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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14236
FELCOR LODGING TRUST INCORPORATED
(Exact name of registrant as specified in its charter)
MARYLAND 72-2541756
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, par value $.01 per share, of FelCor
Lodging Trust Incorporated outstanding on November 10, 1999 was 65,941,292.
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FELCOR LODGING TRUST INCORPORATED
INDEX
PAGE
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PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements...................................................................... 3
FELCOR LODGING TRUST INCORPORATED
Consolidated Balance Sheets - September 30, 1999 (Unaudited)
and December 31, 1998............................................................. 3
Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited)..................................... 4
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 1999 and 1998 (Unaudited)..................................... 5
Notes to Consolidated Financial Statements............................................. 6
DJONT OPERATIONS, L.L.C.
Consolidated Balance Sheets - September 30, 1999 (Unaudited)
and December 31, 1998............................................................. 14
Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited)..................................... 15
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 1999 and 1998 (Unaudited)..................................... 16
Notes to Consolidated Financial Statements............................................. 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 19
General/Third Quarter Activities....................................................... 19
Results of Operations.................................................................. 19
Liquidity and Capital Resources........................................................ 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 30
PART II. -- OTHER INFORMATION
Item 5. Other Information......................................................................... 31
Item 6. Exhibits and Reports on Form 8-K.......................................................... 31
SIGNATURE.......................................................................................... 32
2
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
ASSETS
Investment in hotels, net of accumulated depreciation of $290,495
at September 30, 1999 and $178,072 at December 31, 1998 ................... $ 4,045,358 $ 3,955,582
Investment in unconsolidated entities ........................................ 137,017 148,065
Cash and cash equivalents .................................................... 48,027 34,692
Due from Lessees ............................................................. 19,650 18,968
Deferred expenses, net of accumulated amortization of $3,758
at September 30, 1999 and $2,096 at December 31, 1998 ..................... 13,104 10,041
Other assets ................................................................. 7,930 8,035
------------- -------------
Total assets ...................................................... $ 4,271,086 $ 4,175,383
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt, net of discount of $1,458 at September 30, 1999
and $1,628 at December 31, 1998 ........................................... $ 1,707,981 $ 1,594,734
Distributions payable ........................................................ 42,549 67,262
Accrued expenses and other liabilities ....................................... 87,848 57,312
Minority interest in Operating Partnership, 2,987 and 2,939 units issued and
outstanding at September 30, 1999 and December 31, 1998, respectively ..... 87,625 87,353
Minority interest in other partnerships ...................................... 51,389 51,105
------------- -------------
Total liabilities ................................................. 1,977,392 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 September 30, 1999
and December 31, 1998, respectively ....................................... 693 693
Additional paid-in capital ................................................... 2,142,104 2,142,250
Distributions in excess of earnings .......................................... (102,616) (78,839)
Common stock in treasury, at cost, 1,213 shares .............................. (41,487) (41,487)
------------- -------------
Total shareholders' equity ........................................ 2,293,694 2,317,617
------------- -------------
Total liabilities and shareholders' equity ........................ $ 4,271,086 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues:
Percentage lease revenue ......................... $ 120,598 $ 104,919 $ 377,480 $ 223,775
Equity in income from unconsolidated entities .... 2,353 2,446 6,190 6,429
Other revenue .................................... 1,131 1,234 2,516 3,326
---------- ---------- ---------- ----------
Total revenues .......................... 124,082 108,599 386,186 233,530
---------- ---------- ---------- ----------
Expenses:
General and administrative ....................... 2,943 1,452 7,696 4,026
Depreciation ..................................... 38,627 27,720 112,789 61,036
Taxes, insurance, and other ...................... 19,529 14,651 60,386 29,490
Interest expense ................................. 31,520 22,960 90,692 46,486
Minority interest in Operating Partnership ....... 1,094 1,639 3,933 5,452
Minority interest in other partnerships .......... 348 323 1,987 805
---------- ---------- ---------- ----------
Total expenses .......................... 94,061 68,745 277,483 147,295
---------- ---------- ---------- ----------
Income before extraordinary charge ................. 30,021 39,854 108,703 86,235
Extraordinary charge from write off of deferred
financing fees .................................. 2,519 1,113 3,075
---------- ---------- ---------- ----------
Net income ......................................... 30,021 37,335 107,590 83,160
Preferred dividends ................................ 6,184 6,184 18,551 13,987
---------- ---------- ---------- ----------
Income applicable to common shareholders ........... $ 23,837 $ 31,151 $ 89,039 $ 69,173
========== ========== ========== ==========
Per common share data:
Basic:
Income applicable to common shareholders before
extraordinary charge ........................ $ 0.35 $ 0.58 $ 1.33 $ 1.64
Extraordinary charge ............................. (0.04) (0.02) (0.07)
---------- ---------- ---------- ----------
Net income applicable to common shareholders ..... $ 0.35 $ 0.54 $ 1.31 $ 1.57
========== ========== ========== ==========
Weighted average common shares outstanding ....... 68,014 58,461 68,012 43,925
Diluted:
Income applicable to common shareholders before
extraordinary charge ........................ $ 0.35 $ 0.57 $ 1.32 $ 1.63
Extraordinary charge ............................. (0.04) (0.02) (0.07)
---------- ---------- ---------- ----------
Net income applicable to common shareholders ..... $ 0.35 $ 0.53 $ 1.30 $ 1.56
========== ========== ========== ==========
Weighted average common shares outstanding ....... 68,221 58,834 68,262 44,294
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- -----------
Cash flows from operating activities:
Net income ..................................................................... $ 107,590 $ 83,160
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ......................................................... 112,789 61,036
Amortization of deferred financing fees .............................. 2,035 1,927
Accretion of debt .................................................... (725)
Amortization of unearned officers' and directors' compensation ....... 526 605
Equity in income from unconsolidated entities ........................ (6,190) (6,429)
Extraordinary charge for write off of deferred financing fees ........ 1,113 3,075
Minority interest in Operating Partnership ........................... 3,933 5,452
Minority interest in other partnerships .............................. 1,987 805
Changes in assets and liabilities:
Due from Lessees ..................................................... (682) (19,031)
Deferred financing fees .............................................. (6,211) (4,300)
Other assets ......................................................... (1,755) (4,102)
Accrued expenses and other liabilities ............................... 24,006 28,933
----------- -----------
Net cash flow provided by operating activities ............. 238,416 151,131
----------- -----------
Cash flows used in investing activities:
Improvements and additions to hotels ........................................... (192,847) (44,310)
Acquisition of hotel assets .................................................... (10,802) (354,435)
Acquisition of unconsolidated entities ......................................... (984)
Proceeds from sales of hotels .................................................. 15,091
Net cash received from acquisition of Bristol Hotels ........................... 16,790
Bristol Interim Credit Facility ................................................ (120,000)
Cash distributions from unconsolidated entities ................................ 17,187 18,406
----------- -----------
Net cash flow used in investing activities ................. (171,371) (484,533)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings ....................................................... 782,000 942,003
Repayment of borrowings ........................................................ (674,200) (640,300)
Proceeds from sale of preferred stock .......................................... 143,750
Costs associated with public offerings ......................................... (4,686)
Proceeds from exercise of stock options ........................................ 8 1,657
Distributions paid to limited partners ......................................... (5,916) (4,807)
Distributions paid to preferred shareholders ................................... (19,804) (13,987)
Distributions paid to common shareholders ...................................... (135,798) (58,403)
----------- -----------
Net cash flow provided by (used in) financing activities ... (53,710) 365,227
----------- -----------
Net change in cash and cash equivalents .................................................. 13,335 31,825
Cash and cash equivalents at beginning of periods ........................................ 34,692 17,543
----------- -----------
Cash and cash equivalents at end of periods .............................................. $ 48,027 $ 49,368
=========== ===========
Supplemental cash flow information --
Interest paid .................................................................. $ 85,606 $ 33,322
=========== ===========
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
FelCor Lodging Trust Incorporated ("FelCor") is one of the nation's
largest hotel real estate investment trusts ("REIT") which, at September 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". At September 30, 1999, the Company owned 100%
interests in 163 hotels, a 90% or greater interest in entities that owned seven
hotels, a 60% interest in an entity that owned two hotels and 50% interests in
separate entities that owned 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, leased to each
of the Company's Lessees at September 30, 1999:
NOT OPERATED
BRAND DJONT BRISTOL UNDER A LEASE TOTAL
----- ----- ------- ------------- -----
Embassy Suites 58 58
Holiday Inn 44 1 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 2 1 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 85 100 2 187
===== ===== ====== ======
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 and disposition of hotels through
September 30, 1999:
NET HOTELS
ACQUIRED/(DISPOSED OF)
----------------------
1994 7
1995 13
1996 23
1997 30
1998 120
FIRST QUARTER 1999 (4)
SECOND QUARTER 1999 (2)
THIRD QUARTER 1999 --
-----
187
=====
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION (CONTINUED)
At September 30, 1999, the Company leased 85 of the Hotels to DJONT
Operations, L.L.C., a Delaware limited liability company, or a consolidated
subsidiary thereof (collectively "DJONT"), and leased 100 of the Hotels to
Bristol Hotels & Resorts, or a consolidated subsidiary thereof ("Bristol" and,
together with DJONT, the "Lessees"). Two Hotels were 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 72 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, an independent publicly owned company, 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.
