1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-14236
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 August 10, 1999 was 68,078,492.
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2
FELCOR LODGING TRUST INCORPORATED
INDEX
PAGE
----
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements.............................................................................. 3
FELCOR LODGING TRUST INCORPORATED
Consolidated Balance Sheets - June 30, 1999 (Unaudited)
and December 31, 1998..................................................................... 3
Consolidated Statements of Operations -- For the Three and Six Months
Ended June 30, 1999 and 1998 (Unaudited).................................................. 4
Consolidated Statements of Cash Flows -- For the Six Months
Ended June 30, 1999 and 1998 (Unaudited).................................................. 5
Notes to Consolidated Financial Statements..................................................... 6
DJONT OPERATIONS, L.L.C.
Consolidated Balance Sheets - June 30, 1999 (Unaudited)
and December 31, 1998..................................................................... 13
Consolidated Statements of Operations -- For the Three and Six Months
Ended June 30, 1999 and 1998 (Unaudited).................................................. 14
Consolidated Statements of Cash Flows -- For the Six Months
Ended June 30, 1999 and 1998 (Unaudited).................................................. 15
Notes to Consolidated Financial Statements..................................................... 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 18
General/Second Quarter Highlights.............................................................. 18
Results of Operations.......................................................................... 19
Liquidity and Capital Resources................................................................ 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 30
PART II. -- OTHER INFORMATION
Item 2. Changes in Securities............................................................................. 31
Item 4. Submission of Matters to a Vote of Security Holders............................................... 31
Item 5. Other Information................................................................................. 31
Item 6. Exhibits and Reports on Form 8-K.................................................................. 32
SIGNATURE....................................................................................................... 33
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3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $251,924
at June 30, 1999 and $178,072 at December 31, 1998 .......................... $ 4,037,959 $ 3,955,582
Investment in unconsolidated entities .......................................... 138,554 148,065
Cash and cash equivalents ...................................................... 50,569 34,692
Due from Lessees ............................................................... 32,324 18,968
Deferred expenses, net of accumulated amortization of $3,026
at June 30, 1999 and $2,096 at December 31, 1998 ............................ 13,163 10,041
Other assets ................................................................... 8,057 8,035
------------ ------------
Total assets ........................................................ $ 4,280,626 $ 4,175,383
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt, net of discount of $1,515 at June 30, 1999
and $1,628 at December 31, 1998 ............................................. $ 1,712,540 $ 1,594,734
Distributions payable .......................................................... 42,549 67,262
Accrued expenses and other liabilities ......................................... 78,753 57,312
Minority interest in Operating Partnership, 2,987 and 2,939 units issued and
outstanding at June 30, 1999 and December 31, 1998, respectively ............ 88,202 87,353
Minority interest in other partnerships ........................................ 51,728 51,105
------------ ------------
Total liabilities ................................................... 1,973,772 1,857,766
------------ ------------
Commitments and contingencies (Notes 3 and 5)
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 ....... 143,750 143,750
Common stock, $.01 par value, 200,000 shares authorized, 69,291 and 69,284
shares issued, including shares in treasury, at June 30, 1999
and December 31, 1998, respectively ......................................... 693 693
Additional paid-in capital ..................................................... 2,142,072 2,142,250
Distributions in excess of earnings ............................................ (89,424) (78,839)
Common stock in treasury, at cost, 1,213 shares ................................ (41,487) (41,487)
------------ ------------
Total shareholders' equity .......................................... 2,306,854 2,317,617
------------ ------------
Total liabilities and shareholders' equity .......................... $ 4,280,626 $ 4,175,383
============ ============
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues:
Percentage lease revenue ......................... $ 131,891 $ 62,793 $ 256,882 $ 118,853
Equity in income from unconsolidated entities .... 2,591 2,689 3,837 3,982
Other revenue .................................... 705 1,920 1,385 2,095
---------- ---------- ---------- ----------
Total revenues .......................... 135,187 67,402 262,104 124,930
---------- ---------- ---------- ----------
Expenses:
General and administrative ....................... 2,509 1,375 4,753 2,574
Depreciation ..................................... 37,737 17,429 74,162 33,316
Taxes, insurance, and other ...................... 19,904 7,568 40,857 14,838
Interest expense ................................. 30,750 13,795 59,172 23,526
Minority interest in Operating Partnership ....... 1,519 2,063 2,839 3,813
Minority interest in other partnerships .......... 833 291 1,639 482
---------- ---------- ---------- ----------
Total expenses .......................... 93,252 42,521 183,422 78,549
---------- ---------- ---------- ----------
Income before extraordinary charge ................. 41,935 24,881 78,682 46,381
Extraordinary charge from write off of deferred
financing fees .................................. 1,113 1,113 556
---------- ---------- ---------- ----------
Net income ......................................... 40,822 24,881 77,569 45,825
Preferred dividends ................................ 6,184 4,854 12,368 7,803
---------- ---------- ---------- ----------
Income applicable to common shareholders ........... $ 34,638 $ 20,027 $ 65,201 $ 38,022
========== ========== ========== ==========
Per common share data:
Basic:
Income applicable to common shareholders before
extraordinary charge ........................ $ 0.53 $ 0.55 $ 0.98 $ 1.06
Extraordinary charge ............................. (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Net income applicable to common shareholders ..... $ 0.51 $ 0.55 $ 0.96 $ 1.04
========== ========== ========== ==========
Weighted average common shares outstanding ....... 68,013 36,537 68,011 36,541
========== ========== ========== ==========
Diluted:
Income applicable to common shareholders before
extraordinary charge ........................ $ 0.53 $ 0.54 $ 0.97 $ 1.05
Extraordinary charge ............................. (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Net income applicable to common shareholders ..... $ 0.51 $ 0.54 $ 0.95 $ 1.03
========== ========== ========== ==========
Weighted average common shares outstanding ....... 68,351 36,851 68,347 36,878
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
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5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income ..................................................................... $ 77,569 $ 45,825
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ......................................................... 74,162 33,316
Amortization of deferred financing fees .............................. 1,303 1,256
Accretion of debt .................................................... (494)
Amortization of unearned officers' and directors' compensation ....... 350 396
Equity in income from unconsolidated entities ........................ (3,837) (3,982)
Extraordinary charge for write off of deferred financing fees ........ 1,113 556
Minority interest in Operating Partnership ........................... 2,839 3,813
Minority interest in other partnerships .............................. 1,639 482
Changes in assets and liabilities:
Due from Lessees ..................................................... (13,356) (13,793)
Deferred financing fees .............................................. (5,538) (3,558)
Other assets ......................................................... (1,140) (8,436)
Accrued expenses and other liabilities ............................... 15,343 11,599
---------- ----------
Net cash flow provided by operating activities ............. 149,953 67,474
---------- ----------
Cash flows used in investing activities:
Acquisition of hotel assets .................................................... (10,802) (353,615)
Acquisition of unconsolidated entities ......................................... (418)
Sale of hotels ................................................................. 15,091
Improvements and additions to hotels ........................................... (148,519) (22,244)
Bristol Interim Credit Facility ................................................ (120,000)
Cash distributions from unconsolidated entities ................................ 13,297 15,809
---------- ----------
Net cash flow used in investing activities ................. (130,933) (480,468)
---------- ----------
Cash flows from financing activities:
Proceeds from borrowings ....................................................... 744,000 461,000
Repayment of borrowings ........................................................ (630,899) (144,145)
Proceeds from sale of preferred stock .......................................... 143,750
Costs associated with public offerings ......................................... (4,686)
Distributions paid to limited partners ......................................... (4,273) (3,336)
Distributions paid to preferred shareholders ................................... (13,619) (7,803)
Distributions paid to common shareholders ...................................... (98,352) (38,269)
---------- ----------
Net cash flow provided by (used in) financing activities ... (3,143) 406,511
---------- ----------
Net change in cash and cash equivalents .................................................. 15,877 (6,483)
Cash and cash equivalents at beginning of periods ........................................ 34,692 17,543
---------- ----------
Cash and cash equivalents at end of periods .............................................. $ 50,569 $ 11,060
========== ==========
Supplemental cash flow information --
Interest paid .................................................................. $ 55,549 $ 22,226
========== ==========
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 SECOND QUARTER HIGHLIGHTS
FelCor Lodging Trust Incorporated ("FelCor") is one of the nation's
largest hotel real estate investment trusts ("REIT") which, at June 30, 1999,
owned interests in 187 hotels with nearly 50,000 rooms and suites (collectively
the "Hotels") through its greater than 95% equity interest in FelCor Lodging
Limited Partnership (the "Operating Partnership"). FelCor, the Operating
Partnership, and their subsidiaries are herein referred to, collectively, as the
"Company". The Company owns 100% interests in 163 of the Hotels, a 90% or
greater interest in entities owning seven hotels, a 60% interest in an entity
owning two hotels and 50% interests in separate entities that own 15 hotels.
