1
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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, 1997
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 0-24250
FELCOR SUITE HOTELS, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 72-2541756
(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 Suite Hotels, Inc. outstanding on April 30, 1997 was 26,587,733.
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2
FELCOR SUITE HOTELS, INC.
INDEX
PART I. -- FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements .................................................................... 3
FELCOR SUITE HOTELS, INC
Consolidated Balance Sheets - March 31, 1997 (Unaudited)
and December 31, 1996 ........................................................... 3
Consolidated Statements of Operations -- For the Three Months
Ended March 31, 1997 and 1996 (Unaudited) ....................................... 4
Consolidated Statements of Cash Flows -- For the Three Months
Ended March 31, 1997 and 1996 (Unaudited) ....................................... 5
Notes to Consolidated Financial Statements ........................................... 7
DJONT OPERATIONS, L.L.C
Consolidated Balance Sheets - March 31, 1997 (Unaudited)
and December 31, 1996 ........................................................... 12
Consolidated Statements of Operations -- For the Three Months
Ended March 31, 1997 and 1996 (Unaudited) ....................................... 13
Consolidated Statements of Cash Flows -- For the Three Months
Ended March 31, 1997 and 1996 (Unaudited) ....................................... 14
Notes to Consolidated Financial Statements ........................................... 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 17
General/First Quarter Highlights ..................................................... 17
Results of Operations ................................................................ 18
Liquidity and Capital Resources ...................................................... 22
PART II. -- OTHER INFORMATION
Item 2. Changes in Securities ................................................................... 25
Item 5. Other Information ....................................................................... 25
Item 6. Exhibits and Reports on Form 8-K ........................................................ 25
SIGNATURES ...................................................................................... 26
2
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR SUITE HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $47,112
and $36,718 at March 31, 1997 and December 31, 1996 respectively ............ $ 1,061,340 $ 899,691
Investment in unconsolidated partnerships ..................................... 118,320 59,867
Cash and cash equivalents ..................................................... 10,957 7,793
Deposits ...................................................................... 1,616 1,616
Due from Lessee ............................................................... 15,630 5,526
Deferred expenses, net of accumulated amortization of $683
and $364 at March 31, 1997 and December 31, 1996 ............................ 3,702 3,235
Other assets .................................................................. 793 1,060
----------- -----------
Total assets ....................................................... $ 1,212,358 $ 978,788
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Distributions payable ......................................................... $ 17,610 $ 16,090
Accrued expenses and other liabilities ........................................ 4,740 5,235
Debt .......................................................................... 353,650 226,550
Capital lease obligations ..................................................... 12,577 12,875
Minority interest in Operating Partnership, 2,765 and 2,786 units issued and
outstanding at March 31, 1997 and December 31, 1996, respectively ... 62,661 76,112
Minority interest in other partnerships ....................................... 8,043
----------- -----------
Total liabilities .................................................. 459,281 336,862
----------- -----------
Commitments and contingencies (Note 2)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized, 6,050 shares
issued and outstanding at March 31, 1997 and December 31, 1996 ........... 151,250 151,250
Common stock, $.01 par value, 50,000 shares authorized, 26,564 and
23,502 shares issued and outstanding at March 31, 1997
and December 31, 1996, respectively ...................................... 266 235
Additional paid in capital .................................................... 620,465 505,082
Unearned officers' and directors' compensation ................................ (2,448) (1,454)
Distributions in excess of earnings ........................................... (16,456) (13,187)
----------- -----------
Total shareholders' equity ......................................... 753,077 641,926
----------- -----------
Total liabilities and shareholders' equity ......................... $ 1,212,358 $ 978,788
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
4
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-----------------
1997 1996
------- -------
Revenues:
Percentage lease revenue ........................................................ $35,370 $23,976
Income from unconsolidated partnerships ......................................... 1,127 320
Other income .................................................................... 95 146
------- -------
Total revenue .......................................................... 36,592 24,442
------- -------
Expenses:
General and administrative ...................................................... 972 382
Depreciation .................................................................... 10,417 4,516
Taxes, insurance and other ...................................................... 5,207 3,529
Interest expense ................................................................ 5,601 2,424
Minority interest in Operating Partnership ...................................... 1,417 1,620
Minority interest in other partnerships ......................................... 21
------- -------
Total expenses ......................................................... 23,635 12,471
------- -------
Net income ........................................................................ 12,957 11,971
Preferred dividends ............................................................... 2,949
------- -------
Net income applicable to common shareholders ...................................... $10,008 $11,971
======= =======
Per common share information:
Net income ...................................................................... $ 0.39 $ 0.53
======= =======
Weighted average number of common shares outstanding ............................ 25,459 22,614
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
4
5
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income ................................................................ $ 12,957 $ 11,971
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation .................................................... 10,417 4,516
Amortization of deferred financing fees and organization costs .. 319 115
Amortization of unearned officers' and directors' compensation .. 232 69
Income from unconsolidated partnerships ......................... (1,127) (320)
Cash distributions from unconsolidated partnerships ............. 580
Minority interest in Operating Partnership ...................... 1,417 1,620
Minority interest in other partnerships ......................... 21
Changes in assets and liabilities:
Due from Lessee ................................................. (10,104) (5,652)
Deferred expenses and other assets .............................. (542) (1,005)
Accrued expenses and other liabilities .......................... (942) 2,011
--------- ---------
Net cash flow provided by operating activities ........ 13,228 13,325
--------- ---------
Cash flows from investing activities:
Acquisition of hotels ..................................................... (151,644) (226,577)
Acquisition of interests in unconsolidated partnerships ................... (57,756) (24,000)
Improvements and additions to hotels ...................................... (12,377) (9,272)
--------- ---------
Net cash flow used in investing activities ............ (221,777) (259,849)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings .................................................. 132,000 66,200
Repayment of borrowings ................................................... (4,900) (18,746)
Proceeds from sale of common stock ........................................ 106,500 37,827
Costs associated with public offerings .................................... (5,796)
Distributions paid to limited partners .................................... (1,383) (1,102)
Distributions paid to preferred shareholders .............................. (2,949)
Distributions paid to common shareholders ................................. (11,759) (3,816)
--------- ---------
Net cash flow provided by financing activities ........ 211,713 80,363
--------- ---------
Net change in cash and cash equivalents ............................................. 3,164 (166,161)
Cash and cash equivalents at beginning of periods ................................... 7,793 166,821
--------- ---------
Cash and cash equivalents at end of periods ......................................... $ 10,957 $ 660
========= =========
Supplemental cash flow information --
Interest paid ............................................................. $ 4,107 $ 1,455
========= =========
5
6
FELCOR SUITE HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Supplemental disclosure of noncash financing and investing activities:
In the first three months of 1997 the Company provided for the grant of
an aggregate of 41,000 shares of restricted common stock to officers and
directors which, at date of issuance, were valued at $35.00 to $35.375 per
share.
