- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14236
FELCOR LODGING TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
MARYLAND 75-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, par value $.01 per share, of FelCor
Lodging Trust Incorporated outstanding on May 10, 2002 was [53,041,778]
- --------------------------------------------------------------------------------
FELCOR LODGING TRUST INCORPORATED
INDEX
<Table>
<Caption>
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements ........................................................................... 3
Consolidated Balance Sheets - March 31, 2002 (Unaudited)
and December 31, 2001 .................................................................. 3
Consolidated Statements of Operations - For the Three Months
Ended March 31, 2002 and 2001 (Unaudited) .............................................. 4
Consolidated Statements of Comprehensive Income - For the Three Months
Ended March 31, 2002 and 2001 (Unaudited) .............................................. 5
Consolidated Statements of Cash Flows -- For the Three Months
Ended March 31, 2002 and 2001 (Unaudited) .............................................. 6
Notes to Consolidated Financial Statements .................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General ..................................................................................... 14
Financial Comparison ........................................................................ 14
Results of Operations ....................................................................... 14
Liquidity and Capital Resources ............................................................. 22
Inflation ................................................................................... 25
Seasonality ................................................................................. 25
Disclosure Regarding Forward Looking Statements ............................................. 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................... 26
PART II - OTHER INFORMATION
Item 5. Other Information .............................................................................. 27
Item 6. Exhibits and Reports on Form 8-K ............................................................... 27
SIGNATURE .................................................................................................. 28
</Table>
2
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
-------------- --------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $669,413
at March 31, 2002 and $630,962 at December 31, 2001 .......................... $ 3,631,804 $ 3,664,712
Investment in unconsolidated entities ........................................... 150,003 151,047
Hotels held for sale ............................................................ 38,937 38,937
Cash and cash equivalents ....................................................... 112,031 128,742
Accounts receivable, net of allowance for doubtful accounts ..................... 59,768 53,836
Deferred expenses, net of accumulated amortization of $11,977
at March 31, 2002 and $10,672 at December 31, 2001 ........................... 30,177 31,249
Other assets .................................................................... 30,681 20,406
-------------- --------------
Total assets ........................................................... $ 4,053,401 $ 4,088,929
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt, net of discount of $7,481 at March 31, 2002
and $7,768 at December 31, 2001 .............................................. $ 1,924,952 $ 1,938,408
Distributions payable ........................................................... 14,381 8,172
Accrued expenses and other liabilities .......................................... 167,123 173,496
Minority interest in FelCor LP, 9,005 units issued and
outstanding at March 31, 2002 and December 31, 2001 ........................... 232,342 236,100
Minority interest in other partnerships ......................................... 50,345 49,559
-------------- --------------
Total liabilities ...................................................... 2,389,143 2,405,735
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Preferred Stock, 5,980 and 5,981 shares issued and
outstanding at March 31, 2002 and December 31, 2001, respectively ......... 149,512 149,515
Series B Redeemable Preferred Stock, 58 shares issued and outstanding ........ 143,750 143,750
Common stock, $.01 par value, 200,000 shares authorized, 69,422 and
69,418 shares issued, including shares in treasury, at March 31, 2002
and December 31, 2001, respectively .......................................... 694 694
Additional paid-in capital ...................................................... 2,059,198 2,059,448
Accumulated other comprehensive income (loss) ................................... 205 (376)
Distributions in excess of earnings ............................................. (375,645) (355,391)
Common stock in treasury, at cost, 16,370 shares and 16,421 shares
at March 31, 2002 and December 31, 2001, respectively ........................ (313,456) (314,446)
-------------- --------------
Total stockholders' equity ............................................. 1,664,258 1,683,194
-------------- --------------
Total liabilities and stockholders' equity ............................. $ 4,053,401 $ 4,088,929
============== ==============
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
3
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2002 2001
--------- ---------
Revenues:
Hotel operating revenue:
Room ................................................... $ 257,230 $ 192,225
Food and beverage ...................................... 50,691 27,664
Other operating departments ............................ 16,219 12,899
Percentage lease revenue ................................. 51,531
Retail space rental and other revenue .................... 670 1,334
--------- ---------
Total revenues ........................................... 324,810 285,653
--------- ---------
Expenses:
Hotel operating expenses:
Room ................................................... 63,233 43,620
Food and beverage ...................................... 39,991 20,117
Other operating departments ............................ 7,316 5,727
Other property operating costs ........................... 89,160 58,502
Management and franchise fees ............................ 15,648 12,671
Taxes, insurance and lease expense ....................... 34,570 38,364
Corporate expenses ....................................... 3,746 3,141
Depreciation ............................................. 38,618 39,808
Lease termination costs .................................. 36,226
--------- ---------
Total operating expenses ................................. 292,282 258,176
--------- ---------
Operating income ............................................ 32,528 27,477
Interest expense, net ....................................... 41,196 39,356
--------- ---------
Loss before equity in income from unconsolidated entities,
minority interests and gain on sale of assets ....... (8,668) (11,879)
Equity in income from unconsolidated entities ............ 1,221 2,150
Minority interests ....................................... 1,301 450
Gain on sale of assets ................................... 2,473
--------- ---------
Net loss .................................................... (6,146) (6,806)
Preferred dividends ...................................... (6,150) (6,150)
--------- ---------
Net loss applicable to common stockholders .................. $ (12,296) $ (12,956)
========= =========
Per share data:
Basic and diluted:
Net loss applicable to common stockholders ............. $ (0.23) $ (0.25)
========= =========
Weighted average common shares outstanding ............. 52,717 52,595
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
2002 2001
---------- ----------
Net loss ................................................... $ (6,146) $ (6,806)
Cumulative transition adjustment from interest rate swaps .. 248
Unrealized holding losses from interest rate swaps ......... (5,092)
Foreign currency translation adjustment .................... 581
---------- ----------
Comprehensive loss .................................... $ (5,565) $ (11,650)
========== ==========
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss ...................................................................... $ (6,146) $ (6,806)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation ........................................................ 38,618 39,808
Gain on sale of assets .............................................. (2,473)
Amortization of deferred financing fees ............................. 1,305 1,248
Accretion of debt ................................................... 103 (180)
Amortization of unearned compensation ............................... 509 476
Equity in income from unconsolidated entities ....................... (1,221) (2,150)
Lease termination costs ............................................. 36,226
Minority interests .................................................. (1,301) (450)
Changes in assets and liabilities:
Accounts receivable ................................................. (5,932) (10,064)
Deferred expenses ................................................... (233) (1,178)
Other assets ........................................................ (10,217) (12,379)
Deferred rent ....................................................... 5,254
Accrued expenses and other liabilities .............................. (4,201) (6,185)
--------- ---------
Net cash flow provided by operating activities ............ 11,284 41,147
--------- ---------
Cash flows (used in) provided by investing activities:
Improvements and additions to hotels .......................................... (8,448) (13,923)
Proceeds from sale of interest in hotels ...................................... 48,124
Operating cash received in acquisition of lessee .............................. 25,300
Proceeds from sale of assets .................................................. 3,414
Cash distributions from unconsolidated entities ............................... 2,265 1,565
--------- ---------
Net cash flow (used in) provided by investing activities .. (6,183) 64,480
--------- ---------
Cash flows used in financing activities:
Proceeds from borrowings ...................................................... 215,716
Repayment of borrowings ....................................................... (13,202) (241,087)
Purchase of treasury stock .................................................... (92) (3,926)
Proceeds from exercise of stock options ....................................... 692
Distributions paid to other partnership minority interests .................... (2,581)
Distributions paid to FelCor LP limited partners .............................. (1,351) (4,729)
Distributions paid to preferred stockholders .................................. (6,150) (6,150)
Distributions paid to common stockholders ..................................... (1,749) (28,879)
--------- ---------
Net cash flow used in financing activities ................ (22,544) (70,944)
--------- ---------
Effect of exchange rate changes on cash ................................................. 732
Net change in cash and cash equivalents ................................................. (16,711) 34,683
Cash and cash equivalents at beginning of periods ....................................... 128,742 26,060
--------- ---------
Cash and cash equivalents at end of periods ............................................. $ 112,031 $ 60,743
========= =========
Supplemental cash flow information --
Interest paid ................................................................. $ 41,594 $ 43,643
========= =========
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
6
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"), a Maryland corporation,
is one of the nation's largest hotel real estate investment trusts, or REITs,
and is the sole general partner of, and the owner of a greater than 85%
partnership interest in, FelCor Lodging Limited Partnership ("FelCor LP").