FelCor strives to be the premier full-service lodging REIT partnered
with leading brands and management companies to create shareholder value. The
Company is the owner of the largest number of Embassy Suites(R), Crowne
Plaza(R), Holiday Inn(R), and independently owned Doubletree(R) branded hotels
in the world. The following table presents the Hotels, by brand, operated by
each of the Company's Lessees at June 30, 1999:
BRAND DJONT BRISTOL TOTAL
----- ---------- ---------- ----------
Embassy Suites 58 58
Holiday Inn 45 45
Doubletree and Doubletree Guest Suites(R) 16 16
Crowne Plaza and Crowne Plaza Suites(R) 17 17
Holiday Inn Select(R) 10 10
Sheraton(R)and Sheraton Suites(R) 9 9
Hampton Inn(R) 9 9
Holiday Inn Express(R) 5 5
Fairfield Inn(R) 5 5
Harvey Hotel(R) 4 4
Independent 1 2 3
Courtyard by Marriott(R) 2 2
Four Points by Sheraton(R) 1 1
Hilton Suites(R) 1 1
Homewood Suites(R) 1 1
Westin(R) 1 1
---------- ---------- ----------
Total Hotels 86 101 187
========== ========== ==========
The Hotels are located in the United States (34 states) and Canada,
with 79 hotels in California, Florida and Texas. The following table provides
information regarding the net acquisition of hotels through June 30, 1999:
NET HOTELS
ACQUIRED/(DISPOSED)
-------------------
1994 7
1995 13
1996 23
1997 30
1998 120
FIRST QUARTER 1999 (4)
SECOND QUARTER 1999 (2)
------------
187
============
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SECOND QUARTER HIGHLIGHTS -- (CONTINUED)
At June 30, 1999 the Company leased 86 of the Hotels to DJONT
Operations, L.L.C., a Delaware limited liability company, or a consolidated
subsidiary thereof (collectively "DJONT"), 100 of the Hotels to Bristol Hotels &
Resorts or a consolidated subsidiary thereof ("Bristol" and, together with
DJONT, the "Lessees"). One hotel, managed by Bristol, 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 common equity interest in DJONT. The remaining 50%
nonvoting common equity interest is beneficially owned by the children of
Charles N. Mathewson, a director of 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"), ten are managed by subsidiaries of Starwood Hotels & Resorts
Worldwide, Inc. ("Starwood"), and three are managed by two independent
management companies.
Bristol leases and manages 100 Hotels and manages one hotel which
operates without a lease. Bristol is one of the largest independent hotel
operating companies in North America and operates the largest number of Bass
Hotels & Resorts-branded hotels in the world.
A brief discussion of the second quarter 1999 highlights follows:
o Completed renovations at 20 hotels at a total project cost of
$123.6 million.
o Ten additional hotels were undergoing renovation.
o Capital expenditures to the Hotel portfolio per the Company's
renovation and redevelopment program totaled $56 million in
addition to $11 million of routine capital replacements and
improvements.
o Raised $550 million of new long term debt (five and ten year
maturities), which was used to prepay the $250 million term
loan due December 31, 1999, and initially to reduce
outstanding borrowings under the Company's Line of Credit. An
extraordinary charge of $1.1 million was incurred for the
early retirement of the $250 million term loan.
o Declared second quarter dividends of $0.55 per share on the
Company's Common Stock, $0.4875 per share on its $1.95 Series
A Cumulative Convertible Preferred Stock and $0.5625 per
depositary 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 and notes thereto of
the Company and DJONT included in FelCor's Annual Report on Form 10-K for the
year ended December 31, 1998 (the "10-K"). The notes to the financial statements
included herein highlight significant changes to the notes included in the 10-K
and present interim disclosures required by the SEC. The financial statements
for the three and six months ended June 30, 1999 and 1998 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.
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT IN UNCONSOLIDATED ENTITIES
At June 30, 1999, 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% nonvoting interest in an entity that is
developing condominiums for sale and owns a recently completed hotel annex. The
Company accounts for its investments in these unconsolidated entities under the
equity method.
Summarized combined financial information for 100% of these
unconsolidated entities is as follows (in thousands):
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
Balance sheet information:
Investment in hotels, net of accumulated depreciation ..................... $269,123 $269,881
Non-recourse mortgage debt ................................................ $196,462 $176,755
Equity .................................................................... $ 93,524 $105,347
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Statements of Operations Information:
Percentage lease revenue .............................. $ 14,399 $ 14,222 $ 26,970 $ 26,569
Other income .......................................... 2,738 954 4,327 1,114
---------- ---------- ---------- ----------
Total revenue ................................ 17,137 15,176 31,297 27,683
---------- ---------- ---------- ----------
Expenses:
Depreciation ..................................... 4,629 4,278 9,508 8,543
Taxes, insurance, and other ...................... 2,682 1,594 5,024 3,160
Interest expense ................................. 3,468 3,095 6,687 6,354
---------- ---------- ---------- ----------
Total expenses ............................... 10,779 8,967 21,219 18,057
---------- ---------- ---------- ----------
Net income ............................................ $ 6,358 $ 6,209 $ 10,078 $ 9,626
========== ========== ========== ==========
Net income attributable to the Company ................ $ 3,127 $ 3,105 $ 4,908 $ 4,813
Amortization of cost in excess of book value .......... (536) (416) (1,071) (831)
---------- ---------- ---------- ----------
Equity in income from unconsolidated entities ......... $ 2,591 $ 2,689 $ 3,837 $ 3,982
========== ========== ========== ==========
3. DEBT
On April 1, 1999, the Company closed a five-year, $375 million term
loan (the "Senior Term Loan"). The Senior Term Loan is collateralized by stock
and partnership interests in certain subsidiaries of the Company and bears
interest at 250 basis points over LIBOR (30-day LIBOR at June 30, 1999, was
5.24%). The financial covenants in the Senior Term Loan are consistent with
those in the Company's existing Line of Credit. In connection with this
transaction, the Company's $850 million Line of Credit and existing seven and
10-year publicly-traded term notes were equally and ratably collateralized by
the same collateral as the Senior Term Loan. If the Company achieves investment
grade credit ratings from the applicable rating agencies, the stock and
partnership interest collateral will be released. The proceeds of the Senior
Term Loan were used to prepay the $250 million term loan, which was to mature on
December 31, 1999 and initially to reduce borrowings under the Company's Line of
Credit.
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT (CONTINUED)
On April 1, 1999, the Company also closed a 10-year, $100 million
mortgage loan (the "April 1999 First Mortgage Term Loan"). The April 1999 First
Mortgage Term Loan is non-recourse (with certain exceptions), is collateralized
by seven Embassy Suites hotels, carries a fixed rate coupon of 7.54%, matures in
April 2009 and amortizes over 25 years. The proceeds from this loan were used
initially to reduce outstanding borrowings under the Company's Line of Credit.
On May 13, 1999, the Company closed a 10-year, $75 million mortgage
loan (the "May 1999 First Mortgage Term Loan"). This loan is non-recourse (with
certain exceptions), is collateralized by six Embassy Suites hotels, carries a
fixed rate coupon of 7.55%, matures in June 2009 and amortizes over 25 years.
The proceeds from this loan were used initially to reduce outstanding borrowings
under the Company's Line of Credit
Debt at June 30, 1999 and December 31, 1998 consisted of the following
(in thousands):
OUTSTANDING BALANCE
-------------------
INTEREST RATE MATURITY DATE JUNE 30, 1999 DECEMBER 31, 1998
------------- ------------- ------------- -----------------
FLOATING RATE DEBT:
- -------------------
Line of Credit LIBOR + 150bps June 2001 $ 347,000 $ 411,000
Term Loan LIBOR + 150bps December 1999 250,000
Senior Term Loan LIBOR + 250bps March 2004 250,000
Mortgage debt LIBOR + 200bps February 2003 62,851
Other Up to LIBOR + 200bps Various 24,400 34,750
---------- ----------
Total floating rate debt 684,251 695,750
---------- ----------
FIXED RATE DEBT:
- ----------------
Line of credit - swapped 7.24% June 2001 200,000 325,000
Publicly-traded term notes 7.38% October 2004 174,313 174,249
Publicly-traded term notes 7.63% October 2007 124,172 124,122
Mortgage debt 7.24% November 2007 143,675 145,062
Senior Term Loan - swapped 8.30% March 2004 125,000
Mortgage debt 6.97% December 2002 43,836
Mortgage debt 7.54% April 2009 99,773
Mortgage debt 7.55% June 2009 75,000
Other 6.96% - 7.23% 2000 - 2005 86,356 86,715
---------- ----------
Total fixed rate debt 1,028,289 898,984
---------- ----------
Total Consolidated Debt $1,712,540 $1,594,734
========== ==========
A portion of the Company's Line of Credit and Senior Term Loan is
matched with interest rate swap agreements which effectively convert the
variable rate on the Line of Credit and Senior Term Loan to a fixed rate.
The Line of Credit and the Senior Term Loan contain various affirmative
and negative covenants including limitations on total indebtedness, total
secured indebtedness, and cash distributions, as well as the obligation to
maintain certain minimum tangible net worth and certain minimum interest and
debt service coverage ratios. At June 30, 1999, the Company was in compliance
with all such covenants.
