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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 SEPTEMBER 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 0-24250
FELCOR LODGING TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
MARYLAND 72-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
The number of shares of Common Stock, par value $.01 per share, of FelCor
Lodging Trust Incorporated outstanding on November 10, 1998 was 67,891,552.
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FELCOR LODGING TRUST INCORPORATED
INDEX
PAGE
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PART I. -- FINANCIAL INFORMATION
Item 1. Financial statements.............................................................................. 3
FELCOR LODGING TRUST INCORPORATED
Consolidated balance sheets - September 30, 1998 (unaudited)
and December 31, 1997..................................................................... 3
Consolidated statements of operations -- for the three and nine months
ended September 30, 1998 and 1997 (unaudited)............................................. 4
Consolidated statements of cash flows -- for the nine months
ended September 30, 1998 and 1997 (unaudited)............................................. 5
Notes to consolidated financial statements..................................................... 6
DJONT OPERATIONS, L.L.C.
Consolidated balance sheets - September 30, 1998 (unaudited)
and December 31, 1997..................................................................... 14
Consolidated statements of operations -- for the three and nine months
ended September 30, 1998 and 1997 (unaudited)............................................. 15
Consolidated statements of cash flows -- for the nine months
ended September 30, 1998 and 1997 (unaudited)............................................. 16
Notes to consolidated financial statements..................................................... 17
ITEM 2. Management's discussion and analysis of financial condition and results of operations............. 18
General/Third quarter highlights............................................................... 18
Results of operations.......................................................................... 19
Liquidity and capital resources................................................................ 25
PART II. -- OTHER INFORMATION
ITEM 2. Changes in securities............................................................................. 30
ITEM 4. Submission of matters to a vote of security holders............................................... 30
ITEM 5. Other information................................................................................. 30
ITEM 6. Exhibits and reports on Form 8-K.................................................................. 30
SIGNATURE....................................................................................................... 32
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PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $148,339
and $87,400 at September 30, 1998 and December 31, 1997, respectively ...... $ 3,831,313 $ 1,489,764
Investment in unconsolidated entities ......................................... 136,556 132,991
Cash and cash equivalents ..................................................... 49,368 17,543
Due from Lessees .............................................................. 28,861 18,908
Deferred expenses, net of accumulated amortization of $1,473 and
$1,987 at September 30, 1998 and December 31, 1997, respectively ........... 10,617 10,593
Other assets .................................................................. 9,316 3,565
--------------- ---------------
Total assets ....................................................... $ 4,066,031 $ 1,673,364
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt and capital lease obligations, net of discount of $1,704 and $1,855 at
September 30, 1998 and December 31, 1997, respectively ..................... $ 1,504,852 $ 476,819
Distributions payable ......................................................... 42,432 24,671
Accrued expenses and other liabilities ........................................ 63,890 11,331
Minority interest in Operating Partnership, 2,943 and 2,900 units issued
and outstanding at September 30, 1998 and December 31, 1997, respectively .. 89,086 73,451
Minority interest in other partnerships ....................................... 16,388 8,594
--------------- ---------------
Total liabilities .................................................. 1,716,648 594,866
--------------- ---------------
Commitments and contingencies (Note 3)
Shareholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Preferred Stock, 6,050 shares issued and outstanding . 151,250 151,250
Series B Redeemable Preferred Stock, 58 shares issued and outstanding .... 143,750
Common stock, $.01 par value, 200,000 shares authorized, 69,077 and 37,802
shares issued, including shares in treasury, at September 30, 1998
and December 31, 1997, respectively ........................................ 691 378
Additional paid in capital .................................................... 2,137,482 1,003,501
Unearned officers' and directors' compensation ................................ (462) (1,754)
Distributions in excess of earnings ........................................... (42,222) (33,771)
--------------- ---------------
2,390,489 1,119,604
Less common stock in treasury at cost, 1,213 shares ........................... (41,106) (41,106)
--------------- ---------------
Total shareholders' equity ......................................... 2,349,383 1,078,498
--------------- ---------------
Total liabilities and shareholders' equity ......................... $ 4,066,031 $ 1,673,364
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
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4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues:
Percentage lease revenue ................................ $ 105,123 $ 48,603 $ 223,990 $ 122,651
Equity in income from unconsolidated entities ........... 2,446 2,338 6,429 5,765
Other revenue ........................................... 1,030 112 3,111 283
------------ ------------ ------------ ------------
Total revenue .................................. 108,599 51,053 233,530 128,699
------------ ------------ ------------ ------------
Expenses:
General and administrative .............................. 1,452 897 4,026 2,743
Depreciation ............................................ 27,720 14,238 61,036 35,969
Taxes, insurance and other .............................. 14,651 6,155 29,490 16,912
Interest expense ........................................ 22,960 7,183 46,486 20,097
Minority interest in Operating Partnership .............. 1,639 1,643 5,452 4,584
Minority interest in other partnerships ................. 323 195 805 337
------------ ------------ ------------ ------------
Total expenses ................................. 68,745 30,311 147,295 80,642
------------ ------------ ------------ ------------
Net income before extraordinary charge .................... 39,854 20,742 86,235 48,057
Extraordinary charge from write off of deferred
financing fees ....................................... 2,519 3,075
------------ ------------ ------------ ------------
Net income ................................................ 37,335 20,742 83,160 48,057
Preferred dividends ....................................... 6,184 2,949 13,987 8,848
------------ ------------ ------------ ------------
Net income applicable to common shareholders .............. $ 31,151 $ 17,793 $ 69,173 $ 39,209
============ ============ ============ ============
Per common share data:
Basic:
Income applicable to common shareholders before
extraordinary charge ................................. $ 0.58 $ 0.49 $ 1.64 $ 1.33
Extraordinary charge .................................... (0.04) (0.07)
------------ ------------ ------------ ------------
Net income applicable to common shareholders ............ $ 0.54 $ 0.49 $ 1.57 $ 1.33
============ ============ ============ ============
Weighted average common shares outstanding .............. 58,461 36,356 43,925 29,495
Diluted:
Income applicable to common shareholders before
extraordinary charge ................................. $ 0.57 $ 0.48 $ 1.63 $ 1.31
Extraordinary charge .................................... (0.04) (0.07)
------------ ------------ ------------ ------------
Net income applicable to common shareholders ............ $ 0.53 $ 0.48 $ 1.56 $ 1.31
============ ============ ============ ============
Weighted average common shares and equivalents
outstanding ........................................... 58,834 36,812 44,294 29,907
The accompanying notes are an integral part of these consolidated financial
statements.