FelCor, FelCor LP and their subsidiaries are referred to, collectively, as the
"Company." The Company had ownership interests in 183 hotels at March 31, 2002,
with nearly 50,000 rooms and suites. All of the Company's operations are
conducted solely through FelCor LP or its subsidiaries. At March 31, 2002, the
Company owned a 100% interest in 150 hotels, a 90% or greater interest in
entities owning seven hotels, a 60% interest in an entity owning two hotels and
a 50% interest in separate unconsolidated entities that own 24 hotels. Thirteen
of the Company's hotels were designated as held for sale at March 31, 2002.
On January 1, 2001, the REIT Modernization Act ("RMA") went into
effect. Among other things, the RMA permits a REIT to form taxable subsidiaries
("TRS") 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 TRSs 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. Effective July 1, 2001, the Company acquired the remaining 88
hotel leases held by Six Continents Hotels. By acquiring these leases through
its TRSs, the Company acquired the economic benefits and risks of the operation
of these hotels and began reporting hotel revenues and expenses rather than
percentage lease revenues.
The following table provides a schedule of the Company's hotels, by
brand, at March 31, 2002:
<Table>
BRAND
Hilton Hotels Corporation ("Hilton") brands:
Embassy Suites Hotels(R) 59
Doubletree(R) and Doubletree Guest Suites(R) 13(a)
Hampton Inn(R) 7
Hilton Suites(R) 1
Homewood Suites(R) 1
Six Continents Hotels 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 Hotels & Resorts Worldwide Inc ("Starwood") brands:
Sheraton(R) and Sheraton Suites(R) 10
Westin(R) 1
Other brands 14
---
Total hotels 183
===
</Table>
(a) Includes the Company's Doubletree Guest Suites in Boca Raton, Florida,
which was sold effective April 26, 2002. This was one of the 13 hotels
held for sale at March 31, 2002.
7
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION -- (CONTINUED)
At March 31, 2002, the Company's hotels were located in the United
States (35 states) and Canada, with concentrations in Texas (41 hotels),
California (19 hotels), Florida (17 hotels) and Georgia (14 hotels).
Approximately 56% of the Company's hotel room revenues were generated from
hotels in these four states.
At March 31, 2002, of the Company's 183 hotels, (i) subsidiaries of Six
Continents Hotels managed 89, (ii) subsidiaries of Hilton managed 71, (iii)
subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels
Corporation ("IHC") managed eight and (v) three independent management companies
managed four.
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 loss or stockholders' equity.
The financial information for the three months ended March 31, 2002 and
2001, 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, 2001, included in the Company's Annual Report on Form 10-K
("Form 10-K"). Operating results for the three months ended March 31, 2002 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 2002.
2. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes additional criteria to
determine when a long-lived asset is held for sale and establishes a new
recoverability test for long-lived assets to be held for investment. It also
broadens the definition of "discontinued operations" to include the sale of
individual properties. The provisions of the new standard are generally to be
applied prospectively. During the three months ended March 31, 2002, the Company
was not required to record any impairment under the new standard. In addition,
the Company does not have any discontinued operations for the three months ended
March 31, 2002, as no additional hotels were designated as held for sale during
the period.
During the three months ended March 31, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). SFAS 145, among other things, rescinds SFAS
4, which required that gains and losses from extinguishments of debt be
classified as an extraordinary item, net of related income tax effects. SFAS 145
is to be applied beginning in fiscal years beginning after May 15, 2002 and
encourages early application of SFAS 145 related to the rescission of SFAS 4.
The Company has no gains or losses from extinguishments of debt for the three
months ended March 31, 2002.
8
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION OF HOTEL LEASES
As a result of the passage of the RMA, effective January 1, 2001, the
Company acquired 100% of DJONT, which owned leases on 85 of our hotels, and
contributed it to a TRS. In consideration, FelCor LP issued 416,667 of its
units, valued at approximately $10 million, and the Company assumed DJONT's
accumulated stockholders' deficit of $25 million, which was expensed as lease
termination cost in 2001.
On January 1, 2001, the Company also acquired from Six Continents
Hotels the leases covering 11 hotels, terminated one additional lease
in connection with the sale of the related hotel and terminated the 12 related
management agreements in exchange for 413,585 shares of FelCor common stock
valued at approximately $10 million. Of this $10 million in consideration, $8
million was expensed in 2000, in connection with the designation of certain of
these hotels as held for sale. An additional $2 million was expensed as lease
termination costs in 2001 as a result of the acquisition of the leases. Of
the 11 hotels, two have been sold, eight have been contributed to a joint
venture with IHC, and one will be retained.