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT (CONTINUED)
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to or less restrictive than the Line of
Credit and Senior Term Loan. Most of the mortgage debt is nonrecourse to the
Company (with certain exceptions) and contains provisions allowing for the
substitution of collateral upon satisfaction of certain conditions. Most of the
mortgage debt is prepayable; subject, however, to various prepayment penalties,
yield maintenance, or defeasance obligations.
Future scheduled debt principal payments at June 30, 1999 are as
follows (in thousands):
YEAR
----
Remainder of 1999 $ 8,514
2000 31,979
2001 566,629
2002 9,590
2003 91,212
2004 and thereafter 1,006,131
------------
1,714,055
Discount accretion over term (1,515)
------------
$ 1,712,540
============
4. TAXES, INSURANCE, AND OTHER
Taxes, insurance, and other is comprised of the following for the six
months ended June 30, 1999 and 1998 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Real estate and personal property taxes .................... $ 13,603 $ 6,456 $ 28,623 $ 13,023
Property insurance ......................................... 875 293 1,728 545
Land lease expense ......................................... 4,479 579 8,485 805
State franchise taxes and Canadian income tax .............. 947 240 2,021 465
---------- ---------- ---------- ----------
Total taxes, insurance, and other ................. $ 19,904 $ 7,568 $ 40,857 $ 14,838
========== ========== ========== ==========
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company is to receive rental income from the Lessees under the
Percentage Leases which expire in 2002 (six hotels), 2003 (three hotels), 2004
(12 hotels), 2005 (19 hotels), 2006 (26 hotels), 2007 (37 hotels), 2008 (54
hotels), and thereafter (15 hotels). The rental income under the Percentage
Leases between 14 of the unconsolidated entities, of which the Company owns 50%,
is payable by the Lessee to the respective entities and is not included in the
schedule of future lease commitments to the Company. Minimum future rental
income (i.e., base rents) payable to the Company under these noncancellable
operating leases at June 30, 1999 is as follows (in thousands):
DJONT BRISTOL TOTAL
----- ------- -----
Remainder of 1999 .............................. $ 69,594 $ 77,787 $ 147,381
2000 ........................................... 140,749 180,055 320,804
2001 ........................................... 144,123 180,076 324,199
2002 ........................................... 144,480 180,049 324,529
2003 ........................................... 130,445 177,302 307,747
2004 and thereafter ............................ 519,383 820,168 1,339,551
---------- ---------- ----------
$1,148,774 $1,615,437 $2,764,211
========== ========== ==========
10
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
Certain entities owning interests in DJONT and managers for certain
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 34
of the Hotels. No loans were outstanding under such agreements at June 30, 1999.
DJONT engages third-party managers to operate the Hotels leased by it
and generally pays such managers a base management fee based on a percentage of
room and suite revenue and an incentive management fee based on DJONT's 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 serves as both the lessee and manager of 100 Hotels leased to
it by the Company at June 30, 1999 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 has entered into an absolute and unconditional guarantee of the
obligations of the Bristol Lessees under the Percentage Leases. As an additional
credit enhancement, the Bristol Lessees obtained a letter of credit (the "Letter
of Credit") for the benefit of the Company in the original amount of $20 million
that is required to be maintained until July 27, 1999. This Letter of Credit is
subject to periodic reductions upon satisfaction of certain conditions and at
June 30, 1999, was in the amount of $9.1 million. According to Bristol's
financial statements filed with the SEC, for the three and six months ending
June 30, 1999 Bristol had net income of $4.5 million and $5.6 million,
respectively, and at June 30, 1999 had stockholders' equity of $41.2 million.
Bristol is a public company whose common stock is listed on the New
York Stock Exchange under the symbol BH and that files its financial statements
with the SEC in accordance with the Securities and Exchange Act of 1934.
The Company has a Renovation and Redevelopment Program for the Hotels
and presently expects approximately $160 million to be invested during 1999
under this program, which may be funded from cash on hand or borrowings under
its Line of Credit. Through the six months ending June 30, 1999 the Company has
spent approximately $129 million under the Renovation and Redevelopment program.
6. SUPPLEMENTAL CASH FLOW INFORMATION
During the first six months of 1999, the Company purchased the land
related to three hotels which were previously leased under long term land leases
for an aggregate purchase price of $19.8 million as follows (in thousands):
Assets acquired .................................. $ 19,776
Debt assumed ..................................... (7,800)
Operating Partnership units issued ............... (1,174)
--------
Net cash paid by the Company ................ $ 10,802
========
The debt assumed was paid off immediately after the purchase.
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12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Information
The Company has determined that its reportable segments are those that
are consistent with the Company's method of internal reporting, which segments
its business by Lessee. The Company's Lessees at June 30, 1999 were DJONT and
Bristol. Prior to July 28, 1998 (the date of the Bristol Merger) the Company had
only one Lessee, DJONT. Accordingly, segment information is not disclosed for
the six months ended June 30, 1998.
The following table presents information for the reportable segments
for the six months ended June 30, 1999 (in thousands):
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
---------- ---------- ---------- ------------- -----------
Statements of Operations Information:
Revenues:
Percentage lease revenue ...................... $ 143,496 $ 113,386 $ 256,882 $ 256,882
Equity in income from unconsolidated
entities ..................................... 3,302 535 3,837 3,837
Other revenue ................................. 103 831 934 $ 451 1,385
---------- ---------- ---------- ---------- ----------
Total revenues ...................... 146,901 114,752 261,653 451 262,104
---------- ---------- ---------- ---------- ----------
Expenses:
General and administrative .................... 4,753 4,753
Depreciation .................................. 39,983 34,179 74,162 74,162
Taxes, insurance, and other ................... 18,079 22,778 40,857 40,857
Interest expense .............................. 59,172 59,172
Minority interest in Operating
Partnership ................................ 2,839 2,839
Minority interest in other partnerships ....... 1,639 1,639 1,639
---------- ---------- ---------- ---------- ----------
Total expenses ...................... 59,701 56,957 116,658 66,764 183,422
---------- ---------- ---------- ---------- ----------
Income before extraordinary charge ............... $ 87,200 $ 57,795 $ 144,995 $ (66,313) $ 78,682
========== ========== ========== ========== ==========
Funds From Operations:
Income before extraordinary charge ............... $ 87,200 $ 57,795 $ 144,995 $ (66,313) $ 78,682
Series B preferred dividends ..................... (6,469) (6,469)
Depreciation ..................................... 39,983 34,179 74,162 74,162
Depreciation for unconsolidated entities ......... 4,644 374 5,018 5,018
Minority interest in Operating Partnership ....... 2,839 2,839
---------- ---------- ---------- ---------- ----------
Funds from operations ............................ $ 131,827 $ 92,348 $ 224,175 $ (69,943) $ 154,232
========== ========== ========== ========== ==========
Weighted average common shares and
units outstanding (1) ......................... 76,008
(1) Weighted average common shares and units outstanding are computed
including dilutive options, unvested stock grants, and assuming conversion
of Series A Preferred Stock to Common Stock.
12
13
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
--------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents ...................................................... $ 35,700 $ 28,538
Accounts receivable, net ....................................................... 33,247 27,561
Inventories .................................................................... 4,157 4,381
Prepaid expenses ............................................................... 3,221 471
Other assets ................................................................... 4,635 3,021
Investment in real estate, net of accumulated depreciation of $289 in 1999 ..... 11,677
--------- ---------
Total assets ......................................................... $ 92,637 $ 63,972
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade ........................................................ $ 7,142 $ 6,514
Accounts payable, other ........................................................ 10,133 6,994
Due to FelCor Lodging Trust Incorporated ....................................... 34,864 16,875
Accrued expenses and other liabilities ......................................... 40,836 41,820
Minority interest .............................................................. 6,390
Debt ........................................................................... 7,766
--------- ---------
Total liabilities .................................................... 107,131 72,203
--------- ---------
Commitments and contingencies (Note 2)
Shareholders' equity (deficit):
Capital ........................................................................ 1 1
Accumulated deficit ............................................................ (14,495) (8,232)
--------- ---------
Total shareholders' deficit .......................................... (14,494) (8,231)
--------- ---------
Total liabilities and shareholders' equity ........................... $ 92,637 $ 63,972
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
13
14
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue:
Room and suite revenue ...................... $ 167,109 $ 160,993 $ 334,840 $ 304,278
Food and beverage revenue ................... 22,280 19,847 43,467 35,111
Food and beverage rent ...................... 1,349 1,297 2,614 2,470
Other revenue ............................... 14,618 13,023 28,630 24,391
---------- ---------- ---------- ----------
Total revenues ......................... 205,356 195,160 409,551 366,250
---------- ---------- ---------- ----------
Expenses:
Property operating costs .................... 49,110 43,148 95,338 81,753
General and administrative .................. 15,784 14,223 30,730 26,481
Advertising and promotion ................... 13,823 12,676 27,730 24,462
Repair and maintenance ...................... 9,548 8,943 19,106 16,930
Utilities ................................... 6,969 7,058 14,122 13,155
Management and incentive fees ............... 5,573 6,184 11,966 11,779
Franchise fees .............................. 4,929 4,780 9,847 8,921
Food and beverage expenses .................. 16,600 16,823 32,125 30,335
Percentage lease expenses ................... 83,714 77,021 169,558 145,459
Lessee overhead expenses .................... 301 482 567 842
Liability insurance ......................... 589 300 1,154 569
Interest expense ............................ 156 372
Depreciation ................................ 289 289
Minority interests in partnership ........... 157 157
Other ....................................... 1,310 1,370 2,752 2,637
---------- ---------- ---------- ----------
Total expenses ......................... 208,852 193,008 415,813 363,323
---------- ---------- ---------- ----------
Net income (loss) ................................ $ (3,496) $ 2,152 $ (6,262) $ 2,927
========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
14
15
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
1999 1998
---------- ----------
Cash flows from operating activities:
Net income (loss) ......................................................... $ (6,262) $ 2,927
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ........................................ 289
Minority interest in partnership income .............................. 157
Changes in assets and liabilities:
Accounts receivable .................................................. (5,686) (9,533)
Inventories .......................................................... 224 (454)
Prepaid expenses ..................................................... (2,750) 561
Other assets ......................................................... (1,903) 1,213
Due to FelCor Lodging Trust Incorporated ............................. 17,989 13,793
Accounts payable, accrued expenses and other liabilities ............. 5,104 7,433
---------- ----------
Net cash flow provided by operating activities .................. 7,162 15,940
---------- ----------
Net change in cash and cash equivalents ........................................ 7,162 15,940
Cash and cash equivalents at beginning of periods .............................. 28,538 25,684
---------- ----------
Cash and cash equivalents at end of periods .................................... $ 35,700 $ 41,624
========== ==========
The accompany notes are an integral part of these consolidated
financial statements.