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FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net income ............................................................... $ 83,160 $ 48,057
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation ................................................... 61,036 35,969
Amortization of deferred financing fees and organization costs . 1,927 1,011
Amortization of unearned officers' and directors' compensation . 605 737
Equity in income from unconsolidated entities .................. (6,429) (5,765)
Extraordinary charge for write off of deferred financing fees .. 3,075
Minority interest in Operating Partnership ..................... 5,452 4,584
Minority interest in other partnerships ........................ 805 337
Changes in assets and liabilities, net of effects of acquisitions:
Due from Lessee ................................................ (19,031) (7,893)
Deferred financing fees ........................................ (4,300)
Deferred costs and other assets ................................ (4,102) (4,362)
Accrued expenses and other liabilities ......................... 28,933 (966)
------------ ------------
Net cash flow provided by operating activities ....... 151,131 71,709
------------ ------------
Cash flows from investing activities, net of effects of acquisitions:
Acquisition of hotels .................................................... (354,435) (537,100)
Net cash paid in the acquisition of unconsolidated entities .............. (984) (59,571)
Net cash received in acquisition of Bristol hotels ....................... 16,790
Bristol Interim Credit Facility .......................................... (120,000)
Improvements and additions to hotels ..................................... (44,310) (38,413)
Cash distributions from unconsolidated entities .......................... 18,406 2,849
------------ ------------
Net cash flow used in investing activities ........... (484,533) (632,235)
------------ ------------
Cash flows from financing activities, net of effects of acquisitions:
Proceeds from borrowings ................................................. 942,003 332,000
Repayment of borrowings .................................................. (640,300) (151,900)
Proceeds from sale of preferred stock .................................... 143,750
Proceeds from sale of common stock ....................................... 516,700
Costs associated with public offerings ................................... (4,686) (27,600)
Proceeds from exercise of stock options .................................. 1,657 592
Purchase of treasury stock ............................................... (41,106)
Distributions paid to limited partners ................................... (4,807) (4,432)
Distributions paid to preferred shareholders ............................. (13,987) (8,848)
Distributions paid to common shareholders ................................ (58,403) (43,731)
------------ ------------
Net cash flow provided by financing activities ....... 365,227 571,675
------------ ------------
Net change in cash and cash equivalents ............................................ 31,825 11,149
Cash and cash equivalents at beginning of periods .................................. 17,543 7,793
------------ ------------
Cash and cash equivalents at end of periods ........................................ $ 49,368 $ 18,942
============ ============
Supplemental cash flow information --
Interest paid ............................................................ $ 33,322 $ 19,907
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND THIRD QUARTER HIGHLIGHTS
FelCor Lodging Trust Incorporated ("FelCor") is a real estate
investment trust ("REIT") which, at September 30, 1998, owned interests in 194
hotels with nearly 50,000 rooms and suites (collectively the "Hotels") through
its 95.8% general partner interest in FelCor Lodging Limited Partnership (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 172 of the Hotels, a 90% or greater
interest in entities owning seven hotels, and 50% interests in separate entities
that own 15 hotels. FelCor is the owner of the largest number of Embassy
Suites(R), Doubletree Guest Suites(R), Crowne Plaza(R) and Holiday Inn(R)
branded hotels. The following table provides a schedule of the Hotels by brand:
BRAND HOTELS
----- ------
Embassy Suites 57
Holiday Inn 52
Doubletree(R) and Doubletree Guest Suites 18
Crowne Plaza and Crowne Plaza Suites(R) 11
Holiday Inn Select(R) 12
Sheraton(R) and Sheraton Suites(R) 10
Harvey Hotel(R) 5
Other Upscale 7
Hampton Inn(R) 9
Fairfield Inn(R) 5
Holiday Inn Express(R) 6
Other Full Service 2
---
Total Hotels 194
===
The Hotels are located in 34 states and Canada, with 78 hotels in
California, Florida and Texas. The following table provides information
regarding the net acquisition of Hotels through September 30, 1998:
NET HOTELS
ACQUIRED
--------
1994 7
1995 13
1996 23
1997 30
1ST QUARTER 1998 2
2ND QUARTER 1998 12
3RD QUARTER 1998 107
---
194
===
At September 30, 1998 the Company leased 87 of the Hotels to DJONT
Operations, L.L.C., a Delaware limited liability company, or a consolidated
subsidiary thereof (collectively "DJONT"), 106 of the Hotels to Bristol Hotels &
Resorts or a consolidated subsidiary thereof, (collectively with DJONT, the
"Lessees") and one hotel was not leased.
Thomas J. Corcoran, Jr., the President, Chief Executive Officer and a
Director of FelCor, and Hervey A. Feldman, Chairman Emeritus of FelCor,
beneficially own a 50% voting equity interest in DJONT. The remaining 50%
non-voting equity interest is beneficially owned by the children of Charles N.
Mathewson, a director of
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. ORGANIZATION AND THIRD QUARTER HIGHLIGHTS -- (CONTINUED)
FelCor and major initial investor in the Company. DJONT has entered into
management agreements pursuant to which 73 of the Hotels leased by it are
managed by subsidiaries of Promus Hotel Corporation ("Promus"), nine are managed
by subsidiaries of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), two
are managed by Bristol Hotels & Resorts and three are managed by two independent
management companies. Promus is the operator of the largest number of all-suite,
full service hotels in the United States.
Bristol Hotels & Resorts leases and/or manages the remaining 107 Hotels
and is the largest independent hotel operating company in North America. They
operate the largest number of Bass Hotels & Resorts-branded hotels in the world.
A brief discussion of the third quarter 1998 highlights follows:
o Completed the merger of Bristol Hotel Company's hotel assets into the
Company ( the "Bristol Merger") on July 28, 1998. The merger resulted
in the acquisition of 109 primarily full-service hotels in return for
approximately 31.0 million shares of newly issued Common Stock. 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 hotels acquired
added more than 28,000 rooms to the Company'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 ("Bristol"), the new hotel operating company spun off
from Bristol Hotel Company prior to its merger into FelCor, continues
to lease and operate the hotels acquired by FelCor in the merger.
o Sold two of the hotels acquired in the Bristol Merger, the
199-room Holiday Inn Express - Northeast in Atlanta, Ga., and the
200-room Holiday Inn-Orlando Winter Park in Orlando, Fla., for an
aggregate sale price of $7.7 million. Presently, the Company has
pending sales contracts on three additional limited service hotels,
which are expected to close before year end, for an aggregate sales
price of $8.6 million. Five additional hotel properties, acquired from
Bristol Hotel Company, are being actively offered for sale.
o Twenty-three hotels were undergoing redevelopment and renovation during
the quarter, resulting in approximately 120,000 room nights
out-of-service, or approximately 3% of available room nights. During
the quarter, two hotels were re-branded as Sheraton Suites and four
hotels were re-branded as Crowne Plaza hotels. In total, renovations at
11 hotels were completed during the quarter.
o Increased unsecured credit facilities to $1.1 billion from $550
million. The new unsecured credit facilities consist of a $850 million
revolving line of credit that matures on July 1, 2001, and a $250
million term loan that matures on January 1, 2000. In connection with
the retirement of the old unsecured credit facilities, an extraordinary
charge of $2.5 million was recognized in the quarter.
o Declared third quarter dividends of $0.55 per common share, $0.4875 per
$1.95 Series A Cumulative Convertible Preferred share and $0.5625 per
depository share evidencing the 9% Series B Cumulative Redeemable
Preferred Stock.
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
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. ORGANIZATION AND THIRD QUARTER HIGHLIGHTS -- (CONTINUED)
and notes thereto of the Company and DJONT included in FelCor'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 nine months ended September 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 Company for the unaudited periods.
2. SUPPLEMENTAL CASH FLOW INFORMATION
On July 28, 1998, the Company acquired by merger, certain assets and
assumed certain liabilities relating to hotels owned by Bristol Hotel Company.
This was 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 $ 1,975,887
Debt assumed (846,116)
Common Stock issued (1,146,561)
------------
Net cash received by the Company $ (16,790)
============
Under the Bristol Merger the Company provided Bristol a $120 million
interim credit facility (the "Interim Credit Facility"). At July 28, 1998, the
Interim Credit Facility was assumed and canceled by the Company upon completion
of the Bristol Merger.
During the first nine months of 1998, the Company purchased certain
other assets and assumed certain liabilities relating to 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................................................. $367,878
Debt assumed.................................................... (1,479)
Operating Partnership units issued.............................. (4,976)
Minority interest contribution in other partnerships............ (6,988)
--------
Net cash paid by the Company........................... $354,435
========
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS
At September 30, 1998, the Company owned interests in 194 Hotels
operating under various brand names. The Hotels generally 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 Lessees. 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 DJONT.
DJONT generally pays the Hotel managers a base management fee based on
a percentage of suite/room revenue and an incentive management fee based on
income before overhead expenses for each hotel. In certain instances, the hotel
managers have subordinated fees and committed to make subordinated loans to
DJONT, if needed, to meet its rental and other obligations under the Percentage
Leases.
Bristol was both the lessee and/or manager of 107 hotels at September 30, 1998,
and, as such, is compensated for both roles through the profitability of the
hotels, after meeting their operating expenses and rental obligations under the
Percentage Leases. Bristol is a public company whose common stock is listed on
the New York Stock Exchange under the symbol BH and that files financial
statements in accordance with the Securities and Exchange Act of 1934.
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company receives rental income from the Lessees under the
Percentage Leases which expire in 2002 (six hotels), 2003 (12 hotels), 2004 (12
hotels), 2005 (19 hotels), 2006 (25 hotels), 2007 (38 hotels), 2008 (52 hotels),
and thereafter (15 hotels). Minimum future rental income (i.e., base rents)
payable to the Company under these noncancellable operating leases at September
30, 1998 is set forth below (in thousands). The Percentage Leases for 14 of the
unconsolidated entities expire in 2005 - 2007. The rental income under the
Percentage Leases between these 14 unconsolidated entities, of which the Company
owns 50%, and DJONT are payable to the respective entities and as such is not
included in the following schedule of lease commitments to the Company.
