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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 JUNE 30, 1998
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 333-39595-01
FELCOR LODGING LIMITED PARTNERSHIP
(formerly FelCor Suites Limited Partnership)
(Exact name of registrant as specified in its charter)
DELAWARE 75-2544994
(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
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FELCOR LODGING LIMITED PARTNERSHIP
INDEX
PAGE
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PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements ...................................................................... 3
FELCOR LODGING LIMITED PARTNERSHIP
Consolidated Balance Sheets - June 30, 1998 (Unaudited)
and December 31, 1997 ............................................................. 3
Consolidated Statements of Operations -- For the Three and Six Months
Ended June 30, 1998 and 1997 (Unaudited) .......................................... 4
Consolidated Statements of Cash Flows -- For the Six Months
Ended June 30, 1998 and 1997 (Unaudited) .......................................... 5
Notes to Consolidated Financial Statements ............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 13
General/Second Quarter Highlights ...................................................... 13
Results of Operations .................................................................. 14
Liquidity and Capital Resources ........................................................ 20
PART II. -- OTHER INFORMATION
Item 5. Other Information ......................................................................... 23
Item 6. Exhibits and Reports on Form 8-K .......................................................... 23
SIGNATURE ............................................................................................... 25
2
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $120,554
and $87,400 at June 30, 1998 and December 31, 1997, respectively ........... $1,847,039 $1,489,764
Investment in unconsolidated entities ......................................... 119,866 132,991
Cash and cash equivalents ..................................................... 11,060 17,543
Due from Lessee ............................................................... 32,701 18,908
Deferred expenses, net of accumulated amortization of $2,888
and $1,987 at June 30, 1998 and December 31, 1997, respectively ............. 13,007 10,593
Bristol Interim Credit Facility ............................................... 120,000
Other assets .................................................................. 11,913 3,565
---------- ----------
Total assets .......................................................... $2,155,586 $1,673,364
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Debt, net of discount of $1,741 and $1,855 at June 30, 1998
and December 31, 1997, respectively ........................................ $ 784,172 $ 465,726
Distributions payable ......................................................... 26,664 24,671
Accrued expenses and other liabilities ........................................ 24,016 11,331
Capital lease obligations ..................................................... 10,048 11,093
Minority interest in other partnerships ....................................... 16,064 8,594
---------- ----------
Total liabilities ..................................................... 860,964 521,415
---------- ----------
Commitments and contingencies (Note 3 and 4)
Redeemable units, at redemption value ......................................... 95,070 102,933
Preferred units:
Series A Preferred Units.................................................... 151,250 151,250
Series B Preferred Units.................................................... 143,750
Partners' capital ............................................................. 904,552 897,766
---------- ----------
Total liabilities and partners' capital ............................... $2,155,586 $1,673,364
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
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FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------ ----- ------ ------
Revenues:
Percentage lease revenue ....................... $ 62,793 $ 38,677 $ 118,853 $ 74,048
Equity in income from unconsolidated entities .. 2,689 2,300 3,982 3,427
Other revenue .................................. 1,920 76 2,095 170
--------- --------- --------- ---------
Total revenue ............................ 67,402 41,053 124,930 77,645
--------- --------- --------- ---------
Expenses:
General and administrative ..................... 1,375 874 2,574 1,846
Depreciation ................................... 17,429 11,314 33,316 21,730
Taxes, insurance and other ..................... 7,568 5,549 14,838 10,756
Interest expense ............................... 13,795 7,313 23,526 12,914
Minority interest in other partnerships ........ 291 121 482 142
--------- --------- --------- ---------
Total expenses ........................... 40,458 25,171 74,736 47,388
--------- --------- --------- ---------
Net income before extraordinary charge ........... 26,944 15,882 50,194 30,257
Extraordinary charge from write off of deferred
financing fees
-- -- 556 --
--------- --------- --------- ---------
Net income ....................................... 26,944 15,882 49,638 30,257
Preferred distributions .......................... 4,854 2,949 7,803 5,899
--------- --------- --------- ---------
Net income applicable to unitholders ............. $ 22,090 $ 12,933 $ 41,835 $ 24,358
========= ========= ========= =========
Per unit data:
Basic:
Net income applicable to unitholders before
extraordinary charge ........................ $ 0.56 $ 0.44 $ 1.07 $ 0.85
Extraordinary charge ........................... -- -- (0.01) --
--------- --------- --------- ---------
Net income applicable to unitholders ........... $ 0.56 $ 0.44 $ 1.06 $ 0.85
========= ========= ========= =========
Weighted average number of units outstanding ... 39,567 29,439 39,546 28,802
========= ========= ========= =========
Diluted:
Net income applicable to unitholders before
extraordinary charge ........................ $ 0.55 $ 0.43 $ 1.06 $ 0.83
Extraordinary charge ........................... -- -- (0.01) --
--------- --------- --------- ---------
Net income applicable to unitholders ........... $ 0.55 $ 0.43 $ 1.05 $ 0.83
========= ========= ========= =========
Weighted average number of units and equivalents
outstanding ................................. 39,882 29,858 39,883 29,206
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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FELCOR LODGING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income ..................................................................... $ 49,638 $ 30,257
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation ......................................................... 33,316 21,730
Amortization of deferred financing fees and organization costs ....... 1,256 672
Amortization of unearned officers' and directors' compensation ....... 396 510
Equity in income from unconsolidated entities ........................ (3,982) (3,427)
Extraordinary charge for write off of deferred financing fees ........ 556
Minority interest in other partnerships .............................. 482 142
Changes in assets and liabilities:
Due from Lessee ...................................................... (13,793) (3,533)
Deferred financing fees .............................................. (3,558)
Deferred costs and other assets ...................................... (8,436) (4,225)
Accrued expenses and other liabilities ............................... 11,599 168
--------- ---------
Net cash flow provided by operating activities ............. 67,474 42,294
--------- ---------
Cash flows from investing activities:
Acquisition of hotels .......................................................... (353,615) (409,587)
Acquisition of unconsolidated entities ......................................... (418) (59,571)
Improvements and additions to hotels ........................................... (22,244) (25,374)
Bristol Interim Credit Facility ................................................ (120,000)
Cash distributions from unconsolidated entities ................................ 15,809 1,402
--------- ---------
Net cash flow used in investing activities ................. (480,468) (493,130)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings ....................................................... 461,000 149,000
Repayment of borrowings ........................................................ (144,145) (72,900)
Contributions .................................................................. 139,064 414,052
Distributions paid to preferred unitholders .................................... (7,803) (5,899)
Distributions paid to unitholders .............................................. (41,605) (27,816)
--------- ---------
Net cash flow provided by financing activities ............. 406,511 456,437
--------- ---------
Net change in cash and cash equivalents .................................................. (6,483) 5,601