15
16
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 a 50% voting common equity
interest in DJONT Operations, L.L.C., a Delaware limited liability company. The
remaining 50% nonvoting common equity interest is beneficially owned by the
children of Charles N. Mathewson, a Director of FelCor.
Eighty-six of the hotels in which FelCor Lodging Limited Partnership
(the "Operating Partnership") had an ownership interest at June 30, 1999 (the
"DJONT Hotels"), are leased to DJONT Operations L.L.C. or a consolidated
subsidiary thereof ("DJONT") pursuant to percentage leases ("Percentage
Leases"). Certain entities owning interests in DJONT and the managers of certain
DJONT 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 34 of the DJONT Hotels. No loans were outstanding under such agreements
at June 30, 1999.
Fifty-eight of the DJONT Hotels are operated as Embassy Suites(R)
hotels, 16 are operated as Doubletree(R) or Doubletree Guest Suites(R) hotels, 9
are operated as Sheraton(R) or Sheraton Suites(R) hotels, one is operated as a
Westin(R) hotel, one is operated as a Hilton Suites(R) hotel, and one is
operated as an independent hotel. Seventy-three of the DJONT Hotels are managed
by subsidiaries of Promus Hotel Corporation ("Promus"). Promus is the largest
operator of all-suite, full-service hotels in the United States. Of the
remaining DJONT Hotels, 10 are managed by a subsidiary of Starwood Hotels and
Resorts Worldwide, Inc. ("Starwood") and three are managed by two independent
management companies.
2. COMMITMENTS AND RELATED PARTY TRANSACTIONS
DJONT has future lease commitments under the Percentage Leases which
expire in 2002 (six hotels), 2004 (seven hotels), 2005 (12 hotels) 2006 (18
hotels), 2007 (23 hotels), 2008 (12 hotels) and 2012 (eight hotels). Minimum
future rental payments (i.e., base rents) under these noncancellable operating
leases at June 30, 1999 is as follows (in thousands):
YEAR AMOUNT
---- ----------
Remainder of 1999 ...................... $ 83,194
2000 ................................... 167,949
2001 ................................... 171,324
2002 ................................... 171,681
2003 ................................... 157,646
2004 and thereafter .................... 599,173
----------
$1,350,967
==========
3. INVESTMENT IN REAL ESTATE
At June 30, 1999, DJONT owned thirty shares of the Class A Voting
Common Stock, $0.01 par value per share of Kingston Plantation Development
Corporation ("KPDC") which represents 3% of the equity and 100% of the voting
interest in that entity. The investment is recorded on a consolidated basis in
DJONT's financial statements.
16
17
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN REAL ESTATE - (CONTINUED)
KPDC is to receive rental income from a lease agreement which expires
in November, 2008 between a wholly owned subsidiary of KPDC, as lessor, and
FelCor Lodging Limited Partnership, as lessee. The future monthly rental
payments under this lease at June 30, 1999 are as follows (in thousands):
YEAR AMOUNT
---- ----------
Remainder of 1999 ................................ $ 296
2000 ............................................. 593
2001 ............................................. 593
2002 ............................................. 593
2003 ............................................. 593
2004 and thereafter .............................. 2,914
----------
$ 5,582
==========
KPDC owns a 50% interest in an entity developing a parcel of land. This
entity is accounted under the equity method of accounting and KPDC's equity
investment of $2.1 million is reflected in other assets on DJONT's balance
sheet. This unconsolidated entity had no operating income or expense for the six
months ended June 30, 1999. The unconsolidated entity's balance sheet consists
of land, construction in progress and $5.8 million of construction loans at June
30, 1999.
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.
SECOND QUARTER HIGHLIGHTS:
FINANCIAL PERFORMANCE:
o Revenues increased 101%
o EBITDA increased 87% and EBITDA per share increased 10%
o Funds From Operations ("FFO") per share and unit increased 5.0%
o Total portfolio (184 hotels) revenue per available room
("RevPAR") increased 1.3% and comparable hotels (134 hotels)
RevPAR increased 0.3%
o Crowne Plaza(R) non-comparable hotels (10 hotels) RevPAR
increased 22.6%
o Holiday-branded comparable hotels (37 hotels) RevPAR increased
1.8%
o Doubletree-branded comparable hotels (15 hotels) RevPAR
increased 3.2%
o Sold two non-strategic hotels for an aggregate sales price of
$5.4 million
HOTEL RENOVATION, REDEVELOPMENT AND REBRANDING:
o Completed renovations at 20 hotels totaling $123.6 million
o Ten additional hotels were undergoing renovation
o Capital expenditures to the hotel portfolio totaled $67 million
o Approximately 2.5% of room nights were out-of-service
o Six hotels were rebranded:
NEW BRAND PRIOR BRAND LOCATION
--------- ----------- --------
Embassy Suites(R) Doubletree Guest Suites(R) Dallas, Texas
Beaver Creek Lodge Embassy Suites Beaver Creek, Colorado
Crowne Plaza Holiday Inn Select(R) Irvine, California
Crowne Plaza Holiday Inn(R) San Jose, California
Crowne Plaza Independent Chicago, Illinois
Doubletree(R) Radisson(R) Wilmington, Delaware
CAPITALIZATION:
o Raised $550 million of new long term debt (five and ten year),
paid off its $250 million term loan maturing December 31, 1999,
and reduced outstanding borrowings under Company's Line of
Credit. An extraordinary charge of $1.1 million was recognized
for the early extinguishment of the $250 million term loan.
o Declared second quarter dividends of $0.55 per share on its
Common Stock, $0.4875 per share for its $1.95 Series A
Cumulative Convertible Preferred Stock 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 54% and a dividend yield of approximately 13%,
based on the August 9, 1999, closing price for FelCor Common
Stock on the NYSE.
18
19
RESULTS OF OPERATIONS
The Company
Six Months Ended June 30, 1999 and 1998
For the six months ended June 30, 1999 and 1998, the Company had
revenues of $262.1 million and $124.9 million, respectively, consisting
primarily of Percentage Lease revenues of $256.9 million and $118.9 million,
respectively. The increase in total revenue is primarily attributable to the
Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of
interests in more than 100 additional hotels since June 30, 1998, including 101
hotels (net of hotels subsequently sold) that were acquired through the Bristol
Merger on July 28, 1998. Additionally, those hotels owned at both June 30, 1999
and 1998 recorded an increase in Percentage Lease revenues of $2.0 million or
1.4%.
The Company generally seeks to improve those of its hotels that
management believes can achieve increases in room and suite revenue and RevPAR
as a result of renovation, redevelopment and rebranding. However, during the
course of such improvements hotel revenue performance is often adversely
affected by such temporary factors as rooms and suites out of service and
disruptions of hotel operations. (A more detailed discussion of hotel room and
suite revenue is contained in "The Hotels" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.)
Total expenses increased $104.9 million in the six months ended June
30, 1999, from $78.5 million to $183.4 million, compared to the same period in
1998. This increase resulted primarily from the additional hotels acquired in
1998 through the Bristol Merger. Total expenses as a percentage of total revenue
increased to 70.0% for the six months ended June 30, 1999, from 62.9% in the
same period of 1998.
The major components of the increase in expenses, as a percentage of
total revenue, are: depreciation; taxes, insurance, and other; and interest
expense.
Depreciation increased as a percentage of total revenue to 28.3% in the
six months ended June 30, 1999, from 26.7% in the six months ended June 30,
1998. The relative increase in depreciation expense is primarily attributed to
capital improvements made under the Company's renovation, redevelopment and
rebranding program. Renovations totaling $147.4 million were completed at 26
hotels that were placed back into full service during the six months.