BRISTOL HOTELS
DJONT & RESORTS TOTAL
----- --------- -----
Remainder of 1998.................................... $ 34,329 $ 32,865 $ 67,194
1999................................................. 138,575 150,801 289,376
2000................................................. 139,903 176,797 316,700
2001................................................. 143,096 176,797 319,893
2002................................................. 143,090 176,797 319,887
2003 and thereafter.................................. 603,953 965,798 1,569,751
---------- ---------- ----------
$1,202,946 $1,679,855 $2,882,801
========== ========== ==========
Directly or through affiliates, Messrs. Feldman and Corcoran, the
owners of joint venture interests in and the managers of certain of the Hotels
leased by DJONT have agreed to make loans to DJONT of up to an aggregate of
approximately $17.3 million, to the extent necessary to enable DJONT 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
September 30, 1998.
Pursuant to the Amended and Restated Master Hotel Agreement dated as of
July 27, 1998 (the "Master Hotel Agreement"), the lessees under the Percentage
Leases that are affiliated with Bristol (the "Bristol Lessees") are required to
maintain, collectively, a certain amount of Minimum Liquid Net Worth (defined to
mean Liquid Net Worth equal to 15% of the projected annual rent to be paid by
the Bristol Lessees under the Percentage Leases). In addition, each Bristol
Lessee is required to maintain an individual Liquid Net Worth equal to the
portion of the Minimum Liquid Net Worth for all Bristol Lessees allocable to it.
For purposes of these covenants, Liquid Net Worth is defined generally to mean
the lesser of (i) the net worth of the Bristol Lessee (for this purpose,
excluding intangibles) plus any Credit Enhancement Amount, and (ii) the Bristol
Lessees' Liquid Assets Amount plus any Credit Enhancement Amount. Liquid Assets
Amount is defined generally to mean working capital plus the lesser of book or
fair market value of lease or management contracts for non-affiliated hotel
properties (those not owned by an affiliate of FelCor or Bristol), hotels or
other real property owned and any other income producing or readily marketable
tangible property, subject to the reasonable approval of FelCor. Credit
Enhancement Amount means, generally, the aggregate amount available under
letters of credit, guaranties provided by Bristol or its affiliates, or other
forms of credit enhancement acceptable to FelCor.
The Master Hotel Agreement also requires each Bristol Lessee to certify
the amount of its Liquid Net Worth and its then applicable Minimum Liquid Net
Worth, as well as the aggregate Liquid Net Worth and the Minimum Liquid Net
Worth then applicable to the Bristol Lessees, collectively. If the Liquid Net
Worth of any Bristol Lessee or the Bristol Lessees, collectively is less than
the Minimum Liquid Net Worth, Bristol has the obligation, pursuant to the Master
Hotel Agreement, to contribute additional cash, marketable securities or other
assets that qualify for the Liquid Assets Amount, or to provide additional
credit enhancement equal to the deficiency in the Liquid Net Worth.
9
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
At the closing of the Merger, the Liquid Net Worth of the Bristol
Lessees, collectively, was set at $30 million. As credit enhancement, the
Bristol Lessees obtained a letter of credit (the "Letter of Credit") issued by
Bankers Trust Company for the benefit of all of the Bristol Lessees in a total
amount of $20 million. This Letter of Credit is required to be maintained until
July 27, 1999. In addition, Bristol and certain of its affiliates have provided
guaranties of the Percentage Leases pursuant to which Bristol and such
affiliates have guaranteed the payment of rent under the Percentage Leases;
provided, however, that the obligation under each such Guaranty is limited to
the amount of any deficiency in the Liquid Net Worth of the Bristol Lessees
below the Minimum Liquid Net Worth.
4. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations at September 30, 1998 and December
31, 1997 consist of the following (in thousands):
BALANCE
INTEREST RATE MATURITY DATE SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------- ------------- ------------------ -----------------
FLOATING RATE DEBT:
Line of credit - unsecured LIBOR + 150bp July 2001 $ 349,000 $ 61,000
Term loan - unsecured LIBOR + 150bp January 2000 250,000
Other - unsecured Various June 2000 25,650 25,650
------------- -------------
Total floating rate debt 624,650 86,650
------------- -------------
FIXED RATE DEBT:
Line of credit - unsecured 7.27% July 2001 325,000 75,000
Publicly-traded term notes - 7.38% October 2004 174,218 174,116
unsecured
Publicly-traded term notes - 7.63% October 2007 124,098 124,029
unsecured
Mortgage debt - secured 7.46% November 2007 143,289
Mortgage debt - secured 8.0% December 2002 45,101
Other - secured Various Various 68,496 17,024
------------- -------------
Total fixed rate debt 880,202 390,169
------------- -------------
Total debt and capital lease obligations $ 1,504,852 $ 476,819
============= =============
A portion of the Company's Line of Credit is matched with interest rate
swap agreements which effectively convert the variable rate on the Line of
Credit to a fixed rate.
Under its loan agreements, the Company is required to satisfy various
affirmative and negative covenants. The Company was in compliance with these
covenants at September 30, 1998.
5. INVESTMENT IN UNCONSOLIDATED ENTITIES
At September 30, 1998, the Company owned 50% interests in separate
entities owning 15 hotels, a parcel of undeveloped land and a condominium
management company. The Company also owned a 97% non-voting interest in an
entity developing condominiums for sale. The Company is accounting for its
investments in these unconsolidated entities under the equity method.
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. INVESTMENT IN UNCONSOLIDATED ENTITIES -- (CONTINUED)
Summarized combined financial information for 100% of these
unconsolidated entities is as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Balance sheet information:
Investment in hotels, net of accumulated depreciation...................... $252,112 $256,032
Non-recourse mortgage debt................................................. $169,939 $138,956
Equity..................................................................... $ 94,775 $126,324
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 , SEPTEMBER 30 ,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Statements of operations information:
Percentage lease revenue........................ $ 13,575 $ 13,297 $ 40,144 $ 35,551
Other income.................................... 2,087 3,140 3,201 4,316
------------ ------------ ------------ ------------
Total revenue.......................... 15,662 16,437 43,345 39,867
------------ ------------ ------------ ------------
Expenses:
Depreciation............................... 4,261 4,216 12,804 11,431
Taxes, insurance and other................. 2,303 3,436 5,462 6,314
Interest expense........................... 3,373 3,215 9,727 8,216
------------ ------------ ------------ ------------
Total expenses......................... 9,937 10,867 27,993 25,961
------------ ------------ ------------ ------------
Net income...................................... $ 5,725 $ 5,570 $ 15,352 $ 13,906
============ ============ ============ ============
50% of net income attributable to the Company... $ 2,862 $ 2,785 $ 7,676 $ 6,953
Amortization of cost in excess of book value.... (416) (447) (1,247) (1,188)
------------ ------------ ------------ ------------
Equity in income from unconsolidated entities... $ 2,446 $ 2,338 $ 6,429 $ 5,765
============ ============ ============ ============
6. TAXES, INSURANCE AND OTHER
Taxes, insurance and other is comprised of the following for the three
and nine months ended September 30, 1998 and 1997 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Real estate and personal property taxes.............. $ 10,246 $ 5,015 $ 23,269 $ 13,848
Property insurance................................... 801 483 1,346 1,347
Land lease expense................................... 2,729 459 3,535 1,119
State franchise taxes................................ 561 198 1,026 498
Other 314 314 100
------------ ------------ ------------ ------------
Total taxes, insurance and other............ $ 14,651 $ 6,155 $ 29,490 $ 16,912
============ ============ ============ ============
11
12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. SUBSEQUENT EVENTS
The Company completed a $15.5 million non-recourse financing of the
Holiday Inn Select in Pittsburgh, Pa., for a term of five years at a fixed
interest rate of 7.15%. This financing was obtained to satisfy commitments to
the seller made in connection with the acquisition of this hotel.
A one-time distribution of earnings and profits arising from the
Bristol Merger is expected to be made in conjunction with the regular fourth
quarter dividend, which is expected to be paid to shareholders of record on
December 30, 1998. The amount of this additional distribution, which is expected
to be finalized before the end of November, 1998, is currently expected to be
within the ranges of $0.30 to $0.50 per share and unit for common shareholders
and Operating Partnership unitholders, and $0.17 to $0.33 per share on the $1.95
Series A Cumulative Convertible Preferred Stock. The 9% Series B Cumulative
Redeemable Preferred Stock does not participate in this additional distribution.