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, and the
related lease termination costs for the three months ended March 31, 2001, are
as follows (in thousands):
<Table>
Cash and cash equivalents ........................................... $25,300
Accounts receivable ................................................. 30,214
Other assets ........................................................ 17,394
-------
Total assets acquired ............................................... 72,908
-------
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 .................... 16,507
Value of common stock and FelCor LP units issued .................... 19,719
-------
Lease termination costs ........................................ $36,226
=======
</Table>
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50% interests in joint venture entities that owned 24
hotels at March 31, 2002 and 2001. The Company also owned a 50% interest in
entities that owned an undeveloped parcel of land, provided condominium
management services, leased eight hotels 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):
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
-------- ------------
(unaudited)
Balance sheet information:
Investment in hotels .................................... $361,251 $365,802
Debt (a) ................................................ $265,377 $266,238
Equity .................................................. $117,648 $116,032
</Table>
9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT IN UNCONSOLIDATED ENTITIES - (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
----------- -----------
(unaudited) (unaudited)
Statements of operations information:
Total revenues ...................................... $ 21,194 $ 17,250
Net income .......................................... $ 1,719 $ 5,315
Net income attributable to the Company .............. $ 860 $ 2,685
Preferred return 361
Amortization of cost in excess of book value ........ (535)
----------- -----------
Equity in income from unconsolidated entities ....... $ 1,221 $ 2,150
=========== ===========
</Table>
(a) Debt at March 31, 2002, consists of $264.9 million of
non-recourse mortgage debt and $407,000 of full-recourse debt
guaranteed by the Company.
5. HOTELS HELD FOR SALE
In 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, in 2000 the Company recorded an expense
of $63 million representing the difference between the net book value and
estimated fair market value of these hotels. In 2001, the Company recognized an
additional $7 million expense to reflect the deterioration of the market value
of the remaining 13 hotels held for sale. The Company is actively marketing the
remaining 13 hotels held for sale. The Company regularly reviews the carrying
value of the remaining hotels held for sale to ensure that they are recorded at
the lower of depreciated book value or expected net sales proceeds. No
depreciation expense has been recorded on these hotels since June 30, 2000.
At March 31, 2001, the Company had 25 hotels designated as held for
sale. The revenues related to these 25 hotels, less associated costs, were
approximately $5.8 million for the three months then ended. For the three months
ended March 31, 2002, the revenues, less associated expenses, for the remaining
13 hotels held for sale were approximately $1.2 million.
The Company closed on the sale of its 183-room Doubletree Guest Suites
hotel in Boca Raton, Florida, on April 26, 2002, and received net sales proceeds
of $6.5 million. There was a net gain of approximately $700,000 on the sale.
This property previously had been identified as a non-strategic asset and
classified as held for sale.
10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT
Debt at March 31, 2002 and December 31, 2001, consists of the following
(in thousands):
<Table>
<Caption>
MARCH 31,
2002 MARCH DECEMBER 31,
COLLATERAL (a) INTEREST RATE MATURITY DATE 2002 2001
-------------- ------------- ------------- ---------- ----------
(unaudited)
FLOATING RATE DEBT:
Line of credit None 4.03% October 2004 $39,317 $49,674
Publicly-traded term
notes-swapped(b) None 5.37 October 2004 174,665 174,633
Promissory note None 3.88 June 2016 650 650
----- ---------- ----------
Total floating rate debt 5.12 214,632 224,957
----- ---------- ----------
FIXED RATE DEBT:
Publicly-traded term notes None 7.63 October 2007 124,444 124,419
Publicly-traded term notes None 9.50 September 2008 595,692 595,525
Publicly-traded term notes None 8.50 June 2011 297,718 297,655
Mortgage debt 15 hotels 7.24 November 2007 136,825 137,541
Mortgage debt 7 hotels 7.54 April 2009 95,582 95,997
Mortgage debt 6 hotels 7.55 June 2009 71,900 72,209
Mortgage debt 7 hotels 8.73 May 2010 141,785 142,254
Mortgage debt 8 hotels 8.70 May 2010 182,208 182,802
Other 6 hotels 6.96 2002 - 2005 64,166 65,049
----- ---------- ----------
Total fixed rate debt 8.59 1,710,320 1,713,451
----- ---------- ----------
Total debt 8.21% $1,924,952 $1,938,408
===== ========== ==========
</Table>
(a) At March 31, 2002, the Company had unencumbered investments in
hotels with a net book value totaling $2.4 billion.
(b) At March 31, 2002, and December 31, 2001, the Company's $175
million publicly-traded notes due October 2004 were matched
with interest rate swap agreements, which effectively
converted the fixed interest rate on the notes to a variable
interest rate tied to LIBOR. The interest rate swap agreements
also have a maturity of October 2004. 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.
All of the Company's floating rate debt at March 31, 2002, was based
upon LIBOR. One month LIBOR at March 31, 2002, was 1.88%.
Interest expense is reported net of interest income of $579,000 and
$737,000 for the three months ended March 31, 2002 and 2001, respectively, and
capitalized interest of $145,000 and $119,000, respectively.
In anticipation of a continued negative RevPAR environment, we amended
our unsecured line of credit on November 8, 2001. The amendment allows for the
relaxation of certain financial covenants through December 31, 2002, with a
step-up in covenants at September 30, 2002, including the unsecured interest
coverage, fixed charge coverage, and total leverage tests. The interest rate
remains on the same floating rate basis with a tiered spread based on our debt
leverage ratio, but with added tiers to reflect the higher permitted leverage.
The lenders' commitments under the line of credit remain at $615 million, and we
had approximately $39 million outstanding under the facility at March 31, 2002.
In addition to the financial covenants, the Company's line of credit
includes certain other 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. Under the amendment to the line of credit in November 2001, we
agreed to certain more stringent limitations through September 30, 2002. We may
acquire hotel properties and make joint venture investments, subject to
compliance with debt limitations, but with flexibility to make at least $50
million of acquisitions and $20 million of joint venture investments without
specific lender approval, under certain circumstances. Also, we may be limited
in making discretionary capital expenditures through September 30, 2002, other
than
11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT - (CONTINUED)
discretionary capital expenditures for the expansion or renovation of existing
hotels in an aggregate amount of $20 million, subject to an increase under
certain circumstances. At March 31, 2002, the Company was in compliance with all
of these covenants.
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to or less restrictive than the line of
credit. Our failure to satisfy any accelerated indebtedness, if in the amount of
$10 million or more, could result in the acceleration of most of our other
indebtedness. 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.
7. DERIVATIVES
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 the Company to use interest rate hedges to
manage its fixed and floating interest rate position and not to be engaged in
speculation on interest rates. We manage 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. We will generally
seek to pursue interest rate risk mitigation strategies that 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 manage the relative mix of its debt between fixed and variable rate
instruments, at March 31, 2002, the Company had interest rate swap agreements
with three financial institutions with a notional value of $175 million. These
interest rate swap agreements modify a portion of the interest characteristics
of the Company's outstanding fixed rate debt without an exchange of the
underlying principal amount and effectively convert fixed rate debt to a
variable rate.