Cash and cash equivalents at beginning of periods ........................................ 17,543 7,793
--------- ---------
Cash and cash equivalents at end of periods .............................................. $ 11,060 $ 13,394
========= =========
Supplemental cash flow information --
Interest paid .................................................................. $ 22,226 $ 9,760
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND FIRST QUARTER HIGHLIGHTS
FelCor Lodging Limited Partnership, formerly FelCor Suites Limited
Partnership (the "Operating Partnership"), and its subsidiaries owned interests
in 86 hotels with an aggregate of 21,164 suites/rooms (collectively the
"Hotels") at June 30, 1998. The sole general partner of the Operating
Partnership is FelCor Lodging Trust Incorporated, formerly FelCor Suite Hotels,
Inc. ("FelCor"), a self administered real estate investment trust ("REIT") that
at June 30, 1998 owned a 92.4% general partnership interest in the Operating
Partnership. FelCor, the Operating Partnership and its subsidiaries, are herein
referred to, collectively, as the "Company". The Company owns 100% equity
interests in 65 of the Hotels (15,957 suites/rooms), a 90% or greater interest
in entities owning seven hotels (1,745 suites/rooms), and 50% interests in
separate entities that own 14 hotels (3,462 suites/rooms). At June 30, 1998, 58
of the Hotels were operated as Embassy Suites(R) hotels, 14 as Doubletree Guest
Suites(R) hotels, two as full-service Doubletree(R) hotels, five as Sheraton(R)
hotels, four as Sheraton Suites(R) hotels, one as a Hilton(R) hotel, one as a
Hilton Suites(R) hotel and one was in the process of being converted to a
full-service Doubletree hotel. The Hotels are located in 28 states, with 35
hotels in California, Florida and Texas. The following table provides certain
information regarding the acquisition of Hotels through June 30, 1998:
NUMBER OF HOTELS NUMBER OF
ACQUIRED SUITES/ROOMS
-------- ------------
1994 7 2,041
1995 13 2,649
1996 23 5,769
1997 30 7,608
1ST QUARTER 1998 2 348
2ND QUARTER 1998 11 2,749
-- ------
86 21,164
== ======
At June 30, 1998, the Operating Partnership leased all of the Hotels to
DJONT Operations, L.L.C., a Delaware limited liability company, ("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., who at June 30, 1998 were
Chairman of the Board of Directors and Chief Executive Officer of FelCor,
respectively, beneficially own a 50% voting equity interest in the Lessee. The
remaining 50% non-voting equity interest is beneficially owned by the children
of Charles N. Mathewson, a director of FelCor and major initial investor in the
Operating Partnership. The Lessee has entered into management agreements
pursuant to which 73 of the Hotels are managed by Promus Hotel Corporation
("Promus"), or by a subsidiary thereof, nine are managed directly by, or by a
subsidiary of, ITT Sheraton Corporation ("Sheraton") and four are managed by
three independent management companies. Promus is the largest operator of
all-suite, full service hotels in the United States.
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SECOND QUARTER HIGHLIGHTS -- (CONTINUED)
A brief discussion of the second quarter 1998 highlights follows:
o The Company acquired 11 hotels during the second quarter of 1998. Eight
upscale, full-service all-suite hotels were acquired from Starwood
Hotels & Resorts (NYSE:HOT) for an aggregate cash price of $245 million.
The eight hotels acquired from Starwood have a total of 1,898 suites and
are located in geographically diverse U.S. markets. The Operating
Partnership acquired 100% ownership interests in one hotel located in
Secaucus, New Jersey for approximately $23.4 million. In addition, the
Operating Partnership acquired, through a 90% owned partnership, interests
in two other hotels located in Denver, Colorado and Dallas, Texas for
approximately $50.9 million in cash.
o In May 1998, FelCor raised approximately $140 million from the sale of
depositary shares representing its 9% Series B Cumulative Redeemable
Preferred Stock net of $3.8 million of offering expenses and contributed
the proceeds to the Operating Partnership in exchange for preferred units.
o The Operating Partnership declared second quarter distribution of $0.55 per
unit, $0.4875 per unit on its $1.95 Series A Cumulative Convertible
Preferred Units and $0.525 per depositary share on its 9% Series B
Cumulative Redeemable Preferred Units.
o Following the end of the second quarter 1998 the Operating Partnership
increased its unsecured credit facilities to $1.1 billion from $550
million. The new unsecured credit facility consists of an $850 million
revolving line of credit which matures in three years and a $250 million
term loan that matures in 18 months. (See Note 4)
o On July 28, 1998, FelCor completed the merger with Bristol Hotel Company
(NYSE:BH) ("Bristol") following approval by FelCor's Shareholders on July
27, 1998. In conjunction with this closing FelCor issued 31.0 million
shares of Common Stock and assumed approximately $700 million in debt in
exchange for Bristol's real estate holdings. These which were subsequently
contributed to the Operating Partnership in exchange for a like number of
Operating Partnership Units. (See Note 9)
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 Operating Partnership included in the Operating Partnership's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (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.
The financial statements for the three and six months ended June 30, 1998 and
1997 are unaudited; however, in the opinion of management, all adjustments
(which include only normal recurring accruals) have been made which are
considered necessary to present fairly the operating results and financial
position of the Operating Partnership for the unaudited periods.
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUPPLEMENTAL CASH FLOW INFORMATION
During the first six months of 1998, the Operating Partnership 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 (in
thousands):
Assets acquired ...................................... $367,058
Debt assumed ......................................... (1,479)
Operating Partnership units issued ................... (4,976)
Minority interest contribution in other partnerships.. (6,988)
--------
Net cash paid by the Company ......................... $353,615
========
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS
At June 30, 1998, the Operating Partnership owned interests in 58 Embassy
Suites hotels, 14 Doubletree Guest Suites hotels, two full-service Doubletree
hotels, five Sheraton hotels, four Sheraton Suites hotels, one Hilton Suites
hotel, one Hilton hotel and one hotel in the process of conversion to a
full-service Doubletree hotel. The Embassy Suites hotels, Hilton Suites hotel
and Hilton hotel operate pursuant to franchise license agreements which require
the payment of fees based on a percentage of suite/room revenue. These fees are
paid by the Lessee. There are no separate franchise license agreements with
respect to the Doubletree Guest Suites hotels, Doubletree hotels, Sheraton
hotels or Sheraton Suites hotels, which rights are included in management
agreements with the Lessee.
The Lessee generally pays the Hotel managers a base management fee based
on a percentage of suite/room revenue and an incentive management fee based on
the Lessee's income before overhead expenses for each hotel. In certain
instances, the hotel managers have subordinated fees and committed to make
subordinated loans to the Lessee, if needed, to meet its rental and other
obligations under the Percentage Leases.
The Operating Partnership is to receive rental income from the Lessee under
the Percentage Leases which expire in 2004 (7 hotels), 2005 (12 hotels), 2006
(19 hotels), 2007 (14 hotels), 2008 (13 hotels) and 2012 (7 hotels). The
Percentage Leases for the 14 unconsolidated entities expire in 2005 (1 hotel),
2006 (4 hotels) and 2007 (9 hotels). The rental income under the Percentage
Leases between the 14 unconsolidated entities, of which the Operating
Partnership owns 50%, and the Lessee are payable to the respective entities and
as such is not included in the following schedule of future lease commitments to
the Operating Partnership. Minimum future rental income (i.e., base rents) to
the Operating Partnership under these noncancellable operating leases at June
30, 1998 is as follows (in thousands):
Remainder of 1998 ......... $ 66,989
1999 ...................... 134,364
2000 ...................... 134,451
2001 ...................... 137,596
2002 ...................... 137,596
2003 and thereafter ....... 641,199
----------
$1,252,195
==========
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
Messrs. Feldman and Corcoran, certain entities owning preferred
interests in the Lessee and the managers of certain of the Hotels have agreed to
make loans to the Lessee of up to an aggregate of approximately $17.3 million,
to the extent necessary to enable the Lessee to pay rent and other obligations
due under the respective Percentage Leases relating to a total of 38 of the
Hotels. No loans were outstanding under such agreements at June 30, 1998.