Taxes, insurance, and other increased $26.0 million primarily as a
result of the increased number of hotels owned. As a percentage of total
revenue, taxes, insurance, and other increased from 11.9% to 15.6%. The majority
of the increase, as a percentage of total revenue, is attributed to land lease
expenses, which represent 3.2% of total revenue in 1999 but only 0.6% in 1998.
Land lease expenses, as a percentage of total revenue, increased because of the
greater number of hotels subject to land leases acquired through the Bristol
Merger. The remaining increase in taxes, insurance, and other, as a percentage
of total revenue, is related primarily to increased property taxes resulting
from property tax reassessments.
Interest expense increased, as a percentage of total revenue, to 22.6%
in the six months ended June 30, 1999, from 18.8% in the six months ended June
30, 1998. This increase in interest expense is attributed to the increased use
of debt to finance acquisitions and renovations and the assumption of debt
related to the more highly leveraged Bristol assets. Debt, as a percentage of
total assets, increased from 36% at June 30, 1998 to 40% at June 30, 1999.
Three Months Ended June 30, 1999 and 1998
For the three months ended June 30, 1999 and 1998, the Company had
revenues of $135.2 million and $67.4 million, respectively, consisting primarily
of Percentage Lease revenues of $131.9 million and $62.8 million,
19
20
respectively. The increase in total revenue is primarily attributed to the
Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of
interests in more than 100 additional hotels since June 30, 1998, including 101
hotels (net of hotels subsequently sold) that were acquired through the Bristol
Merger on July 28, 1998. Those hotels owned at both June 30, 1999 and 1998,
recorded a slight increase in Percentage Lease revenues of $28,000 for the three
months ended June 30, 1999 versus 1998.
Total expenses increased $50.7 million in the three months ended June
30, 1999, from $42.5 million to $93.3 million, compared to the same period in
1998. This increase resulted primarily from the additional hotels acquired in
1998 through the Bristol Merger. Total expenses as a percentage of total revenue
increased to 69.0% for the three months ended June 30, 1999, from 63.1% in the
same period of 1998.
The major components of the increase in expenses, as a percentage of
total revenue are: depreciation; taxes, insurance, and other; and interest
expense.
Depreciation increased as a percentage of total revenue to 27.9% in the
three months ended June 30, 1999, from 25.9% in the three months ended June 30,
1998. The relative increase in depreciation expense is primarily attributed to
capital improvements made under the Company's renovation, redevelopment and
rebranding program. Renovations totaling $123.6 million were completed at 20
hotels that were placed back into full service during the quarter.
Taxes, insurance, and other, as a percentage of total revenue,
increased from 11.2% to 14.7% in the three months ended June 30, 1999, as
compared to the same quarterly period in 1998. The majority of the increase, as
a percentage of total revenue, is attributed to land lease expenses, which
represented 3.3% of total revenue in 1999, but only 0.9% in 1998. Land lease
expenses as a percentage of total revenue, increased because of the greater
number of hotels subject to land leases that were acquired through the Bristol
Merger. The remaining increase in taxes, insurance, and other, as a percentage
of total revenue, is related primarily to increased property taxes resulting
from property tax reassessments.
Interest expense increased, as a percentage of total revenue, to 22.7%
in the three months ended June 30, 1999, from 20.5% in the three months ended
June 30, 1998. This increase is attributed to the increased use of debt to
finance acquisitions and renovations and the assumption of debt related to the
more highly leveraged Bristol assets. Debt, as a percentage of total assets,
increased from 36% at June 30, 1998 to 40% at June 30, 1999.
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,
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, to pay dividends 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 as determined by GAAP, and should not be considered as an alternative
to net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
20
21
(determined in accordance with GAAP) as a measure of the Company 's liquidity,
nor does it necessarily reflect the funds available to fund the Company's cash
needs, including its ability to make cash distributions. Funds From Operations
may include funds that may not be available for management's discretionary use
due to functional requirements to conserve funds for capital expenditures and
property acquisitions, and other commitments and uncertainties.
The following table details the computation of Funds From Operations
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
FUNDS FROM OPERATIONS (FFO):
Net income ............................................ $ 40,822 $ 24,881 $ 77,569 $ 45,825
Series B preferred dividends ....................... (3,234) (1,905) (6,469) (1,905)
Extraordinary charge from write off
of deferred financing fees .................... 1,113 1,113 556
Depreciation ....................................... 37,737 17,429 74,162 33,316
Depreciation for unconsolidated entities ........... 2,426 2,555 5,018 5,103
Minority interest in Operating Partnership ......... 1,519 2,063 2,839 3,813
---------- ---------- ---------- ----------
FFO ................................................... $ 80,383 $ 45,023 $ 154,232 $ 86,708
========== ========== ========== ==========
Weighted average common shares and units
outstanding ................................... 76,029 44,572 76,008 44,573
========== ========== ========== ==========
Included in the FFO computed above is the Company's share of FFO from
its interests in separate entities owning 15 hotels, a condominium management
company and an entity that develops condominiums for sale and owns a hotel
annex. The FFO contribution from these unconsolidated entities is derived as
follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS INFORMATION:
Percentage lease revenue .................................. $ 14,399 $ 14,222 $ 26,970 $ 26,569
Other income .............................................. 2,738 954 4,327 1,114
---------- ---------- ---------- ----------
Total revenue ..................................... 17,137 15,176 31,297 27,683
---------- ---------- ---------- ----------
Expenses:
Depreciation ......................................... 4,629 4,278 9,508 8,543
Taxes, insurance, and other .......................... 2,682 1,594 5,024 3,160
Interest expense ..................................... 3,468 3,095 6,687 6,354
---------- ---------- ---------- ----------
Total expenses .................................... 10,779 8,967 21,219 18,057
---------- ---------- ---------- ----------
Net income ................................................ $ 6,358 $ 6,209 $ 10,078 $ 9,626
========== ========== ========== ==========
Percentage of net income attributable to the Company ...... $ 3,127 $ 3,105 $ 4,908 $ 4,813
Amortization of cost in excess of book value .............. (536) (416) (1,071) (831)
---------- ---------- ---------- ----------
Equity in income from unconsolidated entities ............. 2,591 2,689 3,837 3,982
Depreciation .............................................. 2,372 2,139 4,890 4,271
Amortization of cost in excess of book value .............. 536 416 1,071 831
---------- ---------- ---------- ----------
FFO from unconsolidated entities .......................... $ 5,497 $ 5,244 $ 9,798 $ 9,084
========== ========== ========== ==========
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The Hotels
Upscale and full service hotels, like Embassy Suites, Crowne Plaza,
Holiday Inn and Holiday Inn Select, Doubletree and Doubletree Guest Suites,
Sheraton(R) and Sheraton Suites(R), and Westin(R), are expected to account for
approximately 97% of Percentage Lease revenue in 1999. The following tables set
forth historical occupancy, average daily rate ("ADR") and RevPAR at June 30,
1999 and 1998, and the percentage changes therein between the years presented
for the Hotels in which the Company had an ownership interest at June 30, 1999.
This information is presented regardless of the date of acquisition.
COMPARABLE HOTELS (A)
SECOND QUARTER 1999 YEAR TO DATE 1999
---------------------------------- ---------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Original 75.3% $115.41 $86.89 72.9% $117.36 $85.51
CSS Hotels 75.1 123.09 92.48 75.5 129.52 97.84
1996 Acquisitions 75.4 129.99 98.07 73.7 130.67 96.36
1997 Acquisitions 74.8 114.37 85.56 73.7 119.37 88.01
1998 Acquisitions 68.7 96.74 66.43 73.9 102.74 75.95
Total DJONT Comparable Hotels 74.9 119.00 89.13 74.1 124.01 91.93
Total Bristol Comparable Hotels 70.7 83.90 59.33 67.4 81.00 54.56
Total Comparable Hotels 72.9% $102.81 $74.96 70.9% $104.64 $74.21
SECOND QUARTER 1998 YEAR TO DATE 1998
---------------------------------- ---------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Original Hotels 76.9% $115.35 $88.72 75.0% $116.01 $86.99
CSS Hotels 75.6 123.71 93.46 75.2 128.27 96.45
1996 Acquisitions 77.4 127.31 98.48 74.7 127.91 95.58
1997 Acquisitions 75.0 111.55 83.63 73.7 117.63 86.28
1998 Acquisitions 69.9 93.52 65.41 66.3 100.15 66.39
Total DJONT Comparable Hotels 75.7 117.61 89.01 74.4 122.16 90.94
Total Bristol Comparable Hotels 72.4 81.63 59.08 69.3 79.12 54.85
Total Comparable Hotels 74.1% $100.85 $74.74 72.0% $102.46 $73.78
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD
2ND QTR. 1999 VS. 2ND QTR. 1998 1999 vs. 1998 Year to Date
---------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Original Hotels (1.6) pts 0.1% (2.1)% (2.1) pts 1.2% (1.7)%
CSS Hotels (0.5) (0.5) (1.1) 0.3 1.0 1.4
1996 Acquisitions (2.0) 2.1 (0.4) (1.0) 2.2 0.8
1997 Acquisitions (0.2) 2.5 2.3 1.9 2.0
1998 Acquisitions (1.2) 3.4 1.6 7.6 2.6 14.4
Total DJONT Comparable Hotels (0.8) 1.2 0.1 (0.3) 1.5 1.1
Total Bristol Comparable Hotels (1.7) 2.8 0.4 (1.9) 2.4 (0.5)
Total Comparable Hotels (1.2) pts 1.9% 0.3% (1.1) pts 2.1% 0.6%
(A) DJONT Comparable Hotels includes 71 and 64 hotels, and Bristol Comparable
Hotels includes 63 and 57 hotels, in the second quarter and year to date,
respectively, which were not undergoing redevelopment in either the 1999 or
1998 periods reported.