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
are recognized as an adjustment to interest expense by the Company and will have
a corresponding effect on its future cash flows.
To determine the fair values of its derivative instruments, the Company
uses a variety of methods and assumptions that are based on market conditions
and risks existing at each balance sheet date. All methods of assessing fair
value result in a general approximation of value, and such value may never
actually be realized.
The interest rate swap agreements held at March 31, 2002, are
designated as fair value hedges, are marked to market through the income
statement, but are offset by the change in fair value of the Company's swapped
outstanding fixed rate debt. The estimated unrealized net loss on these interest
rate swap agreements was approximately $2.4 million at March 31, 2002 and
represents the amount the Company would pay to terminate the agreements based on
current market rates.
8. DEFERRED RENT
The Company recorded deferred rent under Staff Accounting Bulletin
No. 101 ("SAB 101") of $5.3 million for the quarter ended March 31, 2001 on the
88 hotels leased by Six Continents Hotels. This deferred rent was recognized as
percentage lease revenue in the second quarter of 2001, related to the
acquisition of the leases.
12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
The Company generally leases its hotels to wholly-owned TRSs that are
subject to federal and state income taxes. The Company accounts for income taxes
in accordance with the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes ("SFAS 109")." Under SFAS 109, the Company
accounts for income taxes using the asset and liability method, under which
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. At March 31, 2002, the Company's TRS had a deferred tax asset of
approximately $18.6 million, prior to any valuation allowance, relating to
losses of the TRS. 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.
10. GAIN ON SALE OF ASSETS
During the first quarter of 2001 the Company received $3.4 million for
the condemnation of two parcels of land and recorded a gain of $2.5 million.
There were no dispositions during the first quarter of 2002.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 2002 and 2001
(unaudited, in thousands, except per share data):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
----------- -----------
Net loss applicable to common stockholders ............... $ (12,296) $ (12,956)
=========== ===========
Weighted average shares .................................. 52,717 52,595
=========== ===========
Net loss per share data:
Basic and diluted ..................................... $ (0.23) $ (0.25)
=========== ===========
</Table>
The Series A preferred shares and other dilutive securities are not
included in the calculation of diluted earnings per share due to losses incurred
in the quarters presented.
12. SUBSEQUENT EVENTS
On April 4, 2002, FelCor issued 1,025,800 depositary shares,
representing 10,258 shares of its 9% Series B Cumulative Redeemable Preferred
Stock ("Series B preferred stock") at $24.37 per depositary share to yield 9.4%.
The Series B preferred stock and the corresponding depositary shares may be
called by FelCor at $25 per depositary share on or after May 7, 2003, have no
stated maturity, sinking fund or mandatory redemption, and are not convertible
into any other securities of FelCor. The proceeds will be used for working
capital, and will allow the Company to accelerate discretionary capital
expenditures.
During April 2002, the Company initiated an offer to exchange $100
million in 9-1/2% senior unsecured notes that were privately placed in December
2001, for notes with identical terms that are registered under the Securities
Act of 1933.
13
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.
The Company's first quarter results reflect Revenue Per Available Room
("RevPAR") below prior year, but consistent with previous expectations of a
gradual increase in hotel occupancy during 2002. RevPAR for the portfolio
declined 18.1% for the quarter, compared to the same quarter of 2001. However,
the first quarter RevPAR decline was 5 percentage points less than the fourth
quarter 2001 decline of 23%.
FINANCIAL COMPARISON
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31
------------------------------------------
2002 2001 % CHANGE
----------- ----------- -----------
(IN MILLIONS, EXCEPT
REVPAR)
RevPAR ............................................. $ 60.80 $ 74.22 (18.1)%
Funds From Operations ("FFO") ...................... $ 29.3 $ 71.4 (59.0)%
Earnings Before Interest, Taxes, Depreciation and
Amortization ("EBITDA") ........................ $ 77.2 $ 117.3 (34.2)%
Net loss ........................................... $ (6.1) $ (6.8)(1) 10.3%
</Table>
(1) The net loss for the three months ended March 31, 2001, includes
$36.2 million off non-recurring lease termination costs.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2002 and 2001
Effective July 1, 2001, the Company, through its TRS subsidiaries,
acquired the leases with regard to 88 hotels, which were previously leased to
Six Continents Hotels. Since these 88 hotels were leased to Six Continents
Hotels for the three months ended March 31, 2001, the operating results for this
period are not directly comparable to the same period in 2002, where the Company
reported hotel operating revenues and expenses for these 88 hotels.
Total revenue increased $39.2 million for the three months ended
March 31, 2002, over the same period in 2001. The increase is principally
associated with reporting hotel operating revenues for the 88 hotels, compared
to the percentage lease revenue reported by the Company for the same period in
2001.
Total operating expenses increased $34.1 million for the three months
ended March 31, 2002, over the same three month period in 2001. This increase
primarily resulted from the inclusion of hotel operating expenses, management
fees and other property related costs for the 88 hotels that were not included
in the same period of 2001, prior to the Company's acquisition of the Six
Continents Hotels leases. Also included in total operating expenses for 2001
were lease termination costs of $36.2 million.
Interest expense net of interest income increased $1.8 million for the
three months ended March 31, 2002, over the same period in 2001. The principal
reason for the increase is an increase in average debt of $69 million over 2001,
relating primarily to the Company's excess cash carried during 2002.
Equity in the income of unconsolidated entities decreased by $0.9
million, compared to the same quarterly period in 2001. The decrease in 2002
principally resulted from a 17% drop in RevPAR for the unconsolidated hotels.
14
The Company's net loss was reduced by $700,000 for the three months
ended March 31, 2002, compared to the same period in 2001. The major items
affecting the change in net loss was the $36 million of merger financing costs
recorded in 2001 and the 18% decline in the Company's hotel RevPAR in the first
quarter of 2002.
Taxes, insurance and lease expense decreased $3.8 million principally
as the result of decreases in lease expense associated with participating leases
partially offset by increased insurance costs.
Minority interests increased $851,000 for the three months ended March
31, 2002 over the same period in 2001. Minority interest represents the
proportionate share of the net loss of FelCor LP not owned by FelCor and the
proportionate share of the income of other consolidated subsidiaries not owned
by FelCor. This change principally reflects the decrease in net income of the
other consolidated subsidiaries. The activity of these other consolidated
subsidiaries consists primarily of activity associated with hotel properties.