4. DEBT
Debt obligations at June 30, 1998 and December 31, 1997 consist of the
following (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
Senior unsecured notes, net of discount ......... $298,259 $298,145
Line of Credit .................................. 453,000 136,000
Renovation loan ................................. 25,000 25,000
Collateralized mortgage note .................... 7,263 5,931
Other debt payable .............................. 650 650
--------- ---------
$784,172 $465,726
========= =========
Under its loan agreements, the Operating Partnership is required to
satisfy various affirmative and negative covenants. The Operating Partnership
was in compliance with these covenants at June 30, 1998.
On July 1, 1998, the Operating Partnership increased its unsecured
credit facilities to $1.1 billion, consisting of an $850 million revolving line
of credit ("Line of Credit") which matures in three years and a $250 million
non-amortizing term loan ("term loan") which matures in 18 months. Interest
payable on borrowings under the credit facilities is variable, determined from a
ratings and leverage-based pricing matrix, ranging from 87.5 basis points to 175
basis points above LIBOR. The initial interest spread will be 150 basis points.
Additionally, the Operating Partnership is required to pay an unused commitment
fee which is variable, determined from a ratings based pricing matrix, ranging
from 20 to 30 basis points. In the third quarter of 1998, the Operating
Partnership intends to write off approximately $2.5 million of deferred expenses
relating to the $550 million Line of Credit. Through June 30, 1998, the
Operating Partnership has incurred additional expenses of approximately $3.6
million in deferred loan costs associated with the $1.1 billion unsecured credit
facility.
On July 1, 1998, the Operating Partnership entered into six separate
interest rate swap agreements with four financial institutions to manage the
relative mix of its debt between fixed and variable rate instruments. These
interest rate swap agreements modify a portion of the interest characteristics
of the Operating Partnership's outstanding debt without an exchange of the
underlying principal amount and effectively convert variable rate debt to a
fixed rate. The $250 million of interest rate swaps are comprised of $125
million of 5-year contracts maturing on July 1, 2003, with fixed rates ranging
from 5.80% to 5.83% and $125 million of 5-year contracts maturing on July 1,
2003, providing for optional termination by the counterparties on July 1, 2001,
with fixed rates ranging from 5.55% to 5.56%.
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN UNCONSOLIDATED ENTITIES
At June 30, 1998, the Operating Partnership owned 50% interests in
separate entities owning 14 hotels, a parcel of undeveloped land and a
condominium management company. The Operating Partnership also owned a 97%
non-voting interest in an entity developing condominiums for sale. The Operating
Partnership is accounting for its investments in these unconsolidated entities
under the equity method.
Summarized combined financial information for 100% of these
unconsolidated entities is as follows (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
---- ----
Balance sheet information:
Investment in hotels, net of accumulated depreciation ...... $250,215 $256,032
Non-recourse mortgage debt ................................. $167,317 $138,956
Equity ..................................................... $ 94,154 $126,324
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ----------------
1998 1997 1998 1997
----- ----- ---- ----
Statements of operations information:
Percentage lease revenue ....................................... $ 14,222 $ 14,224 $ 26,569 $ 23,729
Other income ................................................... 954 1,114
-------- -------- -------- --------
Total revenue .................................................. 15,176 14,224 27,683 23,729
-------- -------- -------- --------
Expenses:
Depreciation .............................................. 4,278 4,108 8,543 7,214
Taxes, insurance and other ................................ 1,594 1,748 3,160 3,178
Interest expense .......................................... 3,095 2,907 6,354 5,001
-------- -------- -------- --------
Total expenses ................................................. 8,967 8,763 18,057 15,393
-------- -------- -------- --------
Net income ..................................................... $ 6,209 $ 5,461 $ 9,626 $ 8,336
======== ======== ======== ========
50% of net income attributable to the Operating Partnership .... $ 3,105 $ 2,731 $ 4,813 $ 4,168
Amortization of cost in excess of book value ................... (416) (431) (831) (741)
-------- -------- -------- --------
Equity in income from unconsolidated entities .................. $ 2,689 $ 2,300 $ 3,982 $ 3,427
======== ======== ======== ========
6. SERIES B PREFERRED UNITS
On May 7, 1998, FelCor issued 5,750,000 Depositary Shares (including
750,000 shares pursuant to the exercise of an over-allotment option), each
representing an 1/100 interest in a share of 9% Series B Cumulative Redeemable
Preferred Stock, par value $.01 per share ("Series B Preferred Stock"), of
FelCor. Each share of Series B Preferred Stock is entitled to a liquidation
preference of $2,500 per share (equivalent to $25 per Depositary Share plus
accrued dividends). The Series B Preferred Stock is not redeemable prior to
May 7, 2003. The Series B Preferred Stock may be redeemed at the option of
FelCor in whole or in part, at a redemption price of $2,500 per share plus
accrued dividends. All of the Series B Preferred Stock proceeds were
contributed to the Operating Partnership in exchange for a like number of
preferred units. The preference on the Series B Preferred Units are the same
as Felcor's Series B Preferred Stock.
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the three
and six months ended June 30, 1998 and 1997 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1998 1997 1998 1997
------ ------ ------- -------
Real estate and personal property taxes ............. $6,456 $4,423 $13,023 $ 8,833
Property insurance .................................. 293 455 545 863
Land lease expense .................................. 579 411 805 660
State franchise taxes ............................... 240 160 465 300
Other ............................................... 100 100
------ ------ ------- -------
Total taxes, insurance and other ............... $7,568 $5,549 $14,838 $10,756
====== ====== ======= =======
8. BRISTOL INTERIM CREDIT FACILITY
Under the Bristol Merger Agreement, the Operating Partnership provided
Bristol a $120 million interim credit facility (the "Interim Credit Facility").
Under the Interim Credit Facility, the Operating Partnership loaned to Bristol
(i) $45 million to fund a portion of the cash purchase price and to prepay
certain indebtedness assumed by Bristol in connection with the acquisition of a
20 hotel portfolio, (ii) $32.8 million to fund the prepayment of $30 million in
outstanding principal amount of Bristol's Senior Secured Notes and a related
prepayment premium, (iii) $9 million for general corporate purposes and (iv)
$33.2 million for necessary capital improvements. The Interim Credit Facility
was secured by real estate. At June 30, 1998, the Operating Partnership had
advanced the entire $120 million to Bristol under the Interim Credit Facility.
At July 28, 1998, the Interim Credit Facility was assumed and canceled by the
Operating Partnership upon completion of the merger with Bristol.