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23
NON-COMPARABLE HOTELS (B)
SECOND QUARTER 1999 YEAR TO DATE 1999
-------------------------------- ---------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
DJONT Non-comparable Hotels 67.2% $ 108.30 $ 72.77 67.5% $ 108.16 $ 73.02
Bristol Non-comparable Hotels 67.6% $ 91.60 $ 61.93 66.1% $ 93.73 $ 62.00
Total Non-comparable Hotels 67.5% $ 96.17 $ 64.91 66.6% $ 98.54 $ 65.62
SECOND QUARTER 1998 YEAR TO DATE 1998
-------------------------------- ---------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
DJONT Non-comparable Hotels 73.4% $ 105.66 $ 77.54 72.3% $ 105.39 $ 76.24
Bristol Non-comparable Hotels 68.8% $ 82.60 $ 56.82 68.1% $ 84.57 $ 57.58
Total Non-comparable Hotels 70.1% $ 89.21 $ 62.49 69.5% $ 91.65 $ 63.68
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD
2ND QTR. 1999 VS. 2ND QTR. 1998 1999 VS. 1998 YEAR TO DATE
---------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR RevPAR
--------- --- ------ --------- --- ------
DJONT Non-comparable Hotels (6.2)pts 2.5% (6.2)% (4.8)pts 2.6% (4.2)%
Bristol Non-comparable Hotels (1.2)pts 10.9% 9.0% (2.0)pts 10.8% 7.7%
Total Non-comparable Hotels (2.6)pts 7.8% 3.9% (2.9)pts 7.5% 3.1%
(B) DJONT Non-comparable Hotels includes 15 and 22 hotels and Bristol
Non-comparable Hotels includes 35 and 40 hotels, in the second quarter
and year to date, respectively, undergoing redevelopment in either the
1999 or 1998 periods reported. The Bristol Non-comparable Hotels
excludes two and three hotels closed during renovation in the second
quarter and year to date, respectively, and one hotel that was
targeted for sale during both the periods reported.
ALL HOTELS (C)
SECOND QUARTER 1999 YEAR TO DATE 1999
--------------------------------- ---------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Comparable Hotels 72.9% $ 102.81 $ 74.96 70.9% $ 104.64 $ 74.21
Non-comparable Hotels 67.5% $ 96.17 $ 64.91 66.6% $ 98.54 $ 65.62
Total Hotels 71.2% $ 100.82 $ 71.78 69.2% $ 102.36 $ 70.88
SECOND QUARTER 1999 YEAR TO DATE 1999
--------------------------------- ---------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Comparable Hotels 74.1% $ 100.85 $ 74.74 72.0% $ 102.46 $ 73.78
Non-comparable Hotels 70.1% $ 89.21 $ 62.49 69.5% $ 91.65 $ 63.68
Total Hotels 72.8% $ 97.31 $ 70.87 71.0% $ 98.36 $ 69.86
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD
2ND QTR. 1999 VS. 2ND QTR. 1998 1999 VS. 1998 YEAR TO DATE
----------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
Comparable Hotels (1.2)pts 1.9% 0.3% (1.1) pts 2.1% 0.6%
Non-comparable Hotels (2.6)pts 7.8% 3.9% (2.9) pts 7.5% 3.1%
Total Hotels (1.6)pts 3.6% 1.3% (1.8) pts 4.1% 1.5%
(C) Excludes two and three hotels closed during renovation in the
second quarter and year to date, respectively, and one hotel that
was targeted for sale during both the periods reported.
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24
Comparison of The Hotels' Operating Statistics for the Three and Six Months
Ended June 30, 1999 and 1998
For the six months ended June 30, 1999, the Company's Hotels had an
average increase in RevPAR of 1.5% over the same period last year. The
components of this increase were a 4.1% increase in ADR partially offset by a
decrease in occupancy of 1.8 percentage points.
The Comparable Hotels' RevPAR increased 0.6% for the six months ended
June 30, 1999, as compared to the same period in 1998. This was comprised of a
2.1% increase in ADR, which was largely offset by a decrease in occupancy of 1.1
percentage points. In the first quarter of 1999 increases in RevPAR, over the
same periods in 1998, were greater for each successive month, however, the
second quarter did not maintain this trend. In the second quarter, the rate of
RevPAR growth decreased each successive month and for the three months ended
June 30, 1999, RevPAR increased only 0.3% over the same period in 1998.
Hotels in California, Texas, Florida and Georgia accounted for
approximately 54% of the Comparable Hotels' room revenues for the three months
ended June 30, 1999. RevPAR changes and the percentage of the total Comparable
Hotels' room revenues for the three months ended June 30, 1999, as compared to
the same period in 1998, from these four states were as follows:
PERCENTAGE OF
COMPARABLE
REVPAR HOTELS' ROOM
CHANGE REVENUES
------ ------------
California (15 hotels) 2.4 % 17.3%
Texas (28 hotels) (3.3)% 17.0%
Florida (11 hotels) 1.1 % 10.2%
Georgia (12 hotels) 0.6 % 9.3%
The Company attributes the RevPAR decrease for the Texas hotels, and
the moderate RevPAR growth in other markets, to the addition of new hotel rooms
throughout many markets. However, nationally, hotel construction starts dropped
13% in the fourth quarter of 1998 and 10% in the first six months of 1999. If
these declines in supply growth continue, along with a continuation of current
demand levels, stronger RevPAR growth should be seen, beginning by the end of
1999 or during 2000.
The Non-comparable Hotels' RevPAR increased 3.1% for the six months
ended June 30, 1999, versus the same period in 1998, and increased 3.9% for the
three months ended June 30, 1999 compared to 1998.
Included in the Non-comparable Hotels for the quarter are 25 hotels
which completed renovation programs in 1998 and 25 hotels undergoing renovation
in 1999. RevPAR increased 16.5% in the quarter for those hotels that completed
their renovation program in 1998 and RevPAR decreased 18.2% in the quarter for
those hotels undergoing renovation in 1999.
There are 12 hotels that were rebranded to Crowne Plaza hotels included
in the Non-comparable Hotels for the six months ended June 30, 1999. The RevPAR
for these hotels increased 19.5%, which was derived from a 12.7% increase in ADR
and a 3.9 percentage point increase in occupancy.
DJONT
The Six Months Ended June 30, 1999 and 1998
Total revenues increased to $409.6 million in the first six months of
1999 from $366.3 million in the first six months of 1998, an increase of 11.8%.
Total revenues consisted primarily of room and suite revenue of $334.8 million
and $304.3 million in the first six months of 1999 and 1998, respectively.
24
25
The increase in total revenues is primarily a result of the increase in
the number of hotels leased for the entire six month period to 86 hotels at June
30, 1999 from 73 hotels at June 30, 1998. Room and suite revenues from the 64
DJONT Comparable Hotels, for the six months ended June 30, 1999 over 1998,
increased 1.7% or $4.2 million. The increase in revenues at these hotels is due
primarily to an improvement in ADR to $124.01 for the six months ended June 30,
1999, from $122.16 for the six months ended June 30, 1998. The 22 DJONT
Non-comparable Hotels were undergoing renovation or rebranding during at least a
portion of the last six months, which resulted in a decrease in their combined
occupancy and RevPAR to 67.5% and $73.02, respectively, for the six months ended
June 30, 1999, as compared to 72.3% and $76.24, respectively, for the six months
ended June 30, 1998.
DJONT's income before Percentage Lease rent decreased as a percentage
of total revenues from 40.5% in the six months ended June 30, 1998 to 39.9% in
the six months ended June 30, 1999. This is largely due to increased property
operating costs resulting from higher labor costs and related payroll benefits.
For the first six months of 1999, DJONT incurred losses of $6.3
million, however, management currently expects DJONT to be profitable for the
year.
The Three Months Ended June 30, 1999 and 1998
Total revenues increased to $205.4 million in the second quarter of
1999 from $195.2 million in the second quarter of 1998, an increase of 5.2%.
Total revenues consisted primarily of room and suite revenue of $167.1 million
and $161.0 million in the second quarter of 1999 and 1998, respectively.