Included in net income for the quarter ended March 31, 2001, is again
of $2.5 million related to condemnation proceeds received.
Comparison of the Three Months Ended March 2002 with Pro Forma 2001
On July 1, 2001, we acquired the operating leases covering 88 of our
hotels and contributed them to our TRSs. As the leases were acquired, we began
receiving and recording direct hotel revenues and expenses, rather than
percentage lease revenue. Consequently, a comparison of historical results for
the three months ended March 31, 2002, to the three months ended March 31, 2001,
may not be as meaningful as a discussion of pro forma results. Accordingly, we
have included a discussion of the comparison of the pro forma results of
operations. The pro forma results of operations for the three months ended March
31, 2001 assumes that our acquisition of the 88 hotel leases held by Six
Continents Hotels had occurred on January 1, 2001:
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
PRO FORMA
2002 2001
----------- -----------
(unaudited) (unaudited)
Total revenues ...................................................... $ 324,810 $ 407,320
Lease termination costs ............................................. 36,226
Other operating expenses ............................................ 292,282 340,887
----------- -----------
Operating income .................................................... 32,528 30,207
Interest expense, net ............................................... 41,196 39,356
----------- -----------
Loss before equity in income from unconsolidated entities, minority
interests and gain on sale of assets ........................... (8,668) (9,149)
Equity in income from unconsolidated entities .................... 1,221 2,150
Minority interest ................................................ 1,301 52
Gain on sale of assets ........................................... 2,473
----------- -----------
Net loss ............................................................ (6,146) (4,474)
Preferred dividends .............................................. (6,150) (6,150)
----------- -----------
Net loss applicable to common stockholders .......................... $ (12,296) $ (10,624)
=========== ===========
Basic and diluted per share data:
Net loss applicable to common stockholders ....................... $ (0.23) $ (0.20)
=========== ===========
Weighted average common shares outstanding ....................... 52,717 52,595
</Table>
15
FELCOR LODGING TRUST INCORPORATED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED, IN THOUSANDS)
<Table>
<Caption>
FELCOR
HISTORICAL PRO FORMA
2001 ADJUSTMENTS 2001
----------- ----------- -----------
Total revenues ...................................................... $ 285,653 $ 121,667(a) $ 407,320
Lease termination costs ............................................. 36,226 36,226
Other operating expenses ............................................ 221,950 118,937(b) 340,887
----------- ----------- -----------
Operating income .................................................... 27,477 2,730 30,207
Interest expense, net ............................................... 39,356 39,356
----------- ----------- -----------
Income (loss) before equity in income from unconsolidated entities,
minority interests and gain on sale of assets .................. (11,879) 2,730 (9,149)
Equity in income from unconsolidated entities .................... 2,150 2,150
Minority interests ............................................... 450 (398)(c) 52
Gain on sale of assets ........................................... 2,473 2,473
----------- ----------- -----------
Net income (loss) ................................................... (6,806) 2,332 (4,474)
Preferred dividends .............................................. (6,150) (6,150)
----------- ----------- -----------
Net income (loss) applicable to common stockholders ................. $ (12,956) $ 2,332 $ (10,624)
=========== =========== ===========
</Table>
The unaudited Pro Forma Consolidated Statements of Operations are
presented for illustrative purposes only and are not necessarily indicative of
what the actual results of operations would have been had the transactions
described above occurred on the indicated date, nor do they purport to represent
our results of operations for future periods.
Pro forma numbers presented represent our historical revenues and
expenses, adjusted as described by pro forma changes below.
Pro forma adjustments:
(a) Total revenue adjustments consist of the changes in our historical
revenue from the elimination of historical percentage lease revenue and
the addition of historical hotel operating revenues.
(b) Total operating expense adjustments consist of: (i) the changes in our
historical operating expense from the addition of historical hotel
operating expenses and the elimination of percentage lease expense for
the 88 hotels acquired from Six Continents Hotels, (ii) the adjustments
to record management fees at their new contractual rates, and (iii) the
elimination of historical franchise fees, which are included in
management fees for these hotels.
(c) Represents FelCor LP's minority interest holders' share of revenue and
expense adjustments.
Revenues decreased $82.5 million in 2002 compared to pro forma 2001,
primarily as a result of the continuing economic recession and disruptions in
business and leisure travel patterns following the terrorist attacks on
September 11, 2001. As a result of these events, both business and leisure
travel declined significantly for the three months ended March 31, 2002,
compared to the same pro forma period in 2001. During the three months ended
March 31, 2002, our hotels' RevPAR decreased 18.1%, which was comprised of a
decrease in hotel occupancy of 11.4 percentage points to 60.6% and a decline in
average daily rate ("ADR") of 7.6% to $100.36.
16
Operating expenses and lease termination costs decreased $84.8
million in 2002 compared to pro forma 2001. Without the non-recurring lease
termination expense of $36.2 million that occurred in 2001, operating expense as
a percentage of total revenue increased from 84% to 90%. The principal reason
for the increased operating expense as a percentage of total revenue was a 280
basis point drop in hotel operating margins. This margin compression primarily
relates to increased labor costs, increased repair and maintenance costs and
higher marketing costs as a percentage of total revenue. The increase in costs
as a percentage of revenue is principally related to the decrease in hotel
revenue previously discussed. We are actively working with our managers to
implement cost cutting programs at the hotels to stabilize the hotel operating
profits. These measures include reducing labor costs, streamlining staffing, and
consolidating operations by closing unused floors in hotels when possible.
Interest expense net of interest income increased $1.8 million. As
previously discussed, the principal reason for the increase is an increase in
average debt of $69 million over 2001, relating primarily to the Company's
excess cash carried during 2002.
Equity in income from unconsolidated entities decreased $0.9 million,
principally as the result of the decreased hotel revenues previously discussed.
As previously discussed, minority interest changed principally due to
the decrease in net income of consolidated subsidiaries other than FelCor LP.
Also, included in net income for the three months ended March 31, 2001, is a
gain of $2.5 million related to condemnation proceeds received.
Funds From Operations and EBITDA
We consider 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 our 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 extraordinary items and gains or losses from sales of properties, plus
real estate related depreciation and amortization, after comparable adjustments
for the applicable portion of these items related to unconsolidated entities and
joint ventures. In 2002, NAREIT clarified that FFO related to assets held for
sale, sold or otherwise transferred and included in results of discontinued
operations should continue to be included in FFO. We believe 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 REIT to incur and service debt, to make capital expenditures, to
pay dividends and to fund other cash needs. We compute FFO in accordance with
standards established by NAREIT, except that we add back lease termination costs
and deferred rent 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 we do
or that do not adjust FFO for lease termination costs and deferred rent. 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 our financial
performance or to cash flow from operating activities (determined in accordance
with GAAP) as a measure of our liquidity, nor does it necessarily reflect the
funds available to fund our cash needs, including our ability to make cash
distributions. FFO and EBITDA may include funds that may not be available for
our discretionary use due to functional requirements to conserve funds for
capital expenditures and property acquisitions, and other commitments and
uncertainties.