9. SUBSEQUENT EVENTS
On July 27, 1998, FelCor announced the approval by its Shareholders of
the merger with Bristol at its 1998 Annual Shareholders Meeting. Approximately
75% of FelCor's outstanding Common Stock voted in favor of, and less than 1%
voted against, the proposed merger.
On July 28, 1998, FelCor completed the merger of Bristol's real estate
holdings with and into the Company. The merger resulted in the acquisition of
109 primarily full-service Bristol hotels in return for approximately 31.0
million shares of newly issued FelCor Common Stock. The Hotels and assumed debt
were subsequently exchanged for a like number of Operating Partnership units.
Based on the July 27, 1998 closing prices of FelCor Common Stock, the
transaction was valued at approximately $1.7 billion, including the assumption
of approximately $700 million in debt. The Bristol hotels add more than 28,000
rooms to the Operating Partnership's portfolio at approximately $59,000 per
room. The merger established significant brand/owner manager relationships for
the Company with Bass plc and its subsidiary Bass Hotels & Resorts, which
acquired approximately 14% of FelCor's currently outstanding Common Stock in the
merger. Bristol Hotels & Resorts, the new hotel operating company spun off from
Bristol prior to Bristol's merger into FelCor, will continue to lease and
operate the hotels acquired in the merger. With the completion of the Bristol
merger and related transactions, the Operating Partnership's consolidated
debt-to-total investment in hotel assets, at cost, is approximately 37%, fixed
interest rate debt comprised 61% of total indebtedness, and only 7% of total
assets were encumbered with secured debt. In addition to its current standing as
the owner of the largest number of Embassy Suites hotels, as a result of the
merger the Operating Partnership is the owner of the largest number of Crowne
Plaza(R) and Holiday Inn(R) hotels.
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FELCOR LODGING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Consolidated Statements of Operations
for the six months ended June 30, 1998 and 1997 are presented as if the
acquisitions of all hotels owned by the Operating Partnership at June 30, 1998,
the equity offerings (and subsequent contribution of the proceeds to the
Operating Partnership) consummated during 1997 and 1998 and the merger with
Bristol had occurred as of the beginning of the periods presented and the Hotels
had been leased pursuant to Percentage Leases.
The following unaudited Pro Forma Consolidated Statements of Operations for
the periods presented are not necessarily indicative of what actual results of
operations of the Operating Partnership would have been assuming such
transactions had been completed at the beginning of the periods presented nor
does it purport to represent the results of operations for future periods.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1997
---- ----
Revenues:
Percentage lease revenue ....................... $244,227 $226,564
Equity in income from unconsolidated entities... 5,367 4,462
Other income ................................... 103 --
-------- --------
Total revenue ............................... 249,697 231,026
-------- --------
Expenses:
General and administrative ..................... 3,073 2,346
Depreciation ................................... 65,513 62,313
Taxes, insurance and other ..................... 38,814 37,278
Interest expense ............................... 52,625 51,202
Minority interest in other partnerships ........ 677 628
-------- --------
Total expenses .............................. 160,702 153,767
-------- --------
Net income ....................................... 88,995 77,259
Preferred distributions .......................... 12,368 12,368
-------- --------
Net income applicable to unitholders ............. $ 76,627 $ 64,891
======== ========
Per unit data:
Basic:
Net income applicable to unitholders ........... $ 1.09 $ .94
======== ========
Weighted average number of units outstanding ... 70,532 69,374
======== ========
Diluted:
Net income applicable to unitholders ........... $ 1.07 $ .92
======== ========
Weighted average number of units outstanding ... 71,458 70,380
======== ========
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For background information relating to the Operating Partnership and
the definitions of certain capitalized terms used herein, reference is made to
Note 1 of Notes to Consolidated Financial Statements of FelCor Lodging Limited
Partnership appearing elsewhere herein.
SECOND QUARTER HIGHLIGHTS:
o Total revenue increased by 64% for the second quarter and 61% for the first
six months of 1998 over the comparable periods last year.
o Funds From Operations ("FFO") of $45.0 million for the quarter ended June
30, 1998 sets a new quarterly record.
o Net income per diluted unit for the quarter increased 28% from $0.43 to
$0.55.
o The Operating Partnership's 43 comparable hotels, those owned at both
December 31, 1997 and 1996, produced a 6.3% Revenue Per Available
Suite/Room ("RevPAR") increase over the second quarter 1997 and a 7.5%
RevPAR increase over the six months ended June 30, 1997. This increase in
RevPAR, coupled with 263 new suites added at three of the 13 Original
hotels (as hereafter defined) resulted in increased suite revenue for the
43 comparable hotels of 8.6% for the second quarter and 9.6% for the six
months ended June 30, 1997.
o In May 1998, FelCor raised approximately $140 million from the sale of
depositary shares representing its 9% Series B Cumulative Redeemable
Preferred Stock net of $3.8 million of offering expenses and contributed
the proceeds to the Operating Partnership in exchange for preferred units.
o The Operating Partnership declared second quarter distributions of $0.55
per unit on its Operating Partnership Units, $0.4875 per unit on its $1.95
Series A Cumulative Convertible Preferred Units and $0.525 per depositary
share on its 9% Series B Cumulative Redeemable Preferred Units.
o Hotel Acquisitions in Second Quarter 1998:
o On April 15, 1998, the Operating Partnership acquired a 90% ownership
interest in a 248-room Doubletree hotel in Denver (Aurora), Colorado
for approximately $21.7 million in cash. The hotel has 11,000 square
feet of meeting space and is located 13 miles from the Denver
International Airport.
o On May 4, 1998, the Operating Partnership acquired eight upscale,
full-service all-suite hotels from Starwood Hotels & Resorts. The $245
million all-cash purchase includes five Embassy Suites hotels and three
Doubletree Guest Suites hotels comprising 1,898 suites. After planned
conversions, six hotels will be Embassy Suites hotels managed by Promus
and two hotels will be Sheraton Suites hotels managed by Sheraton.
Located in geographically diverse U.S. markets, the hotels are
currently identified as:
HOTEL NUMBER OF SUITES
----- ----------------
Embassy Suites - Phoenix (Airport-44th St.), AZ 229
Embassy Suites - Phoenix (Tempe/ASU), AZ 224
Embassy Suites Resort - Palm Desert, CA 198
Embassy Suites - Atlanta (Airport), GA 233
Embassy Suites - St. Louis (Downtown), MO 297
Doubletree Guest Suites - Dallas-Ft. Worth (Airport), TX 308
Sheraton Suites - Ft. Lauderdale (Cypress Creek), FL 254
Sheraton Suites - Lexington, KY 155
13
14
o On May 5, 1998, the Operating Partnership acquired the 301-room
Meadowlands Hilton hotel in Secaucus, New Jersey for $23.4 million in
cash. The 12-story hotel features 19,000 square feet of meeting and
convention space, a 10,000 square foot exhibition center and is located
within four miles from downtown Manhattan.
o On June 1, 1998, the Operating Partnership acquired a 90% ownership
interest in a 302-room Doubletree hotel at Dallas-Campbell Centre for
$29.2 million in cash, with the remaining 10% ownership interest being
purchased by Promus. The Operating Partnership acquired the hotel in
conjunction with GE Investments' purchase of the 920,000 square-foot
integrated complex known as "Campbell Centre." The 21-story high-rise
hotel features 14,000 square feet of meeting space and is
inter-connected to two adjoining office towers by interior walkways.