In the first three months of 1997 the Company purchased certain assets
and assumed certain liabilities of hotels. These purchases were recorded under
the purchase method of accounting. The fair value of the acquired assets and
liabilities recorded at the date of acquisition are as follows:
Assets acquired ................................. $ 159,666
Minority interest contribution .................. (8,022)
---------
Net cash paid ............................. $ 151,644
=========
On March 30, 1997, the Company declared a dividend of $0.50 per share of
Common Stock and $0.4875 per share on its Series A Preferred Stock, which was
paid on April 30, 1997 to holders of record on April 15, 1997.
The accompanying notes are an integral part of these
consolidated financial statements.
6
7
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS
FelCor Suite Hotels, Inc., formed as a self-administered real estate
investment trust ("REIT"), was incorporated on May 16, 1994 and commenced
operations on July 28, 1994. At the commencement of operations, FelCor Suite
Hotels, Inc. ("FelCor") acquired an equity interest of approximately 75% in
FelCor Suites Limited Partnership (the "Operating Partnership"), which owned
six Embassy Suites(R) hotels (the "Initial Hotels") with an aggregate of 1,479
suites. The Operating Partnership had acquired the Initial Hotels through a
merger with entities, originally formed in 1991, controlled by Hervey A.
Feldman and Thomas J. Corcoran, Jr., the Chairman of the Board of Directors and
Chief Executive Officer of the Company, respectively.
At March 31, 1997, FelCor owned interests in 58 hotels with an aggregate
of 13,642 suites (collectively the "Hotels") through its 90.6% aggregate
ownership of the Operating Partnership and its subsidiaries (collectively, the
"Company"). FelCor also acts as the sole general partner in the Operating
Partnership. The Company owns 100% equity interests in 42 of the Hotels (9,750
suites), a 90% interest in a partnership owning three hotels (691 suites), and
50% interests in separate partnerships that own 13 hotels (3,201 suites). At
March 31, 1997, 48 of the Hotels were operated as Embassy Suites hotels, five
as Doubletree Guest Suites(R) hotels, one as a Hilton Suites(R) hotel, one
hotel was in the process of conversion to an Embassy Suites hotel and three
hotels were in the process of conversion to Doubletree Guest Suites hotels.
The Hotels are located in 24 states, with 20 hotels in California and Florida.
The following table provides certain information regarding the Hotels through
March 31, 1997:
NUMBER OF HOTELS AGGREGATE
ACQUIRED NUMBER OF SUITES ACQUISITION PRICE
---------------- ---------------- -----------------
(DOLLARS IN MILLIONS)
1994 7 1,730 $ 107.3
1995 13 2,649 237.1*
1996 23 5,769 560.5**
1ST QUARTER 1997 15 3,446 209.4***
-- ------ ---------
58 13,594 1,114.3
==
Additional suites constructed by
the Company at Hotels 48 5.3
------ ---------
13,642 $ 1,119.6
====== =========
* Includes the purchase price of the Company's 50% interest in an
unconsolidated partnership owning one hotel with 262 suites.
** Includes the purchase price of the Company's 50% interests in
separate unconsolidated partnerships owning four hotels with an
aggregate 1,005 suites.
*** Includes the purchase price of the Company's 50% interests in
separate unconsolidated partnerships owning eight hotels with an
aggregate 1,934 suites.
The Company has started construction on 129 net additional suites,
meeting rooms and other public area upgrades at its Boston-Marlborough,
Massachusetts hotel at an estimated cost of $15.8 million with an expected
completion in the third quarter of 1997. The Company has also begun
construction on an aggregate 134 suites at its Jacksonville, Florida and
Orlando (North), Florida hotels at an aggregate projected cost of $10.2 million
with an expected completion in early 1998.
7
8
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS -- (CONTINUED)
The Company leases all of the Hotels to DJONT Operations, L.L.C.
("DJONT"), or a consolidated subsidiary thereof (collectively, the "Lessee"),
under operating leases providing for the payment of percentage rent (the
"Percentage Leases"). Hervey A. Feldman and Thomas J. Corcoran, Jr., the
Chairman of the Board and President of the Company, respectively, beneficially
own a 50% voting equity interest in DJONT. The remaining 50% non-voting equity
interest in DJONT is beneficially owned by the children of Charles N.
Mathewson, a director of the Company. The Company's partners in partnerships
owning 12 of the Hotels hold special purpose non-voting equity interests in the
consolidated subsidiary of DJONT which leases such Hotels, which interests
entitle them to 50% of such subsidiary's net income before overhead with
respect to such Hotels. In addition, the Company's partner in a partnership
owning three of the Hotels holds a 50% non-voting equity interest in the
consolidated subsidiary of DJONT leasing those Hotels. See Note 2 Commitments
and Related Party Transactions for additional discussion regarding Lessee
consolidated subsidiaries. The Lessee has entered into management agreements
pursuant to which 47 of the Hotels are managed by Promus Hotels, Inc.
("Promus"), eight of the Hotels are managed by a subsidiary of Doubletree Hotel
Corporation ("Doubletree"), two of the Hotels are managed by American General
Hospitality, Inc. ("AGHI") and one is managed by Coastal Hotel Group, Inc.
("Coastal").
A brief discussion of the hotel assets acquired and other significant
transactions occurring in the first quarter of 1997 follows:
On February 3, 1997, the Company sold three million shares of Common
Stock to the public, at $35.50 per share, pursuant to the Company's omnibus
shelf registration statement ("Shelf Registration"), which provides for
offerings by the Company from time to time of up to an aggregate of $500
million in securities, which may include its debt securities, preferred stock,
common stock and/or common stock warrants. The Company received net proceeds
of approximately $100.7 million from this transaction. The proceeds from this
offering were used to immediately fund the acquisition of 10 hotels acquired
on February 4, 1997.
On February 4, 1997, the Company acquired 50% partnership interests in
eight existing Embassy Suites hotels located in Atlanta, Georgia; Kansas City,
Missouri; Overland Park, Kansas; Raleigh, North Carolina; San Antonio, Texas;
Austin, Texas; Covina, California; and Secaucus, New Jersey with a total of
1,934 suites for approximately $58 million, subject to a 50% share of
approximately $86 million in existing non-recourse debt. Promus holds the
remaining 50% partnership interests in these hotels. The Company also acquired
100% ownership in two Embassy Suites hotels located in Bloomington, Minnesota
and Omaha, Nebraska with a total of 408 suites for approximately $39 million.