17
The following table details our computation of Funds From Operations
(unaudited, in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
-------- --------
FUNDS FROM OPERATIONS (FFO):
Net loss .................................................. $ (6,146) $ (6,806)
Deferred rent ........................................ 5,254
Lease termination costs .............................. 36,226
Series B preferred dividends ......................... (3,234) (3,234)
Depreciation ......................................... 38,618 39,808
Depreciation from unconsolidated entities ............ 2,178 2,381
Minority interest in Operating Partnership ........... (2,087) (2,206)
-------- --------
FFO ....................................................... $ 29,329 $ 71,423
======== ========
Weighted average common shares and units outstanding (a) .. 66,715 66,767
======== ========
</Table>
- -----------------
(a) Weighted average common shares and units outstanding are computed
including dilutive options, unvested stock grants, and assuming conversion
of Series A preferred stock to common stock.
The following table details our computation of EBITDA (unaudited, in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
----------- -----------
EBITDA:
Funds from Operations ................................. $ 29,329 $ 71,423
Interest expense ................................. 41,775 40,093
Interest expense of unconsolidated subsidiaries .. 2,359 2,111
Amortization expense ............................. 509 476
Series B preferred dividends ..................... 3,234 3,234
----------- -----------
EBITDA ................................................ $ 77,206 $ 117,337
=========== ===========
</Table>
18
Hotel Portfolio Composition
The following tables set forth our hotel portfolio distribution by
brand, by our top ten Metropolitan Statistical Areas ("MSAs"), by selected
states, by type of location, and by market segment as a percentage of EBITDA for
the year ended December 31, 2001.
<Table>
<Caption>
Brand Hotels Rooms % of 2001 EBITDA
- ----- ------ ------ ----------------
Embassy Suites(R) 59 14,842 42%
Holiday Inn(R)-branded 59 16,914 27
Crowne Plaza(R) 18 5,963 11
Sheraton(R)-branded 10 3,269 8
Doubletree(R)-branded 13 2,650 6
Other 24 4,848 6
</Table>
<Table>
<Caption>
Top 10 MSAs Hotels Rooms % of 2001 EBITDA
- ----------- ------ ------ ----------------
Dallas 18 5,479 8%
Atlanta 12 3,514 8
San Francisco 6 2,440 5
Houston 9 2,262 4
Orlando 6 2,220 4
New Orleans 3 917 4
Phoenix 5 1,245 3
Philadelphia 3 1,174 3
San Jose 2 572 3
Chicago 4 1,239 3
</Table>
<Table>
<Caption>
Top Four States Hotels Rooms % of 2001 EBITDA
- --------------- ------ ------ ----------------
Texas 41 11,138 17%
California 19 6,026 18
Florida 17 5,529 12
Georgia 14 3,868 8
</Table>
<Table>
<Caption>
Location Hotels Rooms % of 2001 EBITDA
- -------- ------ ------ ----------------
Suburban 84 21,310 43%
Urban 41 12,673 28
Airport 31 9,154 21
Highway 20 3,602 3
Resort 7 1,747 5
</Table>
<Table>
<Caption>
Segment Hotels Rooms % of 2001 EBITDA
- ------- ------ ------ ----------------
Upscale all-suite 77 18,324 51%
Upscale 27 9,286 18
Full-service 61 18,236 29
Limited-service 18 2,640 2
</Table>
19
Hotel Operating Statistics
The following tables set forth historical occupied rooms ("Occupancy"),
ADR and RevPAR at March 31, 2002, and 2001, and the percentage changes therein
between the periods presented for the hotels in which the Company had an
ownership interest at March 31, 2002:
OPERATING STATISTICS BY BRAND
(FOR THE THREE MONTHS ENDED MARCH 31)
<Table>
<Caption>
OCCUPANCY (%)
-----------------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Embassy Suites hotels 66.5 71.5 (7.0)
Holiday Inn-branded hotels 58.8 67.0 (12.3)
Crowne Plaza hotels 56.8 64.7 (12.2)
Doubletree-branded hotels 61.5 72.3 (14.9)
Sheraton-branded hotels 56.4 68.5 (17.6)
Other hotels 55.7 65.5 (15.0)
Total hotels 60.6 68.3 (11.4)
</Table>
<Table>
<Caption>
ADR ($)
-----------------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Embassy Suites hotels 124.89 137.90 (9.4)
Holiday Inn-branded hotels 80.81 85.35 (5.3)
Crowne Plaza hotels 94.04 105.83 (11.1)
Doubletree-branded hotels 106.45 115.85 (8.1)
Sheraton-branded hotels 104.89 118.23 (11.3)
Other hotels 83.77 85.73 (2.3)
Total hotels 100.36 108.61 (7.6)
</Table>
<Table>
<Caption>
REVPAR ($)
-----------------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Embassy Suites hotels 83.06 98.58 (15.7)
Holiday Inn-branded hotels 47.50 57.21 (17.0)
Crowne Plaza hotels 53.40 68.44 (22.0)
Doubletree-branded hotels 65.51 83.79 (21.8)
Sheraton-branded hotels 59.20 80.95 (26.9)
Other hotels 46.63 56.15 (17.0)
Total hotels 60.80 74.22 (18.1)
</Table>
20
OPERATING STATISTICS FOR OUR TOP 10 MSAS
(FOR THE THREE MONTHS ENDED MARCH 31)
<Table>
<Caption>
OCCUPANCY (%)
-----------------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Dallas 51.6 67.2 (23.2)
Atlanta 69.0 74.6 (7.6)
San Francisco 57.8 72.7 (20.5)
Houston 69.2 76.1 (9.1)
Orlando 69.5 75.5 (7.9)
New Orleans 73.7 78.6 (6.3)
Phoenix 69.6 76.8 (9.4)
Philadelphia 53.8 57.1 (5.6)
San Jose 59.6 72.2 (17.5)
Chicago 53.2 64.1 (17.1)
</Table>
<Table>
<Caption>
ADR ($)
-----------------------------------------
2002 2001 % VARIANCE
---- ---- ----------
Dallas 91.69 95.16 (3.7)
Atlanta 94.79 102.52 (7.5)
San Francisco 117.20 152.44 (23.1)
Houston 75.37 78.35 (3.8)
Orlando 89.60 99.74 (10.2)
New Orleans 164.94 164.76 (0.1)
Phoenix 129.50 146.86 (11.8)
Philadelphia 110.53 111.30 (0.7)
San Jose 125.09 160.07 (21.9)
Chicago 112.38 130.37 (13.8)
</Table>
<Table>
<Caption>
REVPAR ($)
-----------------------------------------
2002 2001 % VARIANCE
---- ------ ----------
Dallas 47.33 63.94 (26.0)
Atlanta 65.37 76.53 (14.6)
San Francisco 67.74 110.79 (38.9)
Houston 52.16 59.64 (12.6)
Orlando 62.30 75.34 (17.3)
New Orleans 121.51 129.47 (6.2)
Phoenix 90.13 112.77 (20.1)
Philadelphia 59.51 63.50 (6.3)
San Jose 74.52 115.55 (35.5)
Chicago 59.76 83.57 (28.5)
</Table>
21
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of cash to meet our cash requirements, including
distributions to stockholders and repayments of indebtedness, is from the
results of operations of our hotels. For the three months ended March 31, 2002,
net cash flow provided by operating activities, consisting primarily of hotel
operations, was $11.3 million and FFO was $29.3 million. We currently expect
that our operating cash flow will be sufficient to fund our continuing
operations, including our required capital expenditures, debt service
obligations and distributions to shareholders required to maintain our REIT
status. However, due to the sharp reduction in travel following the terrorist
attacks of September 11 and the resultant drop in RevPAR and profits from our
hotel operations, we plan to limit distributions to holders of our common stock
to our available cash flow. Accordingly, distributions to holders of common
stock may be significantly reduced or possibly eliminated in future periods.