FelCor and Starwood announced the re-branding of FelCor's 545-room
Sheraton Park Central hotel in Dallas, Texas, to the Westin(R) brand. In
addition, the two companies have entered into a joint venture agreement
combining the ownership of this hotel and an adjacent 438-room Sheraton hotel
owned by Starwood, which has recently been re-branded from a Radisson(R) hotel.
FelCor owns 60%, and Starwood owns 40%, of the new joint venture.
8. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited Pro Forma Consolidated Statements of Operations
for the nine months ended September 30, 1998 and 1997 are presented as if the
acquisitions of all hotels owned by the Company at September 30, 1998, the
equity offerings consummated during 1997 and 1998 and the Bristol Merger 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 Company 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.
12
13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. PRO FORMA INFORMATION (UNAUDITED) -- (CONTINUED)
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
Revenues:
Percentage lease revenue ....................... $ 364,762 $ 302,606
Equity in income from unconsolidated entities .. 8,045 7,318
Other income ................................... 159
------------ ------------
Total revenue ............................... 372,966 309,924
------------ ------------
Expenses:
General and administrative ..................... 5,193 3,493
Depreciation ................................... 97,486 92,731
Taxes, insurance and other ..................... 56,823 54,917
Interest expense ............................... 79,602 76,686
Minority interest in Operating Partnership ..... 5,827 3,491
Minority interest in other partnerships ........ 1,000 1,047
------------ ------------
Total expenses .............................. 245,931 232,365
------------ ------------
Net income ....................................... 127,035 77,559
Preferred dividends .............................. 18,552 18,552
------------ ------------
Net income applicable to common shareholders ..... $ 108,483 $ 59,007
============ ============
Per common share data:
Basic:
Net income applicable to common shareholders ... $ 1.61 $ 0.89
============ ============
Weighted average common shares outstanding ..... 67,527 66,460
============ ============
Diluted:
Net income applicable to common shareholders ... $ 1.58 $ 0.87
============ ============
Weighted average common shares outstanding ..... 68,454 67,466
============ ============
13
14
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents ................................................... $ 36,060 $ 25,684
Accounts receivable, net .................................................... 32,452 20,274
Inventories ................................................................. 4,152 3,466
Prepaid expenses ............................................................ 48 1,307
Other assets ................................................................ 671 3,971
------------ ------------
Total assets ...................................................... $ 73,383 $ 54,702
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade ..................................................... $ 4,993 $ 9,426
Accounts payable, other ..................................................... 15,703 4,625
Due to FelCor Lodging Trust Incorporated .................................... 20,915 18,908
Accrued expenses and other liabilities ...................................... 41,783 30,818
------------ ------------
Total liabilities ................................................. 83,394 63,777
------------ ------------
Commitments and contingencies (Note 2)
Shareholders' equity:
Capital ..................................................................... 1 1
Distributions in excess of earnings ......................................... (10,012) (9,076)
------------ ------------
Total shareholders' deficit ....................................... (10,011) (9,075)
------------ ------------
Total liabilities and shareholders' equity ........................ $ 73,383 $ 54,702
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
14
15
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenue:
Suite/room revenue ............................... $ 158,681 $ 128,461 $ 462,959 $ 330,545
Food and beverage revenue ........................ 18,567 10,387 53,678 20,576
Food and beverage rent ........................... 1,122 1,315 3,592 3,338
Other revenue .................................... 11,780 9,488 36,171 26,209
------------ ------------ ------------ ------------
Total revenues .............................. 190,150 149,651 556,400 380,668
------------ ------------ ------------ ------------
Expenses:
Property operating costs and expenses ............ 43,796 37,076 125,550 93,442
General and administrative ....................... 15,116 11,377 41,597 27,694
Advertising and promotion ........................ 13,289 10,720 37,751 26,243
Repair and maintenance ........................... 9,660 7,345 26,590 18,417
Utilities ........................................ 8,303 6,625 21,458 15,316
Management fee ................................... 4,390 2,832 16,169 8,121
Franchise fee .................................... 4,705 3,644 13,626 9,828
Food and beverage expenses ....................... 16,617 8,770 46,952 17,459
Percentage lease expenses ........................ 75,935 61,362 221,393 158,436
Lessee overhead expenses ......................... 468 574 1,309 1,618
Liability insurance .............................. 354 996 923 2,496
Other ............................................ 1,380 930 4,018 3,186
------------ ------------ ------------ ------------
Total expenses .............................. 194,013 152,251 557,336 382,256
------------ ------------ ------------ ------------
Net loss .............................................. $ (3,863) $ (2,600) $ (936) $ (1,588)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
15
16
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
Cash flows from operating activities:
Net loss ........................................................ $ (936) $ (1,588)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Changes in assets and liabilities:
Accounts receivable ........................................ (12,178) (15,270)
Inventories ................................................ (686) (960)
Prepaid expenses ........................................... 1,259 (2,189)
Other assets ............................................... 3,300 59
Due to FelCor Lodging Trust Incorporated ................... 2,007 7,892
Accounts payable, accrued expenses and other liabilities ... 17,610 36,019
------------ ------------
Net cash flow provided by operating activities ........ 10,376 23,963
------------ ------------
Net change in cash and cash equivalents .............................. 10,376 23,963
Cash and cash equivalents at beginning of periods .................... 25,684 5,208
------------ ------------
Cash and cash equivalents at end of periods .......................... $ 36,060 $ 29,171
============ ============
The accompany notes are an integral part of these consolidated
financial statements.
16
17
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Thomas J. Corcoran, Jr, the President, Chief Executive Officer and a
director of FelCor Lodging Trust Incorporated ("FelCor"), and Hervey A. Feldman,
Chairman Emeritus of FelCor, beneficially own all of the voting Class A
membership interest in DJONT Operations, L.L.C. ("DJONT") (representing a 50%
equity interest). 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, and
major initial investor in, FelCor. At September 30, 1998, FelCor Lodging Limited
Partnership (the "Operating Partnership") leased 87 hotels to DJONT (the
"Hotels") pursuant to percentage leases (the "Percentage Leases"). Directly or
through affiliates, Messrs. Feldman and Corcoran, the owners of joint venture
interests in, and the managers of certain of the Hotels have agreed to make
loans to DJONT of up to an aggregate of approximately $17.3 million, to the
extent necessary to enable DJONT 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 DJONT, if any, will be subordinate in right of repayment to the
prior payment in full of rent and other obligations due under the Percentage
Leases relating to such Hotels. No loans were outstanding under such agreements
at September 30, 1998.
At September 30, 1998, 57 of the Hotels leased to DJONT, were operated
as Embassy Suites hotels, 15 as Doubletree Guest Suites hotels, two as
full-service Doubletree hotels, five as Sheraton hotels, four as Sheraton Suites
hotels, one as a Hilton hotel, one as a Hilton Suites hotel, one as a Holiday
Inn Select and one was in the process of being converted to a full-service
Doubletree hotel. Seventy-three of the Hotels leased to DJONT are managed by
Promus Hotel Corporation ("Promus"), or by a subsidiary thereof. Of the
remaining Hotels leased to DJONT, nine are managed directly by, or by a
subsidiary of, Starwood Hotels & Resorts Worldwide, Inc., two are managed by
Bristol Hotels & Resorts and three are managed by two independent management
companies. Promus is the largest operator of all-suite, full-service hotels in
the United States.
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future lease commitments under the Percentage Leases
which expire in 2002 (six hotels), 2003 (two hotels), 2004 (seven hotels), 2005
(12 hotels) 2006 (18 hotels), 2007 (23 hotels), 2008 (12 hotels) and 2012 (seven
hotels). Minimum future rental payments (i.e., base rents) under these
noncancellable operating leases at September 30, 1998 is as follows (in
thousands):
YEAR AMOUNT
- ---- ------
Remainder of 1998................................................... $ 41,091
1999................................................................ 165,626
2000................................................................ 166,954
2001................................................................ 170,148
2002................................................................ 170,142
2003 and thereafter................................................. 710,359
------------
$1,424,320
============
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For background information relating to the Company and the definitions
of certain capitalized terms used herein, reference is made to Note 1 of Notes
to Consolidated Financial Statements of FelCor Lodging Trust Incorporated
appearing elsewhere herein.