Certain reclassifications have been made to prior period financial
information to conform to the current period's presentation with no effect to
previously reported net income or shareholders' equity.
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 nine months ended September 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 September 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 that owns an annex to a hotel owned
by the Company. 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):
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Balance sheet information:
Investment in hotels, net of accumulated depreciation... $ 286,379 $ 269,881
Non-recourse mortgage debt.............................. $ 203,444 $ 176,755
Equity.................................................. $ 95,083 $ 105,347
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Statements of Operations Information:
Percentage lease revenue ....................... $ 13,998 $ 13,575 $ 40,968 $ 40,144
Other income ................................... 2,828 2,087 7,155 3,201
----------- ----------- ----------- -----------
Total revenue ......................... 16,826 15,662 48,123 43,345
----------- ----------- ----------- -----------
Expenses:
Depreciation .............................. 4,511 4,261 14,019 12,804
Taxes, insurance, and other ............... 2,805 2,303 7,830 5,462
Interest expense .......................... 3,627 3,373 10,314 9,727
----------- ----------- ----------- -----------
Total expenses ........................ 10,943 9,937 32,163 27,993
----------- ----------- ----------- -----------
Net income ..................................... $ 5,883 $ 5,725 $ 15,960 $ 15,352
=========== =========== =========== ===========
Net income attributable to the Company ......... $ 2,888 $ 2,862 $ 7,796 $ 7,676
Amortization of cost in excess of book value ... (535) (416) (1,606) (1,247)
----------- ----------- ----------- -----------
Equity in income from unconsolidated entities .. $ 2,353 $ 2,446 $ 6,190 $ 6,429
=========== =========== =========== ===========
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT
Debt at September 30, 1999 and December 31, 1998 consisted of the
following (in thousands):
OUTSTANDING BALANCE
---------------------------------------
INTEREST RATE MATURITY DATE SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------- ------------- ------------------ -----------------
FLOATING RATE DEBT:
Line of Credit LIBOR + 150bps June 2001 $ 345,000 $ 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 62,702
Other Up to LIBOR + 200bps Various 23,150 34,750
----------- ------------
Total floating rate debt 680,852 695,750
----------- ------------
FIXED RATE DEBT:
Line of credit - swapped 7.24% June 2001 200,000 325,000
Publicly-traded term notes 7.38% October 2004 174,345 174,249
Publicly-traded term notes 7.63% October 2007 124,197 124,122
Mortgage debt 7.24% November 2007 143,128 145,062
Senior Term Loan - swapped 8.30% March 2004 125,000
Mortgage debt 6.97% December 2002 43,836
Mortgage debt 7.54% April 2009 99,427
Mortgage debt 7.55% June 2009 74,744
Other 6.96% - 7.23% 2000 - 2005 86,288 86,715
----------- ------------
Total fixed rate debt 1,027,129 898,984
----------- ------------
Total Consolidated Debt $ 1,707,981 $ 1,594,734
=========== ============
One month LIBOR at September 30, 1999, was 5.4%.
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.
During the third quarter 1999, the Company entered into Forward Rate
Agreements which fix three month LIBOR on $188 million of floating rate debt at
an average rate of 5.93%, effective December 8, 1999.
The Line of Credit and the Senior Term Loan contain various affirmative
and negative covenants including limitations on total indebtedness, total
secured indebtedness, and restricted payments (such as stock repurchases and
cash distributions), as well as the obligation to maintain certain minimum
tangible net worth and certain minimum interest and debt service coverage
ratios. At September 30, 1999, the Company was in compliance with all such
covenants
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.
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FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. TAXES, INSURANCE, AND OTHER
Taxes, insurance, and other is comprised of the following for the three
and nine months ended September 30, 1999 and 1998 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Real estate and personal property taxes .......... $ 12,851 $ 10,246 $ 41,845 $ 23,269
Property insurance ............................... 868 801 2,596 1,346
Land lease expense ............................... 5,010 2,729 13,124 3,535
State franchise taxes and Canadian income tax .... 800 561 2,821 1,026
Other ............................................ 314 314
--------- --------- --------- ---------
Total taxes, insurance, and other ....... $ 19,529 $ 14,651 $ 60,386 $ 29,490
========= ========= ========= =========
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company is to receive rental income from the Lessees under the
Percentage Leases, which expire in 2002 (five 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 September 30, 1999 is as follows (in thousands):
DJONT BRISTOL TOTAL
---------- ---------- ----------
Remainder of 1999 .............. $ 34,669 $ 38,894 $ 73,563
2000 ........................... 140,235 180,055 320,290
2001 ........................... 143,609 180,076 323,685
2002 ........................... 143,967 180,049 324,016
2003 ........................... 130,445 177,302 307,747
2004 and thereafter ............ 519,383 820,168 1,339,551
---------- ---------- ----------
$1,112,308 $1,576,544 $2,688,852
========== ========== ==========
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 September 30,
1999.