Prior to January 1, 2001, substantially all of our hotels were leased
to third parties under leases providing for the payment of rent based, in part,
upon revenues from the hotels. Accordingly, our 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, we acquired the leaseholds of 96 of our
hotels and on July 1, 2001, we acquired our remaining 88 hotel leases. As a
result of these acquisitions, we also became subject to the risks of fluctuating
hotel operating margins at our 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 our
results of operations. The recent economic slowdown and the sharp drop in
occupancy following the terrorist attacks of September 11 resulted both in
declines in RevPAR and an erosion in operating margins during the year ended
December 31, 2001, compared to 2000 that continued into the first quarter of
2002. If the declines in hotel RevPAR and/or operating margins worsen or
continue for a protracted time, they could have a material adverse effect on our
operations and earnings.
In anticipation of a continued negative RevPAR environment, we amended
our unsecured line of credit on November 8, 2001. The amendment allows for the
relaxation of certain financial covenants through December 31, 2002, with a
step-up in covenants at September 30, 2002, including the unsecured interest
coverage, fixed charge coverage, and total leverage tests. The interest rate
remains on the same floating rate basis with a tiered spread based on our debt
leverage ratio, but with added tiers to reflect the higher permitted leverage.
The lenders' commitments under the line of credit remain at $615 million, and we
had approximately $39 million outstanding under the facility at March 31, 2002.
22
In addition to the financial covenants, our line of credit includes
certain other affirmative and negative covenants, including: restrictions on our
ability to create or acquire wholly-owned subsidiaries; restrictions on the
operation/ownership of our hotels; limitations on our ability to lease property
or guarantee leases of other persons; limitations on our ability to make
restricted payments; limitations on our ability to merge or consolidate with
other persons, issue stock of our subsidiaries and sell all or substantially all
of our assets; restrictions on our ability to construct new hotels or acquire
hotels under construction; limitations on our ability to change the nature of
our business; limitations on our ability to modify certain instruments;
limitations on our ability to create liens; limitations on our ability to enter
into transactions with affiliates; and limitations on our ability to enter into
joint ventures. Under the most recent amendment to our line of credit, we agreed
to certain more stringent limitations through September 30, 2002. Since January
1, 2002, we may acquire hotel properties and make joint venture investments,
subject to compliance with debt limitations, but with the flexibility to make at
least $50 million of acquisitions and $20 million of joint venture investments,
subject to increases under certain circumstances. Also, we may be limited in
making discretionary capital expenditures through September 30, 2002, except for
the expansion or renovation of our existing hotels in an aggregate amount of $20
million, subject to an increase under certain circumstances. At March 31 2002,
we were in compliance with all of these covenants.
Unless our business has recovered sufficiently from the sharp declines
in RevPAR experienced following the September 11 terrorist attacks, upon the
step-up in financial covenants on September 30, 2002, as provided by the
November amendment to our line of credit, we may be unable to satisfy all of the
increased covenant requirements. In such an event, we may need to obtain further
amendments from our lenders under the line of credit. We are not certain
whether, to what extent, or upon what terms the lenders may be willing to
continue a relaxation of the covenants. Further amendments to our line of credit
may result in additional restrictions on us and may adversely affect our ability
to run our business and financial affairs. At March 31, 2002, we had, and
currently have, sufficient cash on hand to repay our line of credit borrowings
in full.
Failure to satisfy one or more of the financial or other covenants under
our line of credit would constitute an event of default, notwithstanding our
ability to meet our debt service obligations. Other events of default under our
line of credit include, without limitation, a default in the payment of other
indebtedness of $10 million or more, bankruptcy and a change of control.
Our other borrowings contain affirmative and negative covenants that are
generally equal to or less restrictive than those in the line of credit. Most of
our mortgage debt is nonrecourse to us and contains provisions allowing for the
substitution of collateral upon the satisfaction of certain conditions. Most of
the mortgage debt is prepayable; subject, however, to various prepayment
penalties, yield maintenance, or defeasance obligations.
During our first quarter earnings conference call on May 1, 2002, the
Company's management noted that they expected to meet the most recent RevPAR
guidance for the second quarter of a negative 4% to 7%, compared to the same
period of the prior year. Under this guidance, FFO was projected to be within
the range of $52 to $57 million for the second quarter of 2002, and EBITDA was
projected to be within the range of $101 to $106 million for the same period.
Under current guidance that full year 2002 hotel portfolio RevPAR,
compared to 2001, is expected to be flat to negative 3%. RevPAR changes by
quarter for 2002, compared to 2001, are currently expected to fall within the
following ranges:
<Table>
Second quarter (4)% to (7)%
Third quarter 6% to 9%
Fourth quarter 13% to 16%
</Table>
23
FFO for 2002 is anticipated to be within the range of $150 to $174
million and EBITDA to be within the range of $345 to $360 million.