These two hotels were subsequently converted to Doubletree Guest Suites hotels
on May 1, 1997.
On February 19, 1997, the Company acquired the 215 suite Embassy Suites -
Los Angeles Airport (LAX North) hotel for approximately $22 million from a
Japanese-owned limited partnership which had filed for bankruptcy. The hotel
will remain an Embassy Suites hotel managed by Promus.
On February 21, 1997, the Company acquired the 198 suite Hilton Inn hotel
in Dana Point, California for approximately $17.2 million. The Dana Point
hotel will be converted to a Doubletree Guest Suites hotel in May 1997 and is
managed by Doubletree.
On March 10, 1997, the Company increased its unsecured revolving line of
credit ("Line of Credit") from $250 million to $400 million, which included a
reduction in unused commitment fees from 35 basis points to 25 basis points,
under substantially the same terms as the original Line of Credit. At the end
of the first quarter of 1997, the Company had drawn $243 million under the Line
of Credit.
On March 24, 1997, the Company acquired, through a 90% owned partnership,
interests in three Doubletree Guest Suites hotels, totaling 691 suites, located
in Troy, Michigan; Austin, Texas; and near the Baltimore Washington
8
9
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITIONS -- (CONTINUED)
International (BWI) Airport for approximately $80 million. The Company paid
approximately $72 million for its 90% partnership interest and Doubletree paid
approximately $8 million for its 10% limited partnership interest. Doubletree
will continue to manage the hotels.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and
should be read in conjunction with the financial statements and notes thereto
of the Company and the Lessee included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 (the "10-K"). The notes to
the financial statements included herein highlight significant changes to the
notes included in the 10-K and present interim disclosures required by the SEC.
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Upon final completion of the conversions of four hotels, the Hotels will
operate as Embassy Suites (49), Doubletree Guest Suites (8) and Hilton Suites
(1). The Embassy Suites hotels and Hilton Suites hotel will operate pursuant
to franchise license agreements which require the payment of fees based on a
percentage of suite revenue. These fees are paid by the Lessee. There are no
separate franchise license agreements with respect to the Doubletree Guest
Suites hotels, which rights are included in the management agreement.
The Hotels are managed by Promus (47), Doubletree (8), AGHI (2) and
Coastal (1) on behalf of the Lessee. The Lessee generally pays the managers a
base management fee based on a percentage of total revenue and an incentive
management fee based on the Lessee's net income before overhead expenses.
The Company is to receive rental income from the Lessee under the
Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels), 2006
(19 hotels) and 2007 (7 hotels). The rental income under the Percentage Leases
between the 13 unconsolidated partnerships, of which the Company owns 50%, and
the Lessee are payable to the respective partnerships and as such is not
included in the following schedule of future lease commitments to the Company.
Minimum future rental income (i.e., base rents) to the Company under these
noncancellable operating leases at March 31, 1997 is as follows (in thousands):
YEAR
----
Remainder of 1997 . . . . . . . . . . . . . . . . . . . . . . $ 55,322
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,764
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,764
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,764
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,764
2002 and thereafter . . . . . . . . . . . . . . . . . . . . . 302,172
--------
$652,550
========
Minority equity interests in two of DJONT's consolidated subsidiaries,
which lease a total of 15 of the Hotels, are held by unrelated third parties.
These two subsidiaries have entered into separate revolving credit agreements
with an affiliate of Messrs. Feldman and Corcoran and/or the holders of such
minority equity interests or affiliates thereof, which provide these
subsidiaries with the right to borrow up to an aggregate of $9.0 million, to
the extent necessary to enable them to pay rent and other obligations due under
the Percentage Leases relating to such Hotels. Amounts borrowed thereunder, if
any, will be subordinate in right of repayment to the prior payment, when due,
of rent and other obligations under such Percentage Leases. No loans were
outstanding under such agreements at March 31, 1997.
9
10
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations at March 31, 1997 and December 31,
1996 consist of the following (in thousands):
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
Line of Credit ........................... $243,000 $115,000
Term loan ................................ 85,000 85,000
Renovation loan .......................... 25,000 25,000
Other debt payable ....................... 650 1,550
-------- --------
$353,650 $226,550
======== ========
On March 10, 1997, the Company increased its unsecured Line of Credit
from $250 million to $400 million, which included a reduction in unused
commitment fees from 35 basis points to 25 basis points, under substantially
the same terms as the original Line of Credit obtained on September 30, 1996.
Interest payable on borrowings under the Line of Credit is variable, determined
from a ratings-based pricing matrix, and is currently set at LIBOR plus 175
basis points.
The Company has an $85 million collateralized term loan outstanding at
March 31, 1997. This term loan bears interest at LIBOR plus 150 basis points.
Also outstanding at March 31, 1997 is a renovation loan of $25 million that
bears interest at LIBOR plus 45 basis points. At March 31, 1997, 30 day LIBOR
was 5.6875%.
Under its loan agreements the Company is required to satisfy various
affirmative and negative covenants. The Company was in compliance with these
covenants at March 31, 1997.
Capital lease obligations at March 31, 1997 and December 31, 1996 consist
of the following (in thousands):
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
Capital land and building lease obligations ................... $ 9,592 $ 9,675
Capital equipment lease obligations ........................... 2,985 3,200
------- -------
$12,577 $12,875
======= =======
4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
The Company owned 50% interests in separate partnerships owning 13
hotels, a parcel of undeveloped land and a condominium management company at
March 31, 1997. The Company is accounting for its investments in these
unconsolidated partnerships under the equity method.
10
11
FELCOR SUITE HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS - (CONTINUED)
Summarized combined financial information for unconsolidated partnerships, of
which the Company owns 50%, is as follows (in thousands):
MARCH 31, 1997
----------------------
1997 1996
--------- ---------
Balance sheet information:
Net book value of partnership assets ........................... $ 261,671 $ 23,214
Non-recourse mortgage debt ..................................... $ 148,128 $ 24
Equity ......................................................... $ 123,454 $ 24,960
Statement of operations information:
Percentage lease revenue ....................................... $ 9,505 $ 751
Expenses:
Depreciation .............................................. 3,148
Taxes, insurance and other ................................ 1,388 111
Interest expense .......................................... 2,094
--------- ---------
Total expenses ........................................... 6,630 111
--------- ---------
Net income ..................................................... $ 2,875 $ 640
========= =========
50% of net income attributable to the Company .................. $ 1,437 $ 320
Amortization of cost in excess of book value ................... (310)
--------- ---------
Income from unconsolidated partnerships ........................ $ 1,127 $ 320
========= =========
5. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the quarter
ended March 31, 1997 and 1996 (in thousands):
1997 1996
------ ------
Real estate and personal property taxes ....................... $4,410 $2,637
Property insurance ............................................ 408 274
Land lease expense ............................................ 249 375
State franchise taxes ......................................... 140 152
Other ......................................................... 91
------ ------
Total taxes, insurance and other ........................ $5,207 $3,529
====== ======
6. SUBSEQUENT EVENTS
On April 24, 1997, the Company filed its second $500 million omnibus
shelf registration statement with the Securities and Exchange Commission. When
this registration statement becomes effective, it will enable the Company to
provide offerings from time to time up to an additional $500 million in
securities, which may include debt securities, preferred stock, common stock
and/or common stock warrants. At March 31, 1997, approximately $242 million in
registered securities also remains available under its original omnibus shelf
registration statement.