The complex is centrally located in the heart of the Central Expressway
corridor in Dallas, four miles from Dallas-Love Field Airport and five
miles from downtown Dallas.
o Subsequent to the end of the second quarter, the Operating Partnership
increased its unsecured credit facilities to $1.1 billion from $550
million. (See Note 4 of Notes to Consolidated Financial Statements of the
Operating Partnership)
o On July 28, 1998, FelCor completed the merger with Bristol following
approval by FelCor's Shareholders on July 27, 1998. In conjunction with
this closing FelCor issued 31.0 million shares of Common Stock and assumed
approximately $700 million in debt in exchange for Bristol's real estate
holdings. These were subsequently contributed to the Operating Partnership
in exchange for a like number of Operating Partnership units. (See Note 9
of Notes to Consolidated Financial Statements of the Operating Partnership)
RESULTS OF OPERATIONS
The Company
Six Months Ended June 30, 1998 and 1997
For the six months ended June 30, 1998 and 1997, the Operating
Partnership had revenues of $124.9 million and $77.6 million, respectively,
consisting primarily of Percentage Lease revenues of $118.9 million and $74.0
million, respectively. The increase in total revenue is primarily attributed to
the Operating Partnership's acquisition and subsequent leasing pursuant to
Percentage Leases, of interests in 19 additional hotels since June 30, 1997.
Suite/room revenues for the 43 Hotels owned at both December 31, 1997
and 1996 increased 9.6% for the six months ended June 30, 1998 over the
corresponding period in 1997 (an increase of $15.4 million). Furthermore, RevPAR
for these hotels increased 7.5% and average daily rate ("ADR") increased 8.2% to
$124.67 in the six months ended June 30, 1998 from $115.26 in the same period in
1997.
Management believes that the hotels it acquires will generally
experience increases in suite/room revenue and RevPAR (and accordingly, provide
the Operating Partnership with increases in Percentage Lease revenue) after
completion of renovation, upgrade and possible rebranding; however, as
individual hotels undergo such renovation and/or rebranding, their performance
has been, and may continue to be adversely affected by such temporary factors as
suites/rooms out of service and disruptions of hotel operations. (A more
detailed discussion of hotel suite/room revenue is contained in "The Hotels"
section of this Management's Discussion and Analysis of Financial Condition and
Results of Operations.)
14
15
Total expenses increased $27.3 million in the six months ended June 30,
1998, from $47.4 million to $74.7 million, compared to the same period in 1997.
This increase resulted primarily from the additional hotels acquired in 1998 and
1997. Total expenses decreased as percentage of total revenue from 61.0% in the
six months ended June 30, 1997 to 59.8% in the same period of 1998. The major
components of total expenses are depreciation; taxes, insurance and other; and
interest expense.
Depreciation increased primarily as a result of the additional
properties acquired in 1997 and 1998.
Taxes, insurance and other increased $4.1 million primarily as a result
of the increased number of hotels owned.
Interest expense increased as a percentage of total revenue from 16.6%
in the six months ended June 30, 1997 to 18.8% in 1998. This increase in
interest expense is attributed to the increased use of debt to finance
acquisitions, renovations and the $120 million loan to Bristol.
Three Months Ended June 30, 1998 and 1997
For the three months ended June 30, 1998 and 1997, the Operating
Partnership had revenues of $67.4 million and $41.1 million, respectively,
consisting primarily of Percentage Lease revenues of $62.8 million and $38.7
million, respectively. The increase in total revenue is primarily attributed to
the Operating Partnership's acquisition and subsequent leasing pursuant to
Percentage Leases, of interests in 19 additional hotels since June 30, 1997.
Suite/room revenues for the 43 Hotels owned at both December 31, 1997
and 1996 increased 8.6% for the quarter ended June 30, 1998 over the
corresponding period in 1997 (an increase of $7.0 million). Furthermore, RevPAR
for these hotels increased 6.3% and ADR increased 8.3% to $122.06 in the second
quarter of 1998 from $112.71 in the same period in 1997.
Total expenses increased $15.3 million in the three months ended June
30, 1998, from $25.2 million to $40.5 million, compared to the same period in
1997. This increase resulted primarily from the additional hotels acquired in
1998 and 1997. Total expenses decreased as percentage of total revenue from
61.3% in the second quarter of 1997 to 60.0% in the same period of 1998. The
major components of total expenses are depreciation; taxes, insurance and other;
and interest expense.
Depreciation increased primarily as a result of the additional
properties acquired in 1997 and 1998.
Taxes, insurance and other increased $2.0 million primarily as a result
of the increased number of hotels owned.
Interest expense increased as a percentage of total revenue from 17.8%
in the second quarter of 1997 to 20.5% in 1998. This increase in interest
expense is attributed to the increased use of debt to finance acquisitions,
renovations, and the $120 million loan to Bristol.
15
16
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 White Paper on Funds From Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") defines Funds From Operations as net income or loss (computed in
accordance with GAAP), excluding gains or losses from debt restructuring and
sales of properties, plus; real estate related depreciation and amortization and
after comparable adjustments for the Company's portion of these items related to
unconsolidated entities and joint ventures. The Company believes that Funds From
Operations is 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, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds From
Operations in accordance with standards established by NAREIT which may not be
comparable to Funds From Operations reported by other REITs that do not define
the term in accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. Funds From Operations
does not represent cash generated from operating activities determined by GAAP
and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company 's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
Funds From Operations may include funds that may not be available for
management's discretionary use due to functional requirements to conserve funds
for capital expenditures and property acquisitions, and other commitments and
uncertainties.
The following table details the computation of Funds From Operations (in
thousands, except per share and unit data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1998 1997 1998 1997
----- ----- ---- ----
Funds From Operations (FFO):
Net income ...................................... $ 26,944 $ 15,882 $ 49,638 $ 30,257
Less: Series B redeemable preferred
distributions ................................. (1,905) (1,905)
Add back:
Extraordinary charge from write off of
deferred financing fees from unconsolidated
entities .................................... 556
Depreciation .................................. 17,429 11,314 33,316 21,730
Depreciation for unconsolidated entities ...... 2,555 2,485 5,103 4,348
-------- -------- -------- --------
FFO ............................................. $ 45,023 $ 29,681 $ 86,708 $ 56,335
======== ======== ======== ========
Weighted average number of units
outstanding (a) ............................... 44,572 34,548 44,573 33,896
======== ======== ======== ========
(a) Weighted average number of units are computed including dilutive
options, unvested restricted stock grants and assuming conversion
of convertible preferred units to units.