THIRD QUARTER HIGHLIGHTS:
o Revenues increased 113% for the quarter from $51.1 million to $108.6
million.
o Net income applicable to common shareholders increased 75% for the
quarter from $17.8 million to $31.2 million.
o Income before extraordinary charges per share increased 19% for the
quarter from $0.48 to $0.57.
o Funds From Operations ("FFO") of $68.5 million or $1.03 per share and
unit sets a new quarterly record.
o Completed the merger of Bristol Hotel Company's hotel assets, including
109 hotels, into FelCor on July 28, 1998. FelCor's 1998 third quarter
earnings include the results from these hotels for 65 of the 92 days in
the quarter.
o The hotel portfolio's revenue per available room ("RevPAR"), including
the comparable hotels acquired in the Bristol Merger, increased 4.1%
for the quarter and 6.4% year-to-date over the comparable periods. The
overall RevPAR percentage increased for the quarter, but at a slower
pace than during the first half of 1998. The third quarter RevPAR
increase was negatively affected by some overbuilding in select markets
and by room additions at three of the hotels. Nevertheless, 70% of the
comparable hotels (85 of 123 hotels) produced RevPAR increases in the
third quarter as compared to the prior year. Furthermore, the Holiday
Inn and Holiday Inn Select hotels, not undergoing renovation in either
reporting period, produced RevPAR increases of 5.8% and 6.8% for the
quarter and year-to-date, respectively.
o Twenty-three hotels were undergoing redevelopment and renovation during
the quarter, resulting in approximately 120,000 room nights
out-of-service or approximately 3% of available room nights. During the
quarter, two hotels were re-branded as Sheraton Suites and four hotels
were re-branded as Crowne Plaza hotels. In total, renovations at 11
hotels were completed during the quarter.
o Sold two of the hotels acquired in the Bristol Merger: the 199-room
Holiday Inn Express(R) - Northeast in Atlanta, Ga., and the 200-room
Holiday Inn-Orlando Winter Park in Orlando, Fla., for an aggregate sale
price of $7.7 million. Presently, FelCor has pending sales contracts on
three additional limited-service hotels, which are expected to close
before year end, for an aggregate sales price of $8.6 million. Five
additional hotel properties, acquired in the Bristol Merger, are being
actively offered for sale.
o Increased FelCor's unsecured credit facilities to $1.1 billion from
$550 million. The new unsecured credit facilities consist of a $850
million revolving line of credit that matures on July 1, 2001, and a
$250 million term loan that matures on January 1, 2000. In connection
with the retirement of the old unsecured credit facilities, an
extraordinary charge of $2.5 million was recognized in the quarter.
o Following the end of the quarter, completed $15.5 million non-recourse
financing of the Holiday Inn Select in Pittsburgh, Pa., for a term of
five years at a fixed interest rate of 7.15%. This financing was
obtained to satisfy commitments to the seller made in connection with
the acquisition of this hotel.
18
19
o Declared third quarter dividends of $0.55 per common share, $0.4875 per
$1.95 Series A Cumulative Convertible Preferred share and $0.5625 per
depositary share relating to the 9% Series B Cumulative Redeemable
Preferred Stock. The current annual dividend on Common Stock of $2.20
results in a current FFO payout ratio of approximately 60% and a
dividend yield of approximately 9.2%, based on the November 2, 1998,
closing price for FelCor Common Stock on the NYSE.
RESULTS OF OPERATIONS
The Company
Nine Months Ended September 30, 1998 and 1997
For the nine months ended September 30, 1998 and 1997, the Company had
revenues of $233.5 million and $128.7 million, respectively, consisting
primarily of Percentage Lease revenues of $224.0 million and $122.7 million,
respectively. The increase in total revenue is primarily attributed to the
Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of
interests in 123 additional hotels since September 30, 1997 including 107 hotels
acquired on July 28, 1998 through the Bristol Merger.
Management believes that the hotels it acquires will generally
experience increases in suite/room revenue and RevPAR (and accordingly, provide
the Company 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.)
Total expenses increased $66.7 million in the nine months ended
September 30, 1998, from $80.6 million to $147.3 million, compared to the same
period in 1997. This increase resulted primarily from the additional hotels
acquired in 1998 and 1997. Total expenses as a percentage of total revenue
remained constant at 63% in the nine months ended September 30, 1998 and in the
same period of 1997. The major components of total expenses are depreciation;
taxes, insurance and other; and interest expense.
Depreciation increased primarily as a result of the additional hotels
acquired in 1998 and 1997. However, as a percentage of revenue, depreciation
remained relatively constant.
Taxes, insurance and other increased $12.6 million primarily as a
result of the increased number of hotels owned. As a percentage of total
revenue, taxes, insurance and other decreased insignificantly from 13.1% to
12.6%.
Interest expense increased as a percentage of total revenue to 19.9% in
the nine months ended September 30, 1998 from 15.6% in the nine months ended
September 30, 1997. This increase in interest expense is attributed to the
increased use of debt to finance acquisitions and renovations and the debt
assumed in connection with the Bristol Merger.
Three Months Ended September 30, 1998 and 1997
For the three months ended September 30, 1998 and 1997, the Company had
revenues of $108.6 million and $51.1 million, respectively, consisting primarily
of Percentage Lease revenues of $105.1 million and $48.6 million, respectively.
The increase in total revenue is primarily attributed to the Company's
acquisition and subsequent leasing, pursuant to Percentage Leases, of interests
in 123 additional hotels since September 30, 1997, including 107 hotels acquired
on July 28, 1998 through the Bristol Merger.
19
20
Total expenses increased $38.4 million in the three months ended
September 30, 1998, to $68.7 million, compared to the same period in 1997. This
increase resulted primarily from the additional hotels acquired in 1998 and
1997. Total expenses increased as percentage of total revenue to 63.3% in the
third quarter of 1998 from 59.4% in the third quarter of 1997. 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 1998 and 1997. However, as a percentage of revenue,
depreciation remained relatively constant.
Taxes, insurance and other increased $8.5 million primarily as a result
of the increased number of hotels owned. As a percentage of total revenue,
taxes, insurance and other increased from 12.1% to 13.4%.
Interest expense increased as a percentage of total revenue to 21.1% in
the third quarter of 1998 from 14.1% in the third quarter of 1997. This increase
in interest expense is attributed to the increased use of debt to finance
acquisitions and renovations, and the debt assumed in connection with the
Bristol Merger.
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.
20
21
The following table details the computation of Funds From Operations
(in thousands, except per share and unit data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Funds From Operations (FFO):
Net income ....................................... $ 37,335 $ 20,742 $ 83,160 $ 48,057
Less: Series B redeemable preferred dividends .... (3,234) (5,139)
Add back:
Extraordinary charge from write off of deferred
financing fees from unconsolidated entities . 2,519 3,075
Minority interest in Operating Partnership .... 1,639 1,643 5,452 4,584
Depreciation .................................. 27,720 14,238 61,036 35,969
Depreciation for unconsolidated entities ...... 2,501 2,555 7,604 6,904
------------ ------------ ------------ ------------
FFO .............................................. $ 68,480 $ 39,178 $ 155,188 $ 95,514
============ ============ ============ ============
Weighted average common shares and
units outstanding(a) ........................ 66,603 44,407 52,017 37,439
============ ============ ============ ============
(a) Weighted average common shares and units are computed including
dilutive options, unvested restricted stock grants and assuming
conversion of convertible preferred stock to common stock.