11
12
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1996
-------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents ..................................................... $ 27,476 $ 5,208
Accounts receivable, net ...................................................... 12,933 8,700
Inventories ................................................................... 2,548 2,105
Prepaid expenses .............................................................. 1,210 255
Other assets .................................................................. 2,245 2,203
-------- --------
Total assets ........................................................ $ 46,412 $ 18,471
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable, trade ....................................................... $ 3,254 $ 1,273
Accounts payable, other ....................................................... 12,758 2,398
Due to FelCor Suite Hotels, Inc. .............................................. 15,630 5,526
Accrued expenses and other liabilities ........................................ 20,232 15,677
Minority interest ............................................................. 127
-------- --------
Total liabilities ................................................... 52,001 24,874
-------- --------
Shareholders' deficit:
Capital ....................................................................... 1 1
Distributions in excess of earnings ........................................... (5,590) (6,404)
-------- --------
Total shareholders' deficit ......................................... (5,589) (6,403)
-------- --------
Total liabilities and shareholders' deficit ......................... $ 46,412 $ 18,471
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
12
13
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
Revenue:
Suite revenue ................................................................ $ 93,153 $ 52,176
Food and beverage revenue .................................................... 4,028 3,863
Food and beverage rent ....................................................... 965 426
Other revenue ................................................................ 7,069 3,978
-------- --------
Total revenues ........................................................... 105,215 60,443
-------- --------
Expenses:
Property operating costs and expenses ........................................ 25,182 13,244
General and administrative ................................................... 7,166 4,085
Advertising and promotion .................................................... 6,846 4,278
Repair and maintenance ....................................................... 4,904 2,719
Utilities .................................................................... 4,130 2,497
Management fee ............................................................... 2,146 1,519
Franchise fee ................................................................ 2,841 1,015
Food and beverage expenses ................................................... 3,865 3,797
Percentage lease payments .................................................... 44,615 24,727
Lessee overhead expenses ..................................................... 518 324
Liability insurance .......................................................... 719 377
Other ........................................................................ 869 1,006
-------- --------
Total expenses ........................................................... 103,801 59,588
-------- --------
Income before minority interest ................................................... 1,414 855
Minority interest ............................................................ 300
-------- --------
Net income ........................................................................ $ 1,114 $ 855
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
13
14
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income ..................................................................... $ 1,114 $ 855
Adjustments to reconcile net income to net cash provided by
operating activities:
Changes in assets and liabilities:
Accounts receivable ....................................................... (4,233) (2,510)
Inventories ............................................................... (443) (290)
Prepaid expenses .......................................................... (955) (67)
Other assets .............................................................. (42) (838)
Minority interest ......................................................... 127
Due to FelCor Suite Hotels, Inc. .......................................... 10,104 5,652
Accounts payable, accrued expenses and other liabilities .................. 16,596 5,997
-------- --------
Net cash flow provided by operating activities ....................... 22,268 8,799
-------- --------
Net change in cash and cash equivalents ............................................. 22,268 8,799
Cash and cash equivalents at beginning of periods ................................... 5,208 5,345
-------- --------
Cash and cash equivalents at end of periods ......................................... $ 27,476 $ 14,144
======== ========
The accompany notes are an integral part of these consolidated financial
statements.
14
15
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
DJONT Operations, L.L.C. is a Delaware limited liability company
("DJONT") which was formed on June 29, 1994 and began operations on July 28,
1994. All of the voting Class A membership interest in DJONT
(representing a 50% equity interest) is beneficially owned by Hervey A.
Feldman and Thomas J. Corcoran, Jr. who serve as directors and officers of
FelCor Suite Hotels, Inc. (the "Company") and as managers and officers of
DJONT. All of the non-voting Class B membership interest in DJONT
(representing the remaining 50% equity interest) is owned by RGC Leasing, Inc.,
a Nevada corporation owned by the children of Mr. Mathewson, a director of the
Company. Each of the 58 hotels in which FelCor Suites Limited Partnership (the
"Operating Partnership") had an ownership interest at March 31, 1997 (the
"Hotels"), is leased to DJONT or a consolidated subsidiary thereof
(collectively, the "Lessee") pursuant to percentage leases ("Percentage
Leases"). The Company's partners in partnerships owning interests in 12 of the
Hotels hold special purpose non-voting equity interests in the consolidated
subsidiary of DJONT which leases such Hotels, which interests entitle them to
50% of such subsidiary's net income before overhead with respect to such
Hotels. In addition, the Company's partner in a partnership owning three of
the Hotels holds a 50% non-voting equity interest in the consolidated
subsidiary of DJONT leasing those Hotels. These subsidiaries of DJONT have
entered into separate revolving credit agreements with an affiliate of Messrs.
Feldman and Corcoran and/or the holders of such non-voting equity interests, or
affiliates thereof, which provide these subsidiaries with the right to borrow
up to an aggregate of $9.0 million, to the extent necessary to enable them to
pay rent and other obligations due under the Percentage Leases relating to such
hotels. Amounts borrowed thereunder, if any, will be subordinate in right of
repayment to the prior payment, when due, of rent and other obligations under
such Percentage Leases. No loans were outstanding under such agreements at
March 31, 1997.
Messrs. Feldman and Corcoran, as the beneficial owners of an aggregate
50% of DJONT, have entered into an agreement with the Company pursuant to which
they have agreed that, for a period of ten years, any distributions received by
them from DJONT (in excess of their tax liabilities with respect to the income
of DJONT) will be utilized to purchase common stock from the Company or units
of limited partner interest in the Operating Partnership at then current market
prices. The agreement stipulates that Messrs. Feldman and Corcoran are
restricted from selling any stock or units so acquired for a period of two
years from the date of purchase. RGC Leasing, Inc., which owns the other 50%
of DJONT, may elect to purchase common stock or units upon similar terms, at
its option. The independent directors of the Company may suspend or terminate
such agreement at any time.