The increase in total revenues is primarily a result of the increase in
the number of hotels leased for the entire quarter to 86 hotels at June 30, 1999
from 73 hotels at June 30, 1998. Room and suite revenues from the 71 DJONT
Comparable Hotels for the three months ended June 30, 1999 over 1998 increased
0.7% or $909,000. The increase in revenues at these hotels is due primarily to
the improvement in ADR to $119.00 for the three months ended June 30, 1999, as
compared to $117.61 for the three months ended June 30, 1998. The 15 DJONT
Non-comparable Hotels were undergoing renovation or rebranding during at least a
portion of the last three months, which resulted in a decrease in their RevPAR
to $72.77 for the three months ended June 30, 1999, from $77.54 for the three
months ended June 30, 1998.
DJONT's income before Percentage Lease rent decreased as a percentage
of total revenues from 40.6% in the quarter ended June 30, 1998 to 39.1% in the
quarter ended June 30, 1999. This is largely due to increased property operating
costs resulting from higher labor costs and related payroll benefits.
For the three months ended June 30, 1999, DJONT incurred losses of $3.5
million, however management currently expects DJONT to be profitable for the
year.
Bristol
Bristol is a public company whose common stock is listed on the New
York Stock Exchange under the symbol BH. Bristol files financial statements in
accordance with the Securities and Exchange Act of 1934.
RENOVATION, REDEVELOPMENT, AND REBRANDING
Through June 30, 1999, FelCor had spent $129 million (of a planned $160
million) on its 1999 program for the renovation, redevelopment, or rebranding of
over 50 hotels. An additional $20 million of capital expenditures were made
during the same period to maintain the remaining hotels in a competitive
condition. In the second quarter of 1999, approximately $56 million was spent on
the 1999 renovation program and $11 million was spent on other routine capital
improvements. The renovation and redevelopment program for 1999 was
approximately 80% complete as of the end of the second quarter. Approximately
$50 million of renovations were completed at the Allerton Crowne Plaza hotel in
Chicago, Illinois, which was closed during most of the first half
25
26
of 1999. The remaining 1999 renovation expenditures will be used to complete the
10 projects in process at the end of the second quarter and to complete 10
additional smaller renovation projects. In 2000, FelCor currently expects to
spend approximately $40 million on the renovation, redevelopment and rebranding
of its existing hotels.
Thirty hotels (18 of which are Bristol-operated hotels) were undergoing
renovation, redevelopment, or rebranding during the quarter, which resulted in
approximately 113,000 room nights out-of-service, or approximately 2.5% of
available room nights. This included 15 Holiday Inn or Holiday Inn Select, six
Embassy Suites, three Doubletree, three Sheraton, and three Crowne Plaza hotels.
Approximately 3.0% of available rooms were out-of-service for the first six
months of 1999. Many of these projects also include renovations to the hotel's
exterior, public areas, meeting spaces and restaurants, which typically have a
negative impact on hotel revenues.
Included in the 30 hotels undergoing renovation during the quarter were
20 hotels, containing approximately 5,800 rooms, where renovations were
completed during the quarter. Many of these renovation projects commenced during
1998. The renovation and redevelopment expenditures on these 20 hotels totaled
$123.6 million.
FELCOR LODGING TRUST INCORPORATED
RENOVATION PROJECTS COMPLETED IN SECOND QUARTER 1999
TOTAL
HOTEL RENOVATION COST LOCATION
----- --------------- --------
(IN MILLIONS)
443-room Allerton Crowne Plaza* $50.0 Chicago, Illinois
335-room Crowne Plaza* 2.9 Irvine, California
305-room Crowne Plaza* 7.5 San Jose, California
248-room Doubletree 2.6 Denver, Colorado
138-room Doubletree Guest Suites 0.9 Dayton, Ohio
233-room Embassy Suites 2.2 Atlanta (Airport), Georgia
308-room Embassy Suites* 3.8 Dallas (Airport), Texas
198-room Embassy Suites 4.1 Palm Desert, California
247-room Holiday Inn 2.9 Amarillo, Texas
190-room Holiday Inn 2.6 Beaumont, Texas
139-room Holiday Inn 2.0 Cambridge, Ontario, Canada
500-room Holiday Inn 12.8 Cocoa Beach, Florida
223-room Holiday Inn 2.9 Columbus, Georgia
530-room Holiday Inn 7.8 Orlando, Florida
155-room Holiday Inn 1.1 Peterborough, Ontario, Canada
364-room Holiday Inn 7.1 Philadelphia, Pennsylvania
210-room Holiday Inn 1.7 Texarkana, Texas
382-room Holiday Inn Select 3.1 Nashville, Tennessee
251-room Holiday Inn Select 3.1 Pittsburgh, Pennsylvania
397-room Holiday Inn Select 2.5 San Antonio (Airport), Texas
- ------ ------
5,796 rooms $123.6
====== ======
* Denotes those hotels which were also rebranded.
26
27
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders and repayments of indebtedness, is its
share of the Operating Partnership's cash flow from the Percentage Leases. For
the six months ended June 30, 1999, cash flow provided by operating activities,
consisting primarily of Percentage Lease revenue, was $150.0 million and Funds
From Operations was $154.2 million.
The Lessees' obligations under the Percentage Leases are largely
unsecured. The Lessees have limited capital resources, and, accordingly, their
ability to make lease payments under the Percentage Leases is substantially
dependent on the ability of the Lessees to generate sufficient cash flow from
the operation of the Hotels.
At June 30, 1999, DJONT had a cumulative shareholders' deficit of $14.5
million. The shareholders' deficit results primarily from losses incurred as a
consequence of the one-time costs of the renovation, redevelopment and
rebranding programs at the Hotels and the substantial number of room and suite
nights lost due to renovation. Currently, management expects DJONT to be
profitable for the year and 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.
Certain entities owning interests in DJONT and the managers of certain
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 when due under the respective Percentage Leases relating to a total
of 34 of the Hotels.
No loans were outstanding under such agreements at June 30, 1999.
Bristol has entered into an absolute and unconditional guarantee of the
obligations of the Bristol Lessees under the Percentage Leases. As an additional
credit enhancement, the Bristol Lessees obtained a letter of credit for the
benefit of the Company in the original amount of $20 million that is required to
be maintained until July 27, 1999. This letter of credit is subject to periodic
reductions upon satisfaction of certain conditions and, at June 30, 1999, was in
the amount of $9.1 million. According to Bristol's financial statements filed
with the SEC, for the three and six months ended June 30, 1999, Bristol had net
income of $4.5 and $5.6 million, respectively, and at June 30, 1999, had
stockholders' equity of $41.2 million.
The Company may incur indebtedness to make property acquisitions, to
purchase shares of its capital stock, or to meet distribution requirements
imposed on a REIT under the Internal Revenue Code, to the extent that working
capital and cash flow from the Company's investments are insufficient for such
purposes. Management is currently evaluating a number of potential opportunities
to enhancing shareholder value, which have been created by the depressed price
at which FelCor's capital stock is currently trading.
During the second quarter, FelCor completed $550 million of long-term
debt financings. The proceeds from these loans were used to prepay FelCor's $250
million unsecured term loan, which was to mature on December 31, 1999, and to
reduce outstanding borrowings under its existing $850 million Line of Credit.
These debt financings consisted of:
o A five-year, $375 million Senior Term Loan (LIBOR + 250 bps)
o A ten-year, $100 million Mortgage debt (7.54% Fixed)
o A ten-year, $75 million Mortgage debt (7.55% Fixed)
The Line of Credit and the Senior Term Loan contain various affirmative
and negative covenants, including limitations on total indebtedness, total
secured indebtedness, and cash distributions, as well as the obligation to
maintain certain minimum tangible net worth and certain minimum interest and
debt service coverage ratios. At June 30, 1999, the Company was in compliance
with all such covenants.
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28
The Company's other borrowings contain affirmative and negative
covenants that are generally equal to or less restrictive than the Line of
Credit and Senior Term Loan. Most of the mortgage debt is nonrecourse to the
Company (with certain exceptions) and contains provisions allowing for the
substitution of collateral upon satisfaction of certain conditions. Most of the
mortgage debt is prepayable; subject, however, to various prepayment penalties,
yield maintenance, or defeasance obligations.
At June 30, 1999, the Company had $50.6 million of cash and cash
equivalents and had utilized $547 million of the $850 million available under
the Line of Credit. Certain significant credit and debt statistics at June 30,
1999 are as follows:
o Interest coverage ratio of 3.5x
o Total debt to annualized EBITDA of 4.2x
o Borrowing capacity of $303 million under the Line of Credit
o Consolidated debt equal to 38% of investment in hotels at cost
o Fixed interest rate debt equal to 62% of total debt
o Weighted average maturity of fixed interest rate debt of
approximately six years
o Mortgage debt to total assets of 11%
o Debt of less than $9 million and $32 million maturing in the
remainder of 1999 and 2000, respectively.