Included in the Funds From Operations described above is the Company's
share of FFO from its interest in fifteen unconsolidated entities. The FFO
contribution from these unconsolidated entities was derived as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Statements of operations information:
Percentage Lease revenue ..................................... $ 13,575 $ 13,297 $ 40,144 $ 35,551
Other income ................................................. 2,087 3,140 3,201 4,316
------------ ------------ ------------ ------------
Total revenue ................................. 15,662 16,437 43,345 39,867
------------ ------------ ------------ ------------
Expenses:
Depreciation ......................................... 4,170 4,216 12,714 11,431
Taxes, insurance and other ........................... 2,394 3,436 5,552 6,314
Interest expense ..................................... 3,373 3,215 9,727 8,216
------------ ------------ ------------ ------------
Total expenses ................................ 9,937 10,867 27,993 25,961
------------ ------------ ------------ ------------
Net income ................................................... $ 5,725 $ 5,570 $ 15,352 $ 13,906
============ ============ ============ ============
50% of net income attributable to the Company ................ $ 2,862 $ 2,785 $ 7,676 $ 6,953
Amortization of cost in excess of book value ................. (416) (447) (1,247) (1,188)
------------ ------------ ------------ ------------
Income from unconsolidated entities .......................... 2,446 2,338 6,429 5,765
Add back: 50% of depreciation ................................ 2,085 2,108 6,357 5,715
Amortization of cost in excess of book
value ................................... 416 447 1,247 1,188
------------ ------------ ------------ ------------
FFO contribution of unconsolidated entities .................. $ 4,947 $ 4,893 $ 14,033 $ 12,668
============ ============ ============ ============
21
22
DJONT
Nine Months Ended September 30, 1998 and 1997
Total revenues increased to $556.4 million for the nine months ended
September 30, 1998 from $380.7 million in the same period of 1997, an increase
of 46.2%. Total revenues consisted primarily of suite/room revenue of $463.0
million and $330.5 million in the nine months of 1998 and 1997, respectively.
The increase in total revenues is primarily a result of the increase in
the number of hotels leased to 87 hotels at September 30, 1998 from 71 hotels at
September 30, 1997 and the increase in RevPAR experienced at the hotels.
Total expenses increased to $557,000 from $382,000 for the nine months
ended September 30, 1998 compared to the same period in 1997. This increase is
attributed to the increased number of hotels leased in 1998. Expense as a
percentage of total revenue remained essentially constant for both periods
presented, except for food and beverage expenses which increased to 8% from 5%.
This increase in food and beverage expense is consistent with the increase in
food and beverage revenue as a percentage of total revenue and results from a
larger number of hotels operating food and beverage facilities rather than
leasing them to a third party.
DJONT's income before Percentage Lease expense decreased as a
percentage of total revenues to 40% in the nine months ended September 30, 1998
from 41% in the nine months ended September 30, 1997.
Three Months Ended September 30, 1998 and 1997
Total revenues increased to $190.1 million for the three months ended
September 30, 1998 from $149.6 million in the same period of 1997, an increase
of 27.1%. Total revenues consisted primarily of suite/room revenue of $158.7
million and $128.5 million in the three months of 1998 and 1997, respectively.
The increase in total revenues is primarily a result of the increase in
the number of hotels leased to 87 hotels at September 30, 1998 from 71 hotels at
September 30, 1997 and the increase in RevPAR experienced at the hotels.
Total expenses as a percentage of total revenue remained constant for
both the three months ended September 30, 1998 and 1997.
DJONT's income before Percentage Lease expense decreased as a
percentage of total revenues to 38% in the three months ended September 30, 1998
from 39% in the three months ended September 30, 1997.
Bristol
Bristol is a public company whose common stock is listed on the New
York Stock Exchange under the symbol BH and that files financial statements in
accordance with the Securities and Exchange Act of 1934.
22
23
The Hotels
The following table sets forth hotel operating statistics for all
Hotels in which FelCor owned an interest at September 30, 1998, regardless of
the date of acquisition.
COMPARABLE HOTELS (A)
THIRD QUARTER 1998 YEAR-TO-DATE 1998
--------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Original Hotels......................... 73.7% $108.90 $80.27 75.1% $113.68 $85.36
CSS Hotels.............................. 73.5 122.10 89.78 74.6 126.22 94.20
1996 Acquisitions....................... 77.2 126.26 97.51 75.6 127.34 96.23
Total DJONT Comparable Hotels........... 74.6 119.48 89.10 75.6 122.92 92.21
Original Bristol........................ 69.4 74.37 51.63 73.6 73.91 54.40
Holiday Acquisition..................... 77.7 88.82 69.03 76.0 84.01 63.82
Omaha Acquisition....................... 57.0 62.56 35.65 52.2 62.43 32.60
Total Bristol Comparable Hotels......... 71.3 80.32 57.31 70.4 77.43 54.49
Total Comparable Hotels.............. 72.4% $ 93.79 $67.93 72.2% $ 95.71 $69.07
THIRD QUARTER 1997 YEAR-TO-DATE 1997
--------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Original Hotels......................... 76.9% $107.50 $82.70 77.4% $109.29 $84.61
CSS Hotels.............................. 74.5 113.40 84.49 74.5 115.67 86.16
1996 Acquisitions....................... 77.0 120.34 92.70 76.2 118.69 90.44
Total DJONT Comparable Hotels........... 75.9 113.65 86.23 75.8 114.71 86.91
Original Bristol........................ 73.4 68.19 50.08 76.0 68.37 51.93
Holiday Acquisition..................... 79.8 83.13 66.33 77.8 77.90 60.57
Omaha Acquisition....................... 52.9 60.12 31.78 48.1 58.48 28.14
Total Bristol Comparable Hotels......... 73.1 74.99 54.84 71.2 72.06 51.30
Total Comparable Hotels.............. 74.0% $ 88.10 $65.23 72.9% $ 89.01 $64.92
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR YEAR
3RD QTR. 1998 VS. 3RD QTR. 1997 1998 VS. 1997 YEAR-TO-DATE
--------------------------------- -------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Original Hotels......................... (3.2) pts. 1.3% (2.9)% (2.3) pts. 4.0% 0.9%
CSS Hotels.............................. (1.0) 7.7 6.3 0.1 9.1 9.3
1996 Acquisitions....................... (0.2) 4.9 5.2 (0.6) 7.3 6.4
Total DJONT Comparable Hotels........... (1.3) 5.1 3.3 (0.2) 7.2 6.1
Original Bristol........................ (4.0) 9.1 3.1 (2.4) 8.1 4.8
Holiday Acquisition..................... (2.1) 6.8 4.1 (1.8) 7.8 5.4
Omaha Acquisition....................... 4.1 4.1 12.2 4.1 6.8 15.9
Total Bristol Comparable Hotels......... (1.8) 7.1 4.5 (0.8) 7.5 6.2
Total Comparable Hotels.............. (1.6) pts. 6.5% 4.1% (0.7) pts. 7.5% 6.4%
(A) The Original Hotels (13 hotels), CSS Hotels (18 hotels) and 1996
Acquisitions (12 hotels) are considered DJONT Comparable Hotels since these
hotels were owned by FelCor for both the nine months ended September 30, 1997
and 1998.
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24
Bristol Comparable Hotels exclude hotels undergoing redevelopment in
either the 1998 or 1997 period reported, five individual hotel acquisitions
and eight hotels targeted for sale. For the third quarter 1998 data, 17
hotels were undergoing redevelopment and were excluded. For year-to-date
September 30, 1998 data, 29 hotels were undergoing redevelopment and were
excluded.
NON-COMPARABLE HOTELS (B)
THIRD QUARTER 1998 YEAR-TO-DATE 1998
--------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
1997 Acquisitions 71.7% $108.87 $78.08 72.2% $112.16 $80.93
1998 Acquisitions 71.0 91.44 64.89 73.5 99.56 73.17
Bristol Non-Comparable Hotels (C) 61.5 85.37 52.52 66.3 88.16 58.41
THIRD QUARTER 1997 YEAR-TO-DATE 1997
--------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
1997 Acquisitions 72.8% $107.34 $78.17 73.2% $109.01 $79.79
1998 Acquisitions 72.4 89.03 64.50 74.8 96.27 71.96
Bristol Non-Comparable Hotels (C) 69.4 78.07 54.20 73.0 80.68 58.88
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR YEAR
3RD QTR. 1998 VS. 3RD QTR. 1997 1998 VS. 1997 YEAR-TO-DATE
--------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
1997 Acquisitions (1.1) pts. 1.4% (0.1)% (1.0) pts. 2.9% 1.4%
1998 Acquisitions (1.4) 2.7 0.6 (1.3) 3.4 1.7
Bristol Non-Comparable Hotels (C) (7.9) 9.3 (3.1) (6.7) 9.3 (0.8)
(B) The 1997 Acquisitions (30 hotels) and 1998 Acquisitions (13 hotels) are
not considered comparable since these hotels were not owned by FelCor for
both the nine months ended September 30, 1998 and 1997 and the hotels were
undergoing renovation in either the 1998 or 1997 period reported.