16
17
Included in the Funds From Operations described above is the Operating
Partnership's share of FFO from its interest in 14 unconsolidated entities. The
FFO contribution from these unconsolidated entities was derived as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1998 1997 1998 1997
----- ----- ---- ----
Statement of operations information:
Percentage Lease revenue ........................................ $ 14,222 $ 14,224 $ 26,569 $ 23,729
Other income .................................................... 954 1,114
-------- -------- -------- --------
Total revenue ............................... $ 15,176 14,224 27,683 23,729
-------- -------- -------- --------
Expenses:
Depreciation .......................................... 4,278 4,108 8,543 7,214
Taxes, insurance and other ............................ 1,594 1,748 3,160 3,178
Interest expense ...................................... 3,095 2,907 6,354 5,001
-------- -------- -------- --------
Total expenses .............................. 8,967 8,763 18,057 15,393
-------- -------- -------- --------
Net income ...................................................... $ 6,209 $ 5,461 $ 9,626 $ 8,336
======== ======== ======== ========
50% of net income attributable to the Operating Partnership ..... $ 3,105 $ 2,731 $ 4,813 $ 4,168
Amortization of cost in excess of book value .................... (416) (431) (831) (741)
-------- -------- -------- --------
Income from unconsolidated entities ............................. 2,689 2,300 3,982 3,427
Add back: 50% of depreciation ................................... 2,139 2,054 4,271 3,607
Amortization of cost in excess of book value .......... 416 431 831 741
-------- -------- -------- --------
FFO contribution of unconsolidated entities ..................... $ 5,244 $ 4,785 $ 9,084 $ 7,775
======== ======== ======== ========
17
18
The Hotels
The following table sets forth historical suite/room revenue and
percentage changes therein between the periods presented for the 86 hotels which
the Operating Partnership had an ownership interest at June 30, 1998. The
following table also presents comparative information with respect to Occupancy,
ADR and RevPAR for the 13 Original Hotels, the 18 CSS Hotels, the 12 1996
Acquisitions, the 30 1997 Acquisitions and the 13 1998 Acquisitions, regardless
of ownership, through June 30, 1998. Except as otherwise noted below, each of
such hotels is operated as an Embassy Suites hotel.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
1998 1997 VARIANCE 1998 1997 VARIANCE
---- ---- -------- ---- ---- --------
Suite/room Revenue (in thousands):
Original Hotels (13)..................... $ 24,055 $ 22,045 9.1 % $ 47,245 $ 42,918 10.1%
CSS Hotels (18).......................... 39,184 35,559 10.2 % 80,429 72,563 10.8%
1996 Acquisitions (12)................... 25,226 23,868 5.7 % 48,701 45,486 7.1%
-------- -------- -------- --------
Total for Hotels owned at both
December 31, 1997 and 1996 (43)....... 88,465 81,472 8.6 % 176,375 160,967 9.6%
1997 Acquisitions (30)................... 58,743 57,295 2.5 % 113,272 110,897 2.1%
1998 Acquisitions (13)................... 20,719 21,021 (1.4)% 43,291 42,387 2.1%
-------- -------- -------- --------
$167,927 $159,788 5.1 % $332,938 $314,251 5.9%
======== ======== ======== ========
Occupancy:
Original Hotels.......................... 77.2% 80.1% (2.9) pts. 75.8% 77.7% (1.9) pts.
CSS Hotels............................... 75.6% 75.8% (0.2) pts. 75.2% 74.5% 0.7 pts.
1996 Acquisitions........................ 77.4% 79.3% (1.9) pts. 74.7% 75.8% (1.1) pts.
Total for Hotels owned at both
December 31, 1997 and 1996............ 76.5% 77.9% (1.4) pts. 75.2% 75.7% (0.5) pts.
1997 Acquisitions........................ 74.7% 74.9% (0.2) pts. 72.4% 73.4% (1.0) pts.
1998 Acquisitions........................ 75.2% 79.0% (3.8) pts. 74.8% 75.9% (1.1) pts.
ADR:
Original Hotels.......................... $ 114.60 $ 109.24 4.9 % $ 116.10 $ 110.22 5.3%
CSS Hotels............................... $ 123.71 $ 111.86 10.6 % $ 128.27 $ 116.83 9.8%
1996 Acquisitions........................ $ 127.31 $ 117.50 8.3 % $ 127.91 $ 117.83 8.6%
Total for Hotels owned at both
December 31, 1997 and 1996............ $ 122.06 $ 112.71 8.3 % $ 124.67 $ 115.26 8.2%
1997 Acquisitions........................ $ 113.82 $ 110.52 3.0 % $ 113.81 $ 109.85 3.6%
1998 Acquisitions........................ $ 97.90 $ 94.57 3.5 % $ 103.48 $ 99.78 3.7%
RevPAR:
Original Hotels.......................... $ 88.49 $ 87.50 1.1 % $ 88.00 $ 85.62 2.8%
CSS Hotels............................... $ 93.46 $ 84.81 10.2 % $ 96.45 $ 87.01 10.8%
1996 Acquisitions........................ $ 98.48 $ 93.18 5.7 % $ 95.58 $ 89.29 7.0%
Total for Hotels owned at both
December 31, 1997 and 1996............ $ 93.39 $ 87.85 6.3 % $ 93.81 $ 87.26 7.5%
1997 Acquisitions........................ $ 84.99 $ 82.83 2.6 % $ 82.39 $ 80.61 2.2%
1998 Acquisitions........................ $ 73.65 $ 74.73 (1.4)% $ 77.38 $ 75.76 2.1%
ORIGINAL HOTELS: Flagstaff, AZ; Jacksonville, FL; Orlando
(North), FL; Orlando (South), FL; Brunswick, GA;
Chicago - Lombard, IL; New Orleans, LA; Boston -
Marlborough, MA; Tulsa, OK; Nashville, TN; Corpus
Christi, TX; Dallas (Love Field), TX; Dallas (Park
Central), TX.
CSS HOTELS: Birmingham, AL; Phoenix (Camelback), AZ; Anaheim, CA;
El Segundo (LAX South), CA; Milpitas, CA; Napa, CA;
Oxnard (Mandalay Beach), CA; San Francisco (Airport
18
19
North), CA; San Francisco (Airport South), CA; Boca
Raton, FL(1); Deerfield Beach, FL; Ft. Lauderdale,
FL; Miami, FL; Tampa (Busch Gardens), FL(1); Baton
Rouge, LA; Minneapolis (Airport), MN; Minneapolis
(Downtown), MN; St. Paul, MN.
1996 ACQUISITIONS: San Rafael (Marin County), CA; Avon (Beaver Creek),
CO; Boca Raton, FL; Atlanta (Buckhead), GA;
Deerfield, IL; Indianapolis (North), IN; Lexington,
KY(2); Charlotte, NC; Parsippany, NJ; Piscataway,
NJ; Cleveland, OH; Myrtle Beach (Kingston
Plantation), SC.
1997 ACQUISITIONS: Phoenix (Crescent), AZ(3); Covina, CA; Dana Point,
CA(1); Los Angeles (LAX North), CA; Lake Buena Vista
(Disney World), FL(1); Tampa (Rocky Point), FL(1);
Atlanta (Airport), GA(4); Atlanta (Galleria)(3), GA;
Atlanta (Perimeter Center), GA; Chicago (O'Hare),
IL(4); Overland Park, KS; Baltimore, MD(1); Troy,
MI(1); Bloomington, MN(1); Kansas City (Plaza), MO;
Raleigh, NC; Raleigh/Durham, NC(1); Omaha, NE(1);
Secaucus, NJ; Syracuse, NY; Dayton, OH(1);
Philadelphia (Society Hill), PA(3); Nashville
(Airport), TN(1); Austin (Airport North), TX; Austin
(Downtown), TX(1); Dallas (Market Center), TX; Dallas
(Park Central), TX(3); San Antonio (Airport), TX;
San Antonio (Northwest), TX; Burlington, VT(3).