In the event that RevPAR declines, compared to the prior year, are
greater than anticipated in the preparation of this guidance, or operating
margins are lower than anticipated, the Company may not meet its forecast for
the second quarter or the remainder of the year. Additionally, the Company may
be unable to satisfy the financial covenants under its line of credit. Although
it is too early to draw conclusions with respect to the second quarter, RevPAR
results for April 2002 were negative 8.9% and the RevPAR performance of the
Company's hotels during the first two weeks of May have been below our forecast.
Our decision to pay a quarterly common dividend will be determined each
quarter based upon the operating results of that quarter, economic conditions,
and other operating trends. We currently anticipate that we should be able to
pay an aggregate of $1.00 in dividends per common share during 2002, based on
the low end of our current FFO estimates. For the three months ended March 31,
2002, the Company paid a dividend of $0.15 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.
On March 31, 2002, our line of credit represented approximately 2% of
our total debt, with $39 million outstanding. We also maintain flexibility in
working with our lenders, as a result of our $112 million of cash and
equivalents on hand, $2.4 billion of unencumbered assets, and a breakeven
portfolio hotel occupancy, after debt service and preferred equity
distributions, of approximately 50%. The $576 million of capacity under our line
of credit is expected to remain available to take advantage of opportunities
that may present themselves as the industry begins to recover in late 2002 and
2003.
We may incur indebtedness to make property acquisitions, to purchase
shares of our 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 our investments are insufficient for such purposes.
At March 31, 2002, we had $112 million of cash and cash equivalents.
Certain significant credit and debt statistics at March 31, 2002, are as
follows:
o Interest coverage ratio of 2.0x for the three month period ended March
31, 2002
o Borrowing capacity of $576 million under our line of credit
o Consolidated debt equal to 40.1% of our investment in hotels, at cost
o Fixed interest rate debt equal to 89% of our total debt
o Weighted average maturity of fixed interest rate debt of approximately
6.6 years
o Mortgage debt to total assets of 17%
o Debt of approximately $10 million maturing in 2002
o Debt of approximately $35 million maturing in 2003
o Debt of approximately $229 million maturing in 2004
We spent approximately $8.6 million on upgrading and renovating our
hotels during the three months ended March 31, 2002. Notwithstanding the current
significant economic downturn, we believe that our hotels will continue to
benefit from our extensive capital expenditure programs in previous years. We
currently anticipate 2002 maintenance capital expenditures of between $40 and
$50 million, depending upon the pace of the anticipated economic recovery.
Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2002 approximately 89% of our consolidated debt had fixed
interest rates. Currently, market rates of interest are below the rates we are
obligated to pay on our fixed-rate debt.
24
The following table provides information about our financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations at March 31, 2002, the
table presents scheduled maturities and weighted average interest rates, by
maturity dates. For interest rate swaps, 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 March 31, 2002. The fair value of our fixed rate debt indicates the estimated
principal amount of debt having the same debt service requirements that could
have been borrowed at March 31, 2002, at then current market interest rates.
The fair value of our variable to fixed interest rate swaps indicates
the estimated amount that would have been paid by us had the swaps been
terminated at March 31, 2002.
EXPECTED MATURITY DATE
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE
------ ------- -------- ------- ------- ---------- ----------- ----------
LIABILITIES
Debt:
Fixed rate $9,537 $34,904 $189,228 $42,635 $14,217 $1,601,945 $1,892,466 $1,772,925
Average interest rate 7.88% 7.43% 7.42% 7.48% 8.04% 8.66% 8.48%
Floating rate $ 39,317 $650 $ 39,967 $ 39,967
Average interest rate(a) 8.08% 8.59% 8.09%
Discount accretion $ (7,481) $ (7,481)
----------
Total debt $1,924,952 $1,805,411
INTEREST RATE SWAPS:
Fixed to floating $175,000 $ 175,000 $ (2,366)
Average pay rate 5.08%
Fixed rate 7.38%
</Table>
(a) The average floating rate of interest represents the projected forward
rate at March 31, 2002.
Swap contracts, such as described above, contain a credit risk, in that
the counterparties may be unable to fulfill the terms of the agreement. We
minimize that risk by evaluating the creditworthiness of our counterparties, who
are limited to major banks and financial institutions, and we do not anticipate
nonperformance by the counterparties. The credit ratings for the financial
institutions that are counterparties to the interest rate swap agreements range
from A- to AA.
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 us to reduce room rates in the near term and may limit our
ability to raise room rates in the future.
SEASONALITY
The lodging business is seasonal in nature. Generally, hotel revenues
are greater in the second and third calendar quarters than in the first and
fourth calendar quarters, although this may not be true for hotels in major
tourist destinations. Revenues for hotels in tourist areas generally are
substantially greater during tourist season than other times of the year.
Seasonal variations in revenue at our hotels can be expected to cause quarterly
fluctuations in our revenues. Quarterly earnings also may be adversely affected
by events beyond our control, such as extreme weather conditions, economic
factors and other considerations affecting travel. Historically, to the extent
that cash flow from operations has been insufficient during any quarter, due to
temporary or seasonal fluctuations in revenues, we have utilized cash on hand or
borrowings under our line of credit to make distributions to our equity holders.
25
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
is incorporated herein by reference to the discussion under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" contained elsewhere in this
Quarterly Report on Form 10-Q for the three months ended March 31, 2002.
26
PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to certain other transactions by the Company
through March 31, 2002, see Note 1 of Notes to Consolidated Financial Statements
of FelCor Lodging Trust Incorporated contained in Item 1 of Part I of this
Quarterly Report on Form 10-Q. Such information is incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description
------ -----------
None
(b) Reports on Form 8-K:
A current report on Form 8-K was filed by the Company on March 25,
2002. This filing, under Item 5, attached as an exhibit a press release dated
December 5, 2001, relating to the announcement of Michael A. DeNicola as
Executive Vice President and Chief Investment Officer. In addition, this filing,
under Item 5, also attached as an exhibit a press release dated as of February
6, 2002, reporting the operating results for the fourth quarter ended December
31, 2001.
A current report on Form 8-K was filed by the Company on April 4, 2002.
This filing, under Item 5, attached as exhibits a Placement Agency Agreement
between the Company and Merrill Lynch and Co., Merrill Lynch, Pierce, Fenner and
Smith Incorporated and three separate purchase agreements with prospective
purchasers of the Company's depositary shares (as defined below). Pursuant to
these agreements, the Company issued an aggregate of 1,025,800 depository shares
(the "Depositary Shares"), each representing 1/100th of a share of 9% Series B
Cumulative Redeemable Preferred Stock, par value $0.01 per share ("Series B
Preferred Stock"), of the Company.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 2002
FELCOR LODGING TRUST INCORPORATED
By: /s/ Richard J. O'Brien
------------------------------
Richard J. O'Brien
Executive Vice President and
Chief Financial Officer
28