(C) Excludes two closed hotels under renovation and eight hotels targeted for
sale. In aggregate, the eight hotels targeted for sale had a 8.7% and 9.5%
decline in RevPAR for the third quarter 1998 and year-to-date, respectively.
All hotel performance statistics reflect the hotels' performance for the
entire periods noted, whether or not the hotel was owned by FelCor for the
entire periods.
Comparison of The Hotels' Operating Statistics for the Nine Months Ended
September 30, 1998 and 1997
Revenue per available room ("RevPAR") for the DJONT Comparable Hotels
increased 6.1% for the nine months ended September 30, 1998 compared to the same
period in 1997. Of these hotels the strongest performance came from the CSS
Hotels, which the Company purchased in late 1995 and early 1996. The Company
invested more than $50 million to renovate and reposition these hotels and
believes that this contributed to the strong increase in RevPAR. The Original
Hotels which represent 13 hotels acquired between 1994 and 1995 had increases in
RevPAR of 0.9%. There were room additions at two of these hotels which
negatively effected RevPAR, but resulted in increases in revenue and percentage
rent income. Additionally, three of the Original Hotels are in Florida and were
impacted by adverse weather conditions and three hotels are located in markets
experiencing overall decreases in occupancy.
RevPAR for the Bristol Comparable Hotels increased 4.5% over the same
period in 1997. These were led by the Omaha Acquisition, which has benefitted
from Bristol management.
The Company noted that most of the markets in which Company's hotels are
located experienced strong performance. The Company's hotels in Southern
California saw double digit RevPAR growth. Florida and east coast hotels were
adversely affected by Hurricane Bonnie during the peak summer season but
generally performed well.
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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 nine months ended
September 30, 1998, cash flow provided by operating activities, consisting
primarily of Percentage Lease revenue, was $151.1 million and Funds From
Operations (as previously defined) was $155.2 million. The Lessees' obligations
under the Percentage Leases are unsecured. The Lessees' 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 Lessees to generate sufficient cash flow from the operation
of the Hotels.
At September 30, 1998, DJONT had paid all amounts then due the Company
under the Percentage Leases. During the nine months ended September 30, 1998,
DJONT had net loss of $1 million. DJONT had a shareholders' deficit of $10
million at September 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 DJONT will be retained until
a positive shareholders' equity is restored. It is anticipated that DJONT's
future earnings will be sufficient to enable it to continue to make its lease
payments under the Percentage Leases when due.
Directly or through affiliates, Messrs. Feldman and Corcoran, the
owners of joint venture interests in and the managers of certain of the Hotels
have agreed to make loans to DJONT of up to an aggregate of approximately $17.3
million, to the extent necessary to enable DJONT 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 DJONT, if any, will be subordinate in
right of repayment to the prior payment in full of rent and other obligations
due under the Percentage Leases relating to such Hotels. No loans were
outstanding under such agreements at September 30, 1998.
Pursuant to the Amended and Restated Master Hotel Agreement dated as of
July 27, 1998 (the "Master Hotel Agreement"), the lessees under the Percentage
Leases that are affiliated with Bristol (the "Bristol Lessees") are required to
maintain, collectively, a certain amount of Minimum Liquid Net Worth (defined to
mean Liquid Net Worth equal to 15% of the projected annual rent to be paid by
the Bristol Lessees under the Percentage Leases). In addition, each Bristol
Lessee is required to maintain an individual Liquid Net Worth equal to the
portion of the Minimum Liquid Net Worth for all Bristol Lessees allocable to it.
For purposes of these covenants, Liquid Net Worth is defined generally to mean
the lesser of (i) the net worth of the Bristol Lessee (for this purpose,
excluding intangibles) plus any Credit Enhancement Amount, and (ii) the Bristol
Lessees' Liquid Assets Amount plus any Credit Enhancement Amount. Liquid Assets
Amount is defined generally to mean working capital plus the lesser of book or
fair market value of lease or management contracts for non-affiliated hotel
properties (those not owned by an affiliate of FelCor or Bristol), hotels or
other real property owned and any other income producing or readily marketable
tangible property, subject to the reasonable approval of FelCor. Credit
Enhancement Amount means, generally, the aggregate amount available under
letters of credit, guaranties provided by Bristol or its affiliates, or other
forms of credit enhancement acceptable to FelCor.
The Master Hotel Agreement also requires each Bristol Lessee to certify
the amount of its Liquid Net Worth and its then applicable Minimum Liquid Net
Worth, as well as the aggregate Liquid Net Worth and the Minimum Liquid Net
Worth then applicable to the Bristol Lessees, collectively. If the Liquid Net
Worth of any Bristol Lessee or the Bristol Lessees, collectively is less than
the Minimum Liquid Net Worth, Bristol has the obligation, pursuant to the Master
Hotel Agreement, to contribute additional cash, marketable securities or other
assets that qualify for the Liquid Assets Amount, or to provide additional
credit enhancement equal to the deficiency in the Liquid Net Worth.
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26
At the closing of the Merger, the Liquid Net Worth of the Bristol
Lessees, collectively, was set at $30 million. As credit enhancement, the
Bristol Lessees obtained a letter of credit (the "Letter of Credit") issued by
Bankers Trust Company for the benefit of all of the Bristol Lessees in a total
amount of $20 million. This Letter of Credit is required to be maintained until
July 27, 1999. In addition, Bristol and certain of its affiliates have provided
guaranties of the Percentage Leases pursuant to which Bristol and such
affiliates have guaranteed the payment of rent under the Percentage Leases;
provided, however, that the obligation under each such Guaranty is limited to
the amount of any deficiency in the Liquid Net Worth of the Bristol Lessees
below the Minimum Liquid Net Worth.
The Company may 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.
At September 30, 1998, the Company had $49.4 million of cash and cash
equivalents and had utilized $674 million of the amount available under the Line
of Credit. Significant debt statistics at September 30, 1998 are as follows:
o Interest coverage ratio of 3.5x
o Total debt to EBITDA of 3.9x
o Borrowing capacity under existing credit facilities of $150 million
o Consolidated debt-to-investment in hotels, at cost, of 38%
o Fixed interest rate debt comprising 58% of total debt
o Total assets encumbered by secured debt of 7%
o Debt maturing in 1999 of $16 million
In addition, FelCor has no interest rate hedging instrument exposure or
forward equity commitments.
To manage the relative mix of its debt between fixed and variable rate
instruments, the Company has entered into eight 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 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 September 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
$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 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
26
27
are limited to major banks and financial institutions, and it does not
anticipate nonperformance by the counterparties.
The Company spent approximately $43 million on upgrading, renovating
and/or rebranding 50 hotels during the nine months ended September 30, 1998. In
addition, the Company plans to continue Bristol's $400 million repositioning and
redevelopment program of Crowne Plaza and Holiday Inn hotels which were acquired
by FelCor in the Bristol Merger. At July 28, 1998, the redevelopment of 39
hotels was completed with a remaining 43 hotels currently in various stages of
redevelopment. FelCor plans to spend approximately $125 million to complete this
repositioning and redevelopment program, commenced by Bristol in 1997, with an
expected completion by the end of 1999.
Hotels undergoing renovations, redevelopment and re-branding during the
third quarter of 1998 included three Doubletree Guest Suites, one Sheraton, four
Embassy Suites, two Sheraton Suites and 13 Holiday Inn or Holiday Inn Select
hotels. Included in these are two hotels, the Allerton Hotel - Chicago (to be
re-branded as a Crowne Plaza) and the Holiday Inn - Tampa Busch Gardens, which
are closed. Both hotels are expected to reopen in the summer of 1999.
Renovations at 11 hotels, containing approximately 3,200 rooms, were
completed during the third quarter and the hotels were returned to service as
follows:
296 - room Crowne Plaza Atlanta, Ga.
224 - room Crowne Plaza Greenville, S.C.
445 - room Crowne Plaza - City Center Philadelphia, Pa.
400 - room Crowne Plaza - Union Square San Francisco, Calif.
219 - room Doubletree Guest Suites Bloomington, Minn.