1998 ACQUISITIONS: Phoenix (Airport - 44th St.), AZ; Phoenix
(Tempe/ASU), AZ; Palm Desert, CA; Denver (Aurora),
CO(6); Wilmington, DE(5); Ft. Lauderdale (Cypress
Creek), FL(4); Atlanta (Airport), GA; Lexington,
KY(4); St. Louis (Downtown), MO; Secaucus
(Meadowlands, NJ(7); Columbus, OH(1); Dallas
(Campbell Centre), TX(6); Dallas - Ft. Worth
(Airport), TX.
(1) Operating as a Doubletree Guest Suites hotel.
(2) Operating as a Hilton Suites hotel.
(3) Operating as a Sheraton hotel.
(4) Operating as a Sheraton Suites hotel.
(5) In the process of conversion to a Doubletree hotel.
(6) Operating as a Doubletree hotel.
(7) Operating as a Hilton hotel.
Comparison of The Hotels' Suite/Room Revenues for the Six Months Ended June
30, 1998 and 1997
The Operating Partnership owned 43 hotels at both December 31, 1997 and
1996. These hotels experienced increased RevPAR of 7.5% for 1998 compared to
1997. Within this group of 43 hotels are the Original Hotels, the CSS Hotels and
the 1996 Acquisition Hotels.
The Original Hotels increased suite/room revenue by 10.1% for the six
months ended June 30, 1998 compared to 1997. ADR increased 5.3% to $116.10 and
Occupancy declined 1.9 pts. from 75.8% to 77.7%. This resulted in an increase in
RevPAR of 2.8% in the six months ended June 30, 1998 over the same period of
1997. Included in this group are three hotels that added suites/rooms since the
first quarter of 1997, Boston-Marlborough Embassy Suites (added 129 suites/rooms
in the second quarter of 1997), Orlando North Embassy Suites (added 67
suites/rooms in the first quarter of 1998) and Jacksonville Embassy Suites
(added 67 suites/rooms in the second quarter of 1998). These three hotels
experienced 33.0% increase in suite/room revenue over the same period in 1997.
The continued growth in revenues at these hotels is attributed to the strength
of the markets in which these hotels are located and aggressive rate management.
The CSS Hotels are made up of 18 former Crown Sterling Suites(R) Hotels
which the Operating Partnership acquired in late 1995 and early 1996. The CSS
Hotels increased suite/room revenue by 10.8% for the six months
19
20
ended June 30, 1998 compared to 1997. Occupancy increased by 0.7 pts. to 75.2%
and ADR increased 9.8% to $128.27. RevPAR increased 10.8% from $87.01 to $96.45
in the six months ended June 30, 1998. The strength of the improvements in the
CSS Hotels is partially a result of the $54 million suite/room renovation
program that was completed in the first quarter of 1997.
The 1996 Acquisition Hotels had a 7.1% increase in suite/room revenue
for the six months ended June 30, 1998 compared to the corresponding period in
1997. ADR increased 8.6% to $127.91 and Occupancy declined 1.1 pts. from 75.8%
to 74.7%. RevPAR for the six months ended 1998 increased
7.0% as compared to the corresponding period in 1997.
The 1997 Acquisition Hotels experienced suite/room revenue increases of
2.1% during the six months ended June 30, 1998. Occupancy declined 1.0% from
73.4% to 72.4% while ADR increased 3.6% to $113.81. Included in the 1997
Acquisition hotels are nine hotels which were undergoing renovation or had
recently been converted to a different brand. Excluding these nine hotels, the
1997 Acquisitions would have recorded an increase in revenue of 4.9%.
For the 43 Hotels owned at both December 31, 1997 and 1996 the
operating results in the Pacific region (8 hotels) were especially strong with
RevPAR increasing 15.6% for the six months ended June 30, 1998 when compared to
the same period of 1997. Other strong geographical regions included the East
North Central (7 hotels) and the Mid Atlantic states (2 hotels) with RevPAR
increases of 9.5% and 11.1%, respectively. The South Atlantic (13 hotels) and
West South Central regions (6 hotels) experienced weaker growth in RevPAR
resulting in increases of 3.5% and 4.4%, respectively for the six months ended
June 30, 1998 as compared to the same period of 1997. The remaining regions
include Mountain (3 hotels), New England (1 hotel) and East South Central (3
hotels) which experienced RevPAR increases of 2.3%, 3.3% and 5.3%, respectively.
The moderate increase in the South Atlantic region was partially due to the
widespread fires in the state of Florida which affected leisure travel in that
region.
LIQUIDITY AND CAPITAL RESOURCES
The Operating Partnership's principal source of cash to meet its cash
requirements, including repayment of indebtedness is cash flow from the
Percentage Leases. For the six months ended June 30, 1998, cash flow provided by
operating activities, consisting primarily of Percentage Lease revenue, was
$67.5 million and Funds From Operations (as previously defined) was $86.7
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
Operating Partnership's liquidity, including repayments of indebtedness are
substantially dependent on the ability of the Lessee to generate sufficient cash
flow from the operation of the Hotels.
At June 30, 1998, the Lessee had paid all amounts then due the
Operating Partnership under the Percentage Leases. During the six months ended
June 30, 1998, the Lessee had net income of $2.9 million. The Lessee had a
shareholders' deficit of $6.1 million at June 30, 1998 resulting primarily from
losses during 1997 and 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/room nights lost during those years
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. It is anticipated that the Lessee's future earnings will be sufficient
to enable it to continue to make its lease payments under the Percentage Leases
when due.
Messrs. Feldman and Corcoran, certain entities owning preferred
interests in the Lessee and the managers of certain of the Hotels have agreed,
directly or through their affiliates, to make loans to the Lessee of up to an
aggregate of approximately $17.3 million, to the extent necessary to enable the
Lessee to pay rent and other obligations due under the respective Percentage
Leases relating to a total of 38 of the Hotels. Amounts so borrowed by the
Lessee, if any, will be subordinate in right of repayment to the prior payment
in full of rent and
20
21
other obligations due under the Percentage Leases relating to such Hotels. No
loans were outstanding under such agreements at June 30, 1998.
The Operating Partnership 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 Operating Partnership's investments
are insufficient to make such distributions.
At June 30, 1998, the Operating Partnership had $11.1 million of cash
and cash equivalents and had utilized $453 million of the amount available under
the Line of Credit.