To manage the relative mix of its debt between fixed and variable rate
instruments, the Company has entered into interest rate swap agreements with six
financial institutions. These interest rate swap agreements modify a portion of
the interest characteristics of the Company's outstanding debt under its Line of
Credit and Senior Term Loan 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 variable rate to be received
by the Company at June 30, 1999, are summarized in the following table:
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 6/30/99 MATURITY
--------------- ------------ ---------- ------------- -------------
$ 50 million 6.111% 7.611% 5.000% October 1999
$ 25 million 5.955% 7.455% 5.000% November 1999
$ 25 million 5.558% 7.058% 4.930% July 2001
$ 25 million 5.548% 7.048% 4.930% July 2001
$ 75 million 5.555% 7.055% 4.930% July 2001
$100 million 5.796% 8.296% 4.930% July 2003
$ 25 million 5.826% 8.326% 4.930% July 2003
------------
$325 million
============
The differences to be paid or received by the Company under the terms
of the interest rate swap agreements are accrued as interest rates change and
recognized as an adjustment to interest expense by the Company pursuant to the
terms of its interest rate agreement and will have a corresponding effect on its
future cash flows. Agreements such as these contain a credit risk that the
counterparties may be unable to meet the terms of the agreement. The Company
minimizes that risk by evaluating the creditworthiness of its counterparties,
which are limited to major banks and financial institutions, and it does not
anticipate nonperformance by the counterparties.
To provide for additional financing flexibility, the Company has
approximately $946 million of common stock, preferred stock, debt securities,
and/or common stock warrants available for offerings under shelf registration
statements previously declared effective.
28
29
INFLATION
Operators of hotels, in general, possess the ability to adjust room
rates daily to reflect the effects of inflation. Competitive pressures may,
however, limit the Lessees' ability to raise room rates.
SEASONALITY
The Hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates primarily during the first three quarters of
each year. This seasonality can be expected to cause fluctuations in the
Company's quarterly lease revenue, particularly during the fourth quarter, to
the extent that it receives Percentage Rent. To the extent that cash flow from
operations is insufficient during any quarter, due to temporary or seasonal
fluctuations in lease revenue, the Company expects to utilize cash on hand or
borrowings under the Line of Credit to make distributions to its equity holders.
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 miscalculation 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 identify and resolve the Year
2000 issues will avoid a major disruption of its business. The Company has
assessed its internal computer systems and believe that they will properly
utilize dates beyond December 31, 1999.
The Company and its managers have completed the assessment of both
computer and noninformation technology systems to determine if the Hotels are
Year 2000 compliant. This assessment included embedded systems that operate
elevators, phone systems, energy maintenance systems, security systems, and
other systems. Most of the upgrades to make a hotel Year 2000 compliant had been
anticipated as part of the renovation, redevelopment, and rebranding program
that the Company generally undertakes upon acquisition of a hotel.
The Company has spent approximately $6 million through the second
quarter of 1999 to remediate Year 2000 issues and anticipates spending an
additional $ 4 million to remediate all Year 2000 issues, which amount is
included in the Company's 1999 capital plans. The majority of the unspent funds
relate to the acquisition and systematic implementation of Year 2000 compliant
computer hardware and software for the Hotels.
The Company has requested and received assurances from the managers of
the Hotels, the franchisors of the Hotels and the Lessees, that they have
implemented appropriate steps to insure that they will avoid a major disruption
of business due to Year 2000 issues. However, the Company cannot assure that
such third parties will successfully avoid a disruption due to Year 2000 issues,
and such disruptions could have an adverse effect upon the Company's business,
financial condition or results of operations.
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 the Private Securities Litigation Reform Act of
1995. Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Important factors that could
cause actual results to differ materially from the
29
30
Company's current expectations are disclosed herein and in the Company's other
filings under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, (collectively, "Cautionary Disclosures"). The
forward looking statements included herein, and all subsequent written and oral
forward looking statements attributable to the Company or persons acting on its
behalf, are expressly qualified in their entirety by the Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to FelCor
is incorporated herein by reference to the discussion under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" contained elsewhere in this
Quarterly Report on Form 10-Q for the three and six months ended June 30, 1999.
30
31
PART II. -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the second quarter of 1999, the Company issued 1,245 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
FelCor held its 1999 Annual Meeting of Stockholders on May 6, 1999
(the "Annual Meeting"). At the Annual Meeting, the stockholders of FelCor
elected Thomas J. Corcoran, Jr., Thomas A. McChristy, Donald J. McNamara and
Richard C. North to serve, as Class II directors, until the Annual Meeting of
Stockholders to be held in 2002. No other matters were voted upon at the
meeting.
The total number of shares entitled to vote at the Annual Meeting was
68,062,887 shares of Common Stock. A total of 50,930,102 shares of Common Stock
were represented in person or by proxy at the Annual Meeting. The following
table sets forth, with respect to each of the directors elected, the number of
votes cast for, and the number of votes withheld, with respect to his election:
NOMINEE VOTES FOR VOTES WITHHELD
- ------- --------- --------------
Thomas J. Corcoran, Jr. 50,810,872 119,230
Thomas A. McChristy 50,801,944 128,158
Donald J. McNamara 50,812,822 117,280
Richard C. North 50,799,314 130,788
ITEM 5. OTHER INFORMATION.
For information relating to asset acquisitions and certain other
transactions by the Company through June 30, 1999, 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.
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32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description
-------- -----------
10.23.1 Promissory Note dated April 1, 1999, in the
original principal amount of $100,000,000
made by Felcor/CSS Holdings, L.P., payable
to the order of The Prudential Insurance
Company of America.
10.23.2 Form of Mortgage, Security Agreement and
Fixture Filing by and between FelCor/CSS
Holdings, L. P., as Mortgagor, and The
Prudential Insurance Company of America, as
Mortgagee (incorporated by reference to
Exhibit 10.23 to the Registrant's Form 10-Q
Quarterly Report for the quarter ending
March 31, 1999).
10.23.3 Mortgage Loan Agreement dated as of April 1,
1999, by and between The Prudential
Insurance Company of America, as Lender, and
FelCor/CSS Holdings, L.P., as Borrower.
10.24.1 Form of six separate Promissory Notes each
dated May 12, 1999, made by FelCor/MM
Holdings, L.P. payable to the order of
Massachusetts Mutual Life Insurance Company
in the respective original principal amounts
of $12,500,000 (Embassy Suites-Dallas Market
Center), $14,000,000 (Embassy Suites-Dallas
Love Field), $12,450,000 (Embassy
Suites-Tempe), $11,550,000 (Embassy
Suites-Anaheim), $8,900,000 (Embassy
Suites-Palm Desert), $15,600,000 (Embassy
Suites-Deerfield Beach).
10.24.2 Form of Deed of Trust, Security Agreement
and Fixture Filing, each dated as of May 12,
1999, from FelCor/MM Holdings, L.P., as
Borrower, in favor of Fidelity National
Title Insurance Company, as Trustee, and
Massachusetts Mutual Life Insurance Company,
as Beneficiary, each covering a separate
hotel and securing one of the separate
Promissory Notes described in Exhibit
10.24.1, also executed by FelCor/CSS
Holdings, L.P. with respect to the Embassy
Suites-Anaheim and Embassy Suites- Deerfield
Beach, and by FelCor Lodging Limited
Partnership with respect to the Embassy
Suites-Palm Desert.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Registrant did not file any reports on Form 8-K during the
second quarter of 1999.
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33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1999
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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34
INDEX TO EXHIBITS
Exhibit
Number Description
-------- -----------
10.23.1 Promissory Note dated April 1, 1999, in the
original principal amount of $100,000,000
made by Felcor/CSS Holdings, L.P., payable
to the order of The Prudential Insurance
Company of America.
10.23.2 Form of Mortgage, Security Agreement and
Fixture Filing by and between FelCor/CSS
Holdings, L. P., as Mortgagor, and The
Prudential Insurance Company of America, as
Mortgagee (incorporated by reference to
Exhibit 10.23 to the Registrant's Form 10-Q
Quarterly Report for the quarter ending
March 31, 1999).
10.23.3 Mortgage Loan Agreement dated as of April 1,
1999, by and between The Prudential
Insurance Company of America, as Lender, and
FelCor/CSS Holdings, L.P., as Borrower.
10.24.1 Form of six separate Promissory Notes each
dated May 12, 1999, made by FelCor/MM
Holdings, L.P. payable to the order of
Massachusetts Mutual Life Insurance Company
in the respective original principal amounts
of $12,500,000 (Embassy Suites-Dallas Market
Center), $14,000,000 (Embassy Suites-Dallas
Love Field), $12,450,000 (Embassy
Suites-Tempe), $11,550,000 (Embassy
Suites-Anaheim), $8,900,000 (Embassy
Suites-Palm Desert), $15,600,000 (Embassy
Suites-Deerfield Beach).
10.24.2 Form of Deed of Trust, Security Agreement
and Fixture Filing, each dated as of May 12,
1999, from FelCor/MM Holdings, L.P., as
Borrower, in favor of Fidelity National
Title Insurance Company, as Trustee, and
Massachusetts Mutual Life Insurance Company,
as Beneficiary, each covering a separate
hotel and securing one of the separate
Promissory Notes described in Exhibit
10.24.1, also executed by FelCor/CSS
Holdings, L.P. with respect to the Embassy
Suites-Anaheim and Embassy Suites- Deerfield
Beach, and by FelCor Lodging Limited
Partnership with respect to the Embassy
Suites-Palm Desert.
27 Financial Data Schedule.