198 - room Doubletree Guest Suites Dana Point, Calif.
261 - room Embassy Suites Austin, Texas
217 - room Embassy Suites San Antonio, Texas
242 - room Holiday Inn Knoxville, Tenn.
385 - room Holiday Inn Select Stamford, Conn.
316 - room Holiday Inn - Downtown San Antonio, Texas
The recently renovated and re-branded Crowne Plaza hotels produced
RevPAR increases in each post renovation month of the third quarter 1998 as
compared to the prior year period. During the remainder of 1998 and in calendar
year 1999, nine additional hotels are expected to be re-branded as Crowne Plaza
hotels.
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 Lessees' 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
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 is 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.
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YEAR 2000
The year 2000 issue relates to computer programs that were written
using two digits rather than four to define the applicable year. In those
programs, the year 2000 may be incorrectly identified as the year 1900, which
could result in a system failure or miscalculations causing a disruption of
operations, including a temporary inability to process transactions, prepare
financial statements or engage in other normal business activities.
The Company believes that its efforts to remediate the year 2000 issues
will avoid a major business disruption.
FelCor has assessed its internal computer systems and believes that
they will properly utilize dates beyond December 31, 1999.
The Hotels owned by FelCor are in various stages of identifying both
computer issues and non-information technology systems issues to determine if
they are year 2000 compliant, including embedded systems that operate elevators,
phone systems, energy maintenance systems, security systems and other systems.
The assessments, which have not been completed at this date, are scheduled to be
completed by the end of the first quarter of 1999. Most of the upgrades to make
a hotel year 2000 compliant had been anticipated as part of the renovation and
re-branding program that the Company undertakes upon acquisition of a hotel.
The Company currently anticipates that the total cost to remediate all
hotel year 2000 issues to be approximately $20 million, which is included in the
Company's 1998 and 1999 capital plans.
Concurrent with the assessment of the year 2000 issue, the Company and
its hotel managers and Lessees are developing contingency plans intended to
mitigate the possible disruption in business operations that may result from
year 2000 issues, and are developing cost estimates for such plans. Once
developed, contingency plans and related cost estimates will be continually
refined as additional information becomes available.
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.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("FAS No. 132").
FAS No. 132 provides additional information to facilitate financial
analysis and eliminates certain disclosures which are no longer useful. To the
extent practicable, the Statement also standardizes disclosures for retiree
benefits. FAS No. 132 is effective for financial statements issued for periods
ending after December 15, 1997. The Company believes that FAS No. 132 will not
have a material impact on the financial statements of the Company.
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29
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 133").
FAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. FAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company believes that, upon
implementation, FAS 133 will not have a material impact on the financial
statements of the Company.
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PART II. -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the third quarter of 1998, the Company issued 141,777 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this item has been previously reported by
FelCor and is included or incorporated by reference in the current report on
Form 8-K as filed with the Securities and Exchange Commission on August 10,
1998.
ITEM 5. OTHER INFORMATION.
For information relating to hotel acquisitions and certain other
transactions by the Company through September 30, 1998, see Note 1 of Notes to
Consolidated Financial Statements of FelCor Lodging Trust Incorporated contained
in Item 1 of Part I of this Quarterly Report on Form 10-Q. Such information is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description
------ -----------
10.1.10 Tenth Amendment to Amended and Restated
Agreement of Limited Partnership of the
Operating Partnership effective as of June
22, 1998, by and among the Company,
Schenley Hotel Associates, and all of the
persons or entities who are or shall in the
future become limited partners of the
Operating Partnership.
10.1.11 Eleventh Amendment to Amended and Restated
Agreement of Limited Partnership of the
Operating Partnership dated as of July 28,
1998, by and between the Company and all of
the persons or entities who are or shall in
the future become limited partners of the
Operating Partnership, changing the name of
the Operating Partnership to "FelCor
Lodging Limited Partnership."
10.2.1 Schedule of executed Lease Agreements
identifying material variations from the
form of Lease Agreement with respect to
hotels acquired by the Company through
September 30, 1998.
10.20 FelCor Suite Hotels, Inc. 1998 Restricted
Stock and Stock Option Plan (filed as
Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (File No. 333-66041)
and incorporated herein by reference).
10.21 Second Amended and Restated 1995 Equity
Incentive Plan (filed as Exhibit 99.1 to the
Company's Post-Effective Amendment on Form
S-3 to Form S-4 Registration Statement
(File No. 333-50509) (the "Form S-3
Registration Statement") and incorporated
herein by reference).
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31
10.22 Amended and Restated Stock Option Plan for
Non-Employee Directors (filed as Exhibit
99.2 to the Company's Form S-3 Registration
Statement and incorporated herein by
reference).
10.23 Form of Nonqualified Stock Option Agreement
for 1995 Equity Incentive Plan (filed as
Exhibit 99.3 to the Company's Form S-3
Registration Statement and incorporated
herein by reference).
10.24 Form of Nonqualified Stock Option Agreement
for Non-Employee Directors Stock Option Plan
(filed as Exhibit 99.4 to the Company's Form
S-3 Registration Statement and incorporated
herein by reference).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
- A current report on Form 8-K was filed by
the Company on August 10, 1998. This filing
reported under Item 2. that on July 28, 1998
pursuant to an Agreement and Plan or Merger
Bristol Hotel Company was merged with and
into FelCor. Additionally under Item 5. the
Company reported the results of its
Stockholders Meeting on July 27, 1998 in
which the stockholders (i) approved and
adopted the Merger Agreement, (ii) approved
an amendment to FelCor's Charter to change
the name of FelCor from FelCor Suite Hotels,
Inc. to FelCor Lodging Trust Incorporated,
(iii) approved an amendment to FelCor's
Charter to increase the authorized number of
shares of capital stock of FelCor to
220,000,000 shares, consisting of
200,000,000 shares of Common Stock and
20,000,000 of preferred stock, par value
$.01 per share, (iv) elected Michael D. Rose
and Charles N. Mathewson as Class I
directors of FelCor, to serve until the
Annual Meeting of Stockholders to be held in
2001, and (v) approved FelCor's 1998
Restricted Stock and Stock Option Plan
("1998 Plan"). The amendments to FelCor's
Charter became effective July 28, 1998.
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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: November 16, 1998
FELCOR LODGING TRUST INCORPORATED
By: /s/ Randall L. Churchey
-------------------------------------------------
Randall L. Churchey
Senior Vice President and Chief Financial Officer
(Chief Financial Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
10.1.10 Tenth Amendment to Amended and Restated
Agreement of Limited Partnership of the
Partnership effective as of June 22, 1998,
by and among the Company, Schenley Hotel
Associates, and all of the persons or
entities who are or shall in the future
become limited partners of the Partnership.
10.1.11 Eleventh Amendment to Amended and Restated
Agreement of Limited Partnership of the
Partnership dated as of July 28, 1998, by
and between the Company and all of the
persons or entities who are or shall in the
future become limited partners of the
Partnership, changing the name of the
Partnership to "FelCor Lodging Limited
Partnership."
10.2.1 Schedule of executed Lease Agreements
identifying material variations from the
form of Lease Agreement with respect to
hotels acquired by the Company through
September 30, 1998.
10.20 FelCor Suite Hotels, Inc. 1998 Restricted
Stock and Stock Option Plan (filed as
Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (File No. 333-66041)
and incorporated herein by reference).
10.21 Second Amended and Restated 1995 Equity
Incentive Plan (filed as Exhibit 99.1 to the
Company's Post-Effective Amendment on Form
S-3 to Form S-4 Registration Statement
(File No. 333-50509) (the "Form S-3
Registration Statement") and incorporated
herein by reference).
10.22 Amended and Restated Stock Option Plan for
Non-Employee Directors (filed as Exhibit
99.2 to the Company's Form S-3 Registration
Statement and incorporated herein by
reference).
10.23 Form of Nonqualified Stock Option Agreement
for 1995 Equity Incentive Plan (filed as
Exhibit 99.3 to the Company's Form S-3
Registration Statement and incorporated
herein by reference).
10.24 Form of Nonqualified Stock Option Agreement
for Non-Employee Directors Stock Option Plan
(filed as Exhibit 99.4 to the Company's Form
S-3 Registration Statement and incorporated
herein by reference).
27 Financial Data Schedule.