Forty-eight of the Hotels are, and one is in the process of conversion
to, Embassy Suites(R) hotels, 47 of which are being managed for the Lessee by a
subsidiary of Promus Hotel Corporation ("Promus"). Two Embassy Suites hotels
are managed for the Lessee by American General Hospitality, Inc. ("AGHI") and
Coastal Hotel Group, Inc. ("Coastal"). Eight of the Hotels are, or are in the
process of conversion to, Doubletree Guest Suites(R) hotels and managed by a
subsidiary of Doubletree Hotels Corporation ("Doubletree"). One of the Hotels
is operated under a Hilton Suites(R) hotel franchise and managed by AGHI.
15
16
DJONT OPERATIONS, L.L.C.
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future lease commitments under the Percentage Leases
which expire in 2004 (7 hotels), 2005 (13 hotels) 2006 (23 hotels) and 2007 (15
hotels). Minimum future rental payments are computed based on the base rent as
defined under these noncancellable operating leases and are as follows (in
thousands):
YEAR AMOUNT
---- --------
Remainder of 1997................................ $ 74,181
1998 ............................................ 98,907
1999 ............................................ 98,908
2000 ............................................ 98,908
2001 ............................................ 98,908
2002 and thereafter.............................. 423,964
--------
$893,776
========
The Lessee typically pays a franchise fee ranging from 0% to 5% of
suite revenue, and marketing and reservation fees ranging from 1% to 3.5% of
suite revenue. In the cases where there is not a separate franchise agreement,
the right to use the brand name is included in the management agreement. Base
management fees typically range from 2% to 3% of total revenues. Incentive
management fees are based upon the hotel's net income before overhead and
typically range from 50% to 75% subject to a maximum annual payment of between
2% and 3% of applicable hotel revenues. In many cases managers and franchisors
have agreed to subordinate all or a portion of their fees at a specific hotel
either for a set period of time, or until the hotel provides a predetermined
return to the Lessee, or both.
16
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
For background information relating to the Company and the definitions
of certain capitalized terms used herein, reference is made to Note 1 of Notes
to Consolidated Financial Statements of FelCor Suite Hotels, Inc. appearing
elsewhere herein.
FIRST QUARTER HIGHLIGHTS:
o Funds From Operations, diluted for conversion of preferred stock
("FFO") of $26.7 million or $0.81 per share and unit sets a new
record for the Company.
o The 15 fully renovated Crown Sterling Suites(R) hotels (" CSS
Hotels") experienced a 19% increase in revenue per available suite
as compared to the first quarter of 1996.
o By the end of the quarter, the suite renovation program for all 18
CSS Hotels had been completed.
o The Company acquired interests in 15 hotels during the quarter,
representing a gross investment of approximately $250 million.
o The Company and Doubletree formed a new strategic alliance for the
acquisition of Doubletree Guest Suites hotels.
o The Company issued three million shares of common stock at $35.50
per share and increased its unsecured Line of Credit from $250
million to $400 million.
The Company's total revenues increased $12.2 million from $24.4
million to $36.6 million in the first three months of 1997 as compared to the
same period of 1996. FFO increased $8.6 million, from $18.1 million in the
first quarter of 1996 to $26.7 million in the same period of 1997. Suite
revenues, on a pro forma basis (without regard to ownership) increased 9.8% in
the first quarter of 1997 compared to 1996. The 18 CSS Hotels increased suite
revenue by 15.1% and those hotels owned prior to the acquisition of the CSS
Hotels ("the Original Hotels") increased suite revenue by 8.6%.
During the first three months of 1997, the Company acquired interests
in 15 hotels with 3,446 suites for an aggregate purchase price of $252.4
million, including its share of non-recourse debt of $43 million. Of the
hotels acquired during the first three months of 1997, nine will be operated
as Embassy Suites(R) hotels and six will operate as Doubletree Guest Suites(R)
hotels.
During the first quarter of 1997, the Company completed the suite
renovation program for the last three of the CSS hotels. The Company also
completed suite renovations at five of its other hotels and expects to begin
refurbishment at a number of the recently acquired hotels later in the year.
It is not expected that such refurbishment will have an adverse impact on the
Company's operations of the magnitude that the renovation of the CSS Hotels had
during 1996.
Improvements in suite revenues significantly impact the Company
because the Company's principal source of revenues is lease payments by the
Lessee under the Percentage Leases. The rent payable under the Percentage
Leases is computed as a percentage of suite revenues, food and beverage
revenues and food and beverage rents of the Hotels. For the three months ended
March 31, 1997, the portion of the Percentage Lease revenue derived from suite
revenues was 97.5%.
17
18
RESULTS OF OPERATIONS
The Company -- Actual
Three Months Ended March 31, 1997 and 1996
For the three months ended March 31, 1997 and 1996, the Company had
revenues of $36.6 million and $24.4 million, respectively, consisting primarily
of Percentage Lease revenues of $35.4 million and $24.0 million , and income
from unconsolidated partnerships of $1.1 million and $320,000, respectively.
The increases in Percentage Lease revenue of $11.4 million was
attributable primarily to the hotels acquired since the first quarter of 1996
and increased suite revenues at the Hotels. Since March 31, 1996, the Company
acquired twelve properties that are consolidated, for financial statement
purposes. These properties contributed $5.2 million to suite revenues in the
first quarter of 1997. The 13 Original Hotels increased suite revenues by
8.6% over the first quarter of 1996 and the CSS Hotels increased suite revenues
by 15.1% over the first quarter of 1996. A more detailed discussion of hotel
suite revenue is contained in "The Hotels -- Actual" section of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Total expenses increased $11.1 million in the three months ended March
31, 1997, from $12.5 million to $23.6 million, compared to the same period in
1996. This represents an increase in expenses as a percentage of total revenue
of 13.6 percentage points from 51.0% to 64.6%. The primary components of this
increase with respect to the increase in dollars were: depreciation; taxes,
insurance and other; and interest expense. The primary reason for this
increase is related to the increased number of hotels owned by the Company.
Those expenses that made up the majority of the increase, as a percentage of
total revenue, were depreciation (28.5% of total revenue for the first quarter
of 1997 compared to 18.5% in the same period in 1996) and interest expense
(15.3% of total revenue in 1997 compared to 9.9% in 1996). Taxes, insurance
and other actually decreased slightly as a percentage of total revenue, from
14.4% in 1996 to 14.2% in 1997.
Depreciation, as a percentage of total revenue, increased primarily as
the result of the major suite renovation projects which were completed in late
1996 or early 1997.
The increased interest expense, as a percentage of total revenue, is
reflective of the additional borrowings during 1996 and early 1997 to finance
hotel acquisitions and the suite renovation program.
