopment
expenditures are discretionary and the Company expects to fund these from cash
flow.
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 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 September 30, 2001, the
table presents scheduled maturities and weighted average interest rates, by
maturity dates. For its interest rate swap, the table presents the notional
amount and weighted average interest rate, by contractual maturity dates.
Weighted average variable rates are based on implied forward rates in the yield
curve as of September 30, 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 September 30, 2001 at then
current market interest rates. The Fair Value of the Company's variable to fixed
interest rate swap indicates the estimated amount that would have been paid by
the Company had the swap been terminated at September 30, 2001.
EXPECTED MATURITY DATE
(IN THOUSANDS)
REMAINDER
OF
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
-------- ---- ---- ---- ---- ---------- ----- ----------
LIABILITIES
Debt:
Fixed rate $3,200 $13,000 $34,904 $189,228 $43,129 $1,516,157 $ 1,799,618(1) $1,655,565
Average interest rate 8.16% 8.19% 8.09% 7.44% 8.67% 8.62%
Floating rate $ 49,900 $ 650 $ 50,550 $ 50,550
Average interest rate 6.97% 8.26%
Discount accretion $ (6,527)
Total debt $ 1,843,641(1)
INTEREST RATE DERIVATIVES
Interest rate swap:
Floating to fixed $ 50,000 $ 50,000 $ (2,171)
Average pay rate 5.56%
Average receive rate 3.58%
(1) Excludes $300 million in senior notes that was repaid out of escrowed funds
in October 2001.
27
Swap contracts, such as 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, require the Company to reduce room rates in the near term and may limit
its ability to raise room rates in the future.
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. Historically, to the
extent that cash flow from operations has been insufficient during any quarter,
due to temporary or seasonal fluctuations in revenues, the Company has utilized
cash on hand or borrowings under its line of credit to make distributions to its
equity holders. However, due to the sharp reduction in travel following the
terrorist attacks of September 11 and the resultant drop in RevPAR and profits
from the Company's hotel operations, the Company plans to limit distributions to
its equity holders to available cash flow. Accordingly, distributions to equity
holders may be significantly reduced or possibly eliminated in future periods.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to FelCor
are 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 and nine months ended September 30,
2001.
28
PART II. - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to certain other transactions by the Company
through September 30, 2001, see Notes 1 and 2 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: The following exhibits are filed as part of this report:
Exhibit No. Description
- ----------- -----------
10.17.1 First Amendment dated as of November 6, 2001, among the
Registrant, FelCor Lodging Limited Partnership and FelCor
Canada Co., as Borrowers, the lenders party thereto, The
Chase Manhattan Bank and The Chase Manhattan Bank of
Canada, as Administrative Agents, and Bankers Trust
Company, as Syndication Agent
(b) Reports on Form 8-K:
A current report on Form 8-K was filed by the Company on August 31,
2001. This filing, under Item 5, reported the filing of the First Amendment to
the Agreement and Plan of Merger among FelCor Lodging Trust Incorporated, FelCor
Lodging Limited Partnership, MeriStar Hospitality Corporation and MeriStar
Hospitality Operating Partnership, L.P. dated August 16, 2001.
A current report on Form 8-K was filed by the Company on September 24,
2001. This filing, under Item 5, reported (a) the termination of the merger
between FelCor Lodging Trust Incorporated, FelCor Lodging Limited Partnership,
FelCor Mergesub, L.L.C., MeriStar Hospitality and MeriStar Hospitality Operating
Partnership, L.P.; (b) the redemption of $300 million of the Company's $600
million in 8 1/2% senior notes, at a redemption price equal to 101% of the
principal amount plus accrued interest, in accordance with the requirements of
the indenture governing such notes, as a result of the termination of the
MeriStar merger; and (c) a supplement to the Cautionary Statements published in
its annual report on Form 10-K for the year ended December 31, 2000.
A current report on Form 8-K was filed by the Company on October 5,
2001. This filing, under Item 5, attached as an exhibit a press release dated
October 4, 2001, reporting improving occupancy trends since the lows experienced
following the September 11, 2001, terrorist attacks, and key information about
the Company's operating performance.
29
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: November 14, 2001
FELCOR LODGING TRUST INCORPORATED
By: /s/Richard J. O'Brien
-----------------------------
Richard J. O'Brien
Executive Vice President and
Chief Financial Officer
30
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
10.17.1 First Amendment dated as of November 6, 2001, among the
Registrant, FelCor Lodging Limited Partnership and FelCor
Canada Co., as Borrowers, the lender party thereto. The
Chase Manhattan Bank and The Chase Manhattan Bank of
Canada, as Administrative Agents, and Bankers Trust
Company, as Syndicator Agent