To manage the relative mix of its debt between fixed and variable rate
instruments, the Operating Partnership has entered into two separate interest
rate swap agreements. These interest rate swap agreements modify a portion of
the interest characteristics of the Operating Partnership's outstanding debt
without an exchange of the underlying principal amount and effectively 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 Operating
Partnership at June 30, 1998 are summarized in the following table:
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 6/30/98 MATURITY
--------------- ----------- ---------- ------------- --------
$50 million 6.11% 7.61% 5.69% October 1999
$25 million 5.95% 7.45% 5.69% November 1999
On July 1, 1998, the Operating Partnership entered into six separate
interest rate swap agreements. The fixed rates to be paid, the effective
interest rate, and the initial variable rate to be received by the Operating
Partnership as of July 1, 1998 are summarized in the following table:
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 7/01/98 MATURITY
- --------------- ----------- ---------- ------------- --------
$75 million 5.55% 7.05% 5.67% July 2001
$25 million 5.56% 7.06% 5.67% July 2001
$25 million 5.55% 7.05% 5.67% July 2001
$50 million 5.80% 7.29% 5.67% July 2003
$50 million 5.80% 7.29% 5.67% July 2003
$25 million 5.83% 7.33% 5.67% July 2003
The differences to be paid or received by the Operating Partnership
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
Operating Partnership 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 Operating Partnership 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.
Under the Bristol Merger Agreement, the Operating Partnership provided
Bristol a $120 million interim credit facility (the "Interim Credit Facility").
Under the Interim Credit Facility, the Operating Partnership loaned to Bristol
(i) $45 million to fund a portion of the cash purchase price and to prepay
certain indebtedness assumed by Bristol in connection with the acquisition of a
20 hotel portfolio, (ii) $32.8 million to fund the prepayment of $30 million in
outstanding principal
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amount of Bristol's Senior Secured Notes and a related prepayment premium,
(iii) $9 million for general corporate purposes and (iv) $33.2 million for
necessary capital improvements. The Interim Credit Facility was secured by real
estate. At June 30, 1998 the Operating Partnership had advanced the entire $120
million to Bristol provided by it under the Interim Credit Facility. At July 28,
1998 the Interim Credit Facility was assumed and canceled by the Operating
Partnership with the completion of the merger with Bristol.
The Operating Partnership spent approximately $15.9 million on
upgrading, renovating and/or rebranding 32 hotels during the six months ended
June 30, 1998. In addition, the Operating Partnership plans to continue
Bristol's $400 million repositioning and redevelopment program of Crowne Plaza
and Holiday Inn hotels which were recently acquired by the Operating Partnership
upon completion of the Bristol merger. At July 28, 1998, the redevelopment of 39
hotels was completed with a remaining 43 hotels currently in the process of
redevelopment. The Operating Partnership plans to spend approximately $175
million to complete this repositioning and redevelopment program, commenced by
Bristol in 1997, with an expected completion by the end of 1999.
INFLATION
Operators of hotels, in general, possess the ability to adjust
suite/room rates periodically to reflect the effects of inflation. Competitive
pressures may, however, limit the Lessee's ability to raise suite/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
Operating Partnership'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 Operating Partnership expects to
utilize other cash on hand or borrowings under the Line of Credit to make
distributions to its unitholders.
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 Operating Partnership 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 Operating Partnership's current expectations are disclosed herein and
in the Operating Partnership'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 Operating Partnership or persons acting on its behalf, are
expressly qualified in their entirety by the Cautionary Statements.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During the second quarter 1998, the Emerging Issues Task Force reached
a consensus on the issue "Accounting for Contingent Rent in Interim Financial
Periods"("EITF 98-9"). Under EITF 98-9, for leases that contain contingent rent
provisions based on specified annual sales thresholds, no contingent rent
revenue shall be recorded by the lessor in the interim financial statements
until the annual thresholds have been reached, which generally occurs later in
the fiscal year. The contingent rent provisions of the Operating Partnership's
leases contain quarterly thresholds, and as such, EITF 98-9 will have no impact
on the financial statements of the Operating Partnership.
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PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to hotel acquisitions and certain other
transactions by the Operating Partnership through June 30, 1998, see Note 1 of
Notes to Consolidated Financial Statements of FelCor Lodging Limited Partnership
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
------- -----------
3.1 - Articles of Amendment and Restatement dated
June 22, 1995, amending and restating the
Charter of the Operating Partnership, as
amended or supplemented by Articles of
Merger dated June 23, 1995, Articles
Supplementary dated April 30, 1996, Articles
of Amendment dated August 8, 1996, Articles
of Amendment dated June 16, 1997, Articles
of Amendment dated October 30, 1997,
Articles Supplementary dated May 6, 1998,
Articles of Merger and attached Articles of
Amendment dated July 27, 1998 (filed as
Exhibit 3.1 to FelCor's Current Report on
Form 8-K dated July 27, 1998 and filed
August 10, 1998 ("August Form 8-K") and
incorporated herein by reference).
10.2.1 - Schedule of executed Lease Agreements
identifying material variations from the
form of Lease Agreement with respect to
hotels acquired by the Operating Partnership
through June 30, 1998.
10.14 - Fourth Amended and Restated Revolving Credit
Agreement dated as of July 1, 1997 among the
Operating Partnership, as borrower, the
Lenders party thereto, The Chase Manhattan
Bank, as Administrative Agent, Chase
Securities, Inc. as Arranger, and Bankers
Trust Company, NationsBank, N.A. and Wells
Fargo Bank, National Association as
Co-Arrangers and Documentation Agents (filed
as Exhibit 10.14 to FelCor's August Form 8-K
and incorporated herein by reference)
10.17 - Amended and Restated Master Hotel Agreement
dated as of July 27, 1998 among the
Operating Partnership, BHR and the lessors
and lessees named therein (filed as Exhibit
10.17 to FelCor's August Form 8-K and
incorporated herein by reference)
10.18 - Stockholders' and Registration Rights
Agreement dated as of July 27, 1998, by and
among FelCor, Bass America, Inc., Holiday
Corporation, Bass plc, United/Harvey
Investors I, L.P., United/Harvey Investors
II, L.P., United/Harvey Investors III, L.P.,
United/Harvey Investors IV, L.P. and
United/Harvey Investors V, L.P. (filed as
Exhibit 10.18 to FelCor's August Form 8-K
and incorporated herein by reference)
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10.19 - Omnibus Lease Amendment Agreement dated as
of June 30, 1998 among FelCor, the Operating
Partnership and the Lessee to clarify the
meaning of Article III of the Lease as
represented by the actual course of dealing
between Lessors and Lessees under such
leases prior to the date hereof.
27 - Financial Data Schedule
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SIGNATURE
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: August 14, 1998
FELCOR LODGING LIMITED PARTNERSHIP
By: Felcor Lodging Trust Incorporated
Its General Partner
By: /s/ Lester C. Johnson
------------------------------
Lester C. Johnson
Vice President and Controller
(Chief Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10.2.1 - Schedule of executed Lease Agreements identifying material
variations from the form of Lease Agreement with respect to
hotels acquired by the Operating Partnership through June 30,
1998.
10.19 - Omnibus Lease Amendment Agreement dated as of June 30, 1998
among FelCor, the Operating Partnership and the Lessee to
clarify the meaning of Article III of the Lease as represented
by the actual course of dealing between Lessors and Lessees
under such leases prior to the date hereof.
27 - Financial Data Schedule