Net income applicable to common shareholders for the quarter was $10.0
million, or 27.4% of total revenue, as compared to $12.0 million, or 49% of
total revenue, for the first three months of 1996. In addition to the relative
increases in depreciation and interest previously discussed, net income
applicable to common shareholders was adversely affected by the preferred
dividends for the three months ended March 31, 1997 that were not payable in
the same period of 1996.
Funds From Operations
The Company considers Funds From Operations to be a key measure 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 following table computes Funds From Operations under the National
Association of Real Estate Investment Trusts ("NAREIT") definition. Funds From
Operations under the NAREIT definition consists of net income, computed in
accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales
18
19
of property, plus depreciation of real property (including furniture and
equipment) and after adjustments for unconsolidated partnerships and joint
ventures (in thousands, except per share and unit data).
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- --------
Funds From Operations (FFO):
Net income ........................................................................ $12,957 $11,971
Less preferred dividends .......................................................... 2,949
------- -------
Net income applicable to common shareholders ...................................... 10,008 11,971
Add back:
Minority interest in Operating Partnership ..................................... 1,417 1,620
Depreciation ................................................................... 10,417 4,516
Depreciation for unconsolidated partnerships ................................... 1,884
------- -------
FFO available to common shares and units .......................................... 23,726 18,107
Add preferred dividends ........................................................... 2,949
------- -------
FFO diluted for conversion of preferred stock ..................................... $26,675 $18,107
======= =======
Weighted average common shares outstanding ........................................ 25,459 22,614
Weighted average units outstanding ................................................ 2,784 3,061
------- -------
Weighted average common shares and units outstanding .............................. 28,243 25,675
======= =======
Weighted average common shares and units outstanding,
diluted for conversion of preferred stock .................................... 32,933 25,675
======= =======
Per share and unit data:
FFO per common share and unit outstanding ......................................... $ 0.84 $ 0.71
FFO per common share and unit outstanding, diluted for
conversion of preferred stock ................................................ $ 0.81 $ 0.71
Included in the Funds From Operations described above is the Company's share
of FFO from its interest in thirteen unconsolidated partnerships. The FFO
contribution from these unconsolidated partnerships was as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
Statement of operations information:
Percentage Lease revenue .......................................................... $ 9,505 $ 751
Expenses:
Depreciation ................................................................... 3,148
Taxes, insurance and other ..................................................... 1,388 111
Interest expense ............................................................... 2,094
------- -------
Total expenses ............................................................. 6,630 111
------- -------
Net income ........................................................................ $ 2,875 $ 640
======= =======
50% of net income attributable to the Company ..................................... $ 1,437 $ 320
Amortization of cost in excess of book value ...................................... (310)
------- -------
Income from unconsolidated partnerships ........................................... 1,127 320
Add back: Depreciation ........................................................... 1,884
Amortization of cost in excess of book value .................... 310
------- -------
FFO contribution of unconsolidated partnerships ................................... $ 3,321 $ 320
======= =======
19
20
The Lessee -- Actual
The Three Months Ended March 31, 1997 and 1996
Total revenues increased 74% from $60.4 million in the first quarter of 1996
to $105.2 million for the same period of 1997. The primary reasons for this
increase are the number of hotels operated by the Lessee which increased from
34 hotels at March 31, 1996 to 58 hotels at March 31, 1997 and the increases in
revenues at the hotels owned in both the first quarter of 1997 and 1996.
Percentage Lease expense, property operating costs and other hotel expenses
increased in the first quarter of 1997 compared to the same period of 1996 and
relate primarily to the increased number of hotels operated by the Lessee. The
increase in percentage lease expense is also attributable in part to the
increase in suite revenues. The Lessee had net income of $1.1 million and
$855,000 for the three months ended March 31, 1997 and 1996, respectively.
The Hotels -- Actual
The following table sets forth historical suite revenue and percentage
changes therein between the periods presented for the 58 hotels which the
Lessee operated at March 31, 1997. The following table also presents
comparative information with respect to occupancy, average daily rate ("ADR")
and revenue per available suites ("REVPAR") for the 13 Original Hotels, the 18
CSS Hotels, the 12 1996 Acquisitions and the 15 1997 Acquisitions, regardless
of ownership, through March 31, 1997.
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996 VARIANCE
--------- -------- --------
Suite Revenue (in thousands):
Original Hotels (13) . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,873 $ 19,228 8.6%
CSS Hotels (18) . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,004 32,144 15.1%
1996 Acquisitions (12) . . . . . . . . . . . . . . . . . . . . . . . . 21,618 20,457 5.7%
1997 Acquisitions (15) . . . . . . . . . . . . . . . . . . . . . . . . 23,915 22,358 7.0%
--------- --------
Total (58) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 103,410 $ 94,187 9.8%
Occupancy:
Original Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . 75.2% 76.3% (1.1)pts
CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.1% 70.3% 2.8 pts
1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . 72.2% 72.3% (0.1)pts
1997 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . 72.9% 71.8% 1.1 pts
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.3% 72.3% 1.0 pts
Average Daily Rate (ADR):
Original Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111.29 $ 101.67 9.5%
CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122.04 $ 108.84 12.1%
1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . $ 118.20 $ 110.48 7.0%
1997 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105.97 $ 99.28 6.7%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114.98 $ 105.26 9.2%
Revenue Per Available Suite (REVPAR):
Original Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83.72 $ 77.62 7.9%
CSS Hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89.22 $ 76.50 16.6%
1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85.35 $ 79.92 6.8%
1997 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77.27 $ 71.26 8.4%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84.29 $ 76.11 10.7%
20
21
ORIGINAL HOTELS: Boston - Marlborough, MA, Brunswick, GA, Chicago -
Lombard, IL, Corpus Christi, TX, Dallas (Love
Field), TX, Dallas (Park Central), TX, Flagstaff, AZ,
Jacksonville, FL, Nashville, TN, New Orleans, LA,
Orlando (North), FL, Orlando (South), FL, Tulsa, OK.
CSS HOTELS: Anaheim, CA, Baton Rouge, LA, Birmingham, AL, Boca
Raton, FL (1), Deerfield Beach, FL, Ft. Lauderdale,
FL, Los Angeles (LAX South), CA, Miami, FL,
Milpitas, CA, Minneapolis (Airport), MN, Minneapolis
(Downtown), MN, Napa, CA, Oxnard (Mandalay Beach),
CA, Phoenix, AZ, San Francisco (Airport North), CA,
San Francisco (Airport South), CA, St. Paul, MN,
Tampa (Busch Gardens), FL(1).
1996 ACQUISITIONS: Atlanta-Buckhead, GA, Beaver Creek Resort
(Avon-Vail), CO, Boca Raton, FL, Charlotte, NC,
Cleveland, OH, Deerfield, IL, Indianapolis, IN,
Kingston Plantation (Myrtle Beach), SC(3), Lexington,
KY(2), Parsippany, NJ, Piscataway, NJ, San Rafael
(Marin County) CA.
1997 ACQUISITIONS: Atlanta, GA, Austin, TX, Austin (Downtown), TX(1),
Bloomington, MN(1), BWI Airport, MD(1), Covina, CA,
Dana Point, CA(1), Kansas City, MO, LAX North, CA,
Omaha, NE(1), Overland Park, KS, Raleigh, NC, San
Antonio, TX, Secaucus, NJ, Troy, MI(1).
(1) Operating as a Doubletree Guest Suites hotel or in the process of
conversion thereto
(2) Operating as a Hilton Suites hotel
(3) In the process of conversion to Embassy Suites hotels
Comparison of The Hotels' Suite Revenues for the Three Months Ended March
31, 1997 and 1996
Suite revenues from the 58 Hotels, included without regard to
ownership, increased 9.8% for the three months ended March 31, 1997 from the
same period of 1996. The Original Hotels increased 8.6%, the CSS Hotels
increased 15.1%, the 1996 Acquisition Hotels increased 5.7% and the 1997
Acquisition Hotels increased 7.0%.
The Original Hotels were owned throughout all of the first quarter of
both 1997 and 1996. Suite revenue for these hotels increased $1.6 million in
the first quarter of 1997 over the same period in 1996. This improvement in
suite revenue resulted from increased average daily rates ("ADR") of 9.5% which
were somewhat offset by a slight decline in occupied rooms as a percentage of
total available rooms ("Occupancy") of 1.1 percentage points. The hotels in
this group recorded increases in ADR ranging from 3.5% to 18.7%. The increases
in ADR at these hotels is attributed to the strength of the markets that these
hotels are in as well as aggressive rate management.
The CSS Hotels experienced an increase in ADR of 12.1% to $122.04 and
a 2.8 percentage point increase in Occupancy to 73.1%. The strength of the
improvement in the CSS Hotels is partially reflective of the $54 million suite
renovation program that was completed in the first quarter of 1997. This
program made substantial upgrades and improvements to these former Crown
Sterling Suites hotels. This group of hotels were also converted to the
Embassy Suites or Doubletree Guest Suites brand during 1996. The increase in
both occupancy and ADR is also attributable in part, to the stronger marketing
presence of the Embassy Suites and Doubletree Guest Suites brands.
The 1996 Acquisition Hotels increased ADR by 7% to $118.20, which was
partially offset by a 0.1 percentage point decrease in Occupancy to 72.2%.
Some of the 1996 Acquisition Hotels benefited from suite renovations completed
in 1996 or during the first quarter of 1997 and the Company expects to commence
renovation on several of the remaining hotels in this group later in the year.
The Company has committed to reserving 4% of suite revenue for ongoing capital
replacements and improvements, in addition to making normal repair and
maintenance expenditures and any necessary renovations for hotels acquired.
The 1997 Acquisition hotels had increases in both ADR and Occupancy in
the first quarter of 1997 compared to the same period of 1996. The Company
believes that these improvements are indicative of the strong markets in which
it has acquired hotels.
21
22
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, is its share of the Operating
Partnership's cash flow from the Percentage Leases. For the three months ended
March 31, 1997, cash flow provided by operating activities, consisting
primarily of Percentage Lease revenue, was $13.2 million and funds from
operations diluted for the conversion preferred stock, which is the sum of net
income, minority interest, and depreciation of real property (including
furniture and equipment), was $26.7 million. The Lessee's obligations under
the Percentage Leases are unsecured. The Lessee's ability to make lease
payments under the Percentage Leases and the Company's liquidity, including its
ability to make distributions to stockholders, are substantially dependent on
the ability of the Lessee to generate sufficient cash flow from the operation
of the Hotels.
At March 31, 1997, the Lessee had paid all amounts then due the
Company under the Percentage Leases. During the first quarter of 1997, the
Lessee realized net income of approximately $1.1 million, reducing the
accumulated shareholders' deficit of approximately $6.4 million at December 31,
1996 to approximately $5.6 million at March 31, 1997. The accumulated
shareholders' deficit resulted primarily from losses during 1996 as a
consequence of the one-time costs of converting the CSS Hotels to the Embassy
Suites and Doubletree Guest Suites brands and the substantial number of suite
nights lost during the year due to renovation. It is anticipated that a
substantial portion of any future profits of the Lessee will be retained until
a positive shareholders' equity is restored. Although it is currently
anticipated that the Lessee could sustain a small loss during 1997, it is
anticipated that its future earnings will be sufficient to enable it to
continue to make its lease payments under the Percentage Leases when due.
Minority equity interests in two of DJONT's consolidated subsidiaries,
which lease a total of 15 of the Hotels, are held by unrelated third parties.
These two subsidiaries have entered into separate revolving credit agreements
with an affiliate of Messrs. Feldman and Corcoran and/or the holders of such
minority equity interests, or affiliates thereof, which provide these
subsidiaries with the right to borrow up to an aggregate of $9.0 million, to
the extent necessary to enable them to pay rent and other obligations due under
the Percentage Leases relating to such Hotels. Amounts borrowed thereunder, if
any, will be subordinate in right of repayment to the prior payment, when due,
of rent and other obligations under such Percentage Leases. No loans were
outstanding under such agreements at March 31, 1997.
The Company intends to acquire additional hotels and may incur
indebtedness to make such acquisitions, 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 to make
such distributions.
The Company's Charter limits consolidated indebtedness to 40% of the
Company's investment in hotels, at cost, on a consolidated basis, after giving
effect to the Company's use of proceeds from any indebtedness. For purposes of
this limitation, the Company's consolidated investment in hotels, at cost, is
its investment, at cost, in hotels, as reflected in its consolidated financial
statements plus (to the extent not otherwise reflected) the value (as
determined by the Board of Directors at the time of issuance) of any equity
securities issued, otherwise than for cash, by the Company or any of its
subsidiaries in connection with the acquisition of hotels. Under this
definition as of March 31, 1997, the Company's investment in hotels at cost was
$1.2 billion. Accordingly, the Company's maximum permitted indebtedness would
have been approximately $499 million (of which $354 million was borrowed at
March 31, 1997). Assuming all of this additional debt capacity, together with
the Company's available cash and cash equivalents, were used for the
acquisition of additional hotels, the Company's investment in hotels would
increase to approximately $1.5 billion and the maximum permitted indebtedness
would increase to approximately $595 million. A proposed charter amendment was
submitted to the Company's shareholders for approval which, if approved, would
remove the 40% debt limitation. However the Board of Directors has indicated
that, if the proposed amendment is approved by the shareholders, a
substantially identical limitation will be adopted as a policy of the Board of
Directors.
At March 31, 1997, the Company had $11.0 million of cash and cash
equivalents and had utilized $243 million of the amount available under the
Company's $400 million unsecured revolving Line of Credit.
To manage the relative mix of its debt between fixed and variable rate
instruments, the Company has entered into two separate interest rate swap
agreements. These interest rate swap agreements modify a portion of the
interest characteristics of the Company's outstanding debt without an exchange
of the underlying principal amount and effectively
22
23
convert variable rate debt to a fixed rate. The fixed rates to be paid, the
effective fixed rate, and the initial variable rate to be received by the
Company at March 31, 1997 are summarized in the following table:
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 3/31/97 MATURITY
- --------------- ------------ ---------- ------------- -------------
$50 million 6.11125% 7.61125% 5.56225% October 1999
$25 million 5.95500% 7.45500% 5.562% November 1999
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 by the Company pursuant to the
terms of its interest rate agreement and will have a corresponding effect on
its future cash flows. Agreements such as these contain a credit risk that the
counterparties may be unable to meet the terms of the agreement. The Company
minimizes that risk by evaluating the creditworthiness of its counterparties,
which are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
To provide for additional financing flexibility, the Company has
registered up to an aggregate of $500 million in common stock, preferred stock,
debt securities and/or common stock warrants pursuant to a shelf registration
declared effective by the Securities Exchange Commission during 1996. The
terms and conditions of the stock or debt securities issued thereunder are
determined by the Company based upon market conditions at the time of issuance.
A total of 6,050,000 shares of preferred stock at $25.00 per share were issued
in the second quarter of 1996 and 3,000,000 shares of common stock at $35.50
were issued during the first quarter of 1997 pursuant to this shelf
registration statement. As a result of these offerings, approximately $242
million in registered securities remains available for issuance by the Company
under this shelf registration statement. Additionally, on April 24, 1997, the
Company filed a second shelf registration statement covering an additional $500
million in debt securities, preferred stock, common stock and/or common stock
warrants under which the specific terms of the securities to be offered will be
determined by the Company at the time of any offering. This second shelf
registration statement has not yet become effective.
The Company has begun construction on a net addition of 129 suites at
the Boston-Marlborough hotel. The suite additions, additional meeting rooms
and other public area upgrades for this hotel is projected at an aggregate cost
of approximately $15.8 million with an expected completion in the third quarter
of 1997. Additionally, construction has begun on suite additions aggregating
134 suites at Jacksonville, Florida and Orlando (North), Florida at an
estimated cost of approximately $10.2 with an expected completion in the first
quarter of 1998.
The Company's cash flow from financing activities of approximately
$211.7 million for the three months ended March 31, 1997 resulted from the sale
of three million shares of common stock with net proceeds of $100.7 million,
net borrowings of $127.1 million under a prior secured line of credit and other
borrowing facilities and distributions of $16.1 million.
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates periodically to reflect the effects of inflation. Competitive pressures
may, however, limit the Lessee's ability to raise room rates.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
each year. This seasonality can be expected to cause fluctuations in the
Company's quarterly lease revenue, particularly during the fourth quarter, to
the extent that it receives Percentage Rent. To the extent the cash flow from
operations are insufficient during any quarter, due to temporary or seasonal
fluctuations in lease revenue, the Company expects to utilize other cash on
hand or borrowings under the Line of Credit to make distributions to its
shareholders.
23
24
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
SFAS No. 128, Earnings Per Share ("EPS), was issued in October 1996.
This statement specifies the computation, presentation, and disclosure
requirements for EPS and is effective for financial statements issued for
periods ending after December 15, 1997. The statement requires restatement of
all prior period EPS data presented, including interim financial statements,
summaries of earnings, and selected financial data, after the effective date.
The Company has determined the effect of adoption will have an immaterial
impact on previously reported EPS numbers.
SFAS No. 129, Disclosure of Information about Capital Structure, was
issued in February 1997. This statement specifies the disclosure requirements
for information about an entity's capital structure applicable to both public
and nonpublic entities and is effective for financial statements issued for
periods ending after December 15, 1997. This statement supersedes the specific
disclosure requirements of Opinions 10 and 15 and Statement 47 and consolidates
them in this statement. The adoption of this statement has no impact on the
disclosure requirements of the Company which was previously subject to the
disclosure requirements of Opinions 10 and 15 and Statement 47.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Quarterly Report on Form 10-Q include forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended ("1933 Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended ("1934 ACT"). 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 1933 Act and 1934 Act (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.
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25
PART II. -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the first quarter of 1997, the Company issued an aggregate of
20,431 shares of its common stock in redemption of a like number of outstanding
units of limited partner interest in the Operating Partnership. Neither the
units, nor the common stock issued in redemption thereof, were registered under
the 1933 Act in reliance upon certain exemptions from the registration
requirements thereof, including the exemption provided by Section 4(2) of that
act.
On February 19, 1997 the Company issued an aggregate of 41,000 shares
of its common stock to certain of its officers and outside directors in the
form of restricted stock under its 1995 Restricted Stock and Stock Option Plan.
Such shares were not registered under the 1933 Act in reliance upon certain
exemptions from the registration requirements thereof, including the exemption
provided by Section 4(2) of that act.
ITEM 5. OTHER INFORMATION.
For information relating to hotel acquisitions and certain other
transactions by the Company through March 31, 1997, see Note 1 of Notes to
Consolidated Financial Statements of FelCor Suite Hotels, Inc. contained in
Item
1 of Part I of this Quarterly Report on Form 10-Q. Such information is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description
------ -----------
10.2.3 -- Second Amended and Restated Revolving Credit
Agreement dated as of March 10, 1997 among the
Registrant and the Operating Partnership, as
Borrower, and the Lenders party thereto, The Chase
Manhattan Bank, as Administrative Agent , and
Wells Fargo Bank, National Association, as
Documentation Agent.
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 12, 1997
FELCOR SUITE HOTELS, INC.
By: /s/ Lester C. Johnson
-----------------------------------
Lester C. Johnson
Vice President and Controller
(Chief Accounting Officer)
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27
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.2.3 -- Second Amended and Restated Revolving Credit Agreement dated as
of March 10, 1997 among the Registrant and the Operating
Partnership, as Borrower, and the Lenders party thereto, The
Chase Manhattan Bank, as Administrative Agent , and Wells Fargo
Bank, National Association, as Documentation Agent.
27 -- Financial Data Schedule