DJONT engages independent 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 are 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 September 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.
10
11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS (CONTINUED)
Bristol has entered into an absolute and unconditional guarantee of the
obligations of the Bristol Lessees under the Percentage Leases, and is required
to maintain a minimum liquid net worth. A portion of this liquid net worth is
being satisfied through a letter of credit for the benefit of the Company. This
letter of credit is subject to periodic reductions upon satisfaction of certain
conditions and, at September 30, 1999, was in the amount of $9.1 million.
According to Bristol's financial statements filed with the SEC, for the three
and nine months ended September 30, 1999, Bristol had net income of $1.9 and
$7.5 million, respectively, and at September 30, 1999, had stockholders' equity
of $43.0 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 presently expects to spend approximately $225 million
during 1999 for capital improvements at the Hotels, consisting of both the 1999
renovation and redevelopment program and routine capital replacements and
improvements, which may be funded from cash on hand or borrowings under its Line
of Credit. Through the nine months ending September 30, 1999, the Company had
spent approximately $193 million on such capital improvements.
6. SUPPLEMENTAL CASH FLOW INFORMATION
During the first nine 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.
11
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 September 30, 1999 were DJONT
and Bristol. Prior to July 28, 1998 (the date of the Bristol Merger) the Company
had only one Lessee, DJONT.
The following tables present information for the reportable segments
for the nine months ended September 30, 1999 and 1998 (in thousands) for both
DJONT and Bristol:
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 1999 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
- ------------------------------------ -------- --------- -------- ------------- ------------
Statements of Operations Information:
Revenues:
Percentage lease revenue..................... $201,712 $175,768 $377,480 $377,480
Equity in income from unconsolidated
entities.................................... 5,595 595 6,190 6,190
Other revenue................................ 234 1,296 1,530 $ 986 2,516
-------- --------- -------- --------- --------
Total revenues..................... 207,541 177,659 385,200 986 386,186
-------- --------- -------- --------- --------
Expenses:
General and administrative................... 7,696 7,696
Depreciation................................. 60,411 52,378 112,789 112,789
Taxes, insurance, and other.................. 25,257 35,129 60,386 60,386
Interest expense............................. 90,692 90,692
Minority interest in Operating
Partnership............................... 3,933 3,933
Minority interest in other partnerships...... 1,987 1,987 1,987
-------- --------- -------- --------- --------
Total expenses..................... 87,655 87,507 175,162 102,321 277,483
-------- --------- -------- --------- --------
Income before extraordinary charge ............. $119,886 $ 90,152 $210,038 $(101,335) $108,703
======== ========= ======== ========= ========
Funds From Operations:
Income before extraordinary charge ............. $119,886 $ 90,152 $210,038 $(101,335) $108,703
Series B preferred dividends.................... (9,703) (9,703)
Depreciation.................................... 60,411 52,378 112,789 112,789
Depreciation for unconsolidated entities........ 6,827 563 7,390 7,390
Minority interest in Operating Partnership...... 3,933 3,933
-------- --------- -------- --------- --------
Funds from operations........................... $187,124 $143,093 $330,217 $(107,105) $223,112
======== ========= ======== ========= ========
Weighted average common shares and
units outstanding (1)........................ 75,928
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13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION (CONTINUED)
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 1998 DJONT BRISTOL(2) TOTAL TO SEGMENTS TOTAL
- ------------------------------------ -------- --------- -------- ------------- ------------
Statements of Operations Information:
Revenues:
Percentage lease revenue..................... $182,341 $41,434 $223,775 $223,775
Equity in income from unconsolidated
entities.................................... 6,305 124 6,429 6,429
Other revenue................................ 215 215 $ 3,111 3,326
-------- --------- -------- --------- --------
Total revenues..................... 188,646 41,773 230,419 3,111 233,530
-------- --------- -------- --------- --------
Expenses:
General and administrative................... 4,026 4,026
Depreciation................................. 51,731 9,305 61,036 61,036
Taxes, insurance, and other.................. 22,164 7,326 29,490 29,490
Interest expense............................. 46,486 46,486
Minority interest in Operating
Partnership............................... 5,452 5,452
Minority interest in other partnerships...... 805 805 805
-------- --------- -------- --------- --------
Total expenses..................... 74,700 16,631 91,331 55,964 147,295
-------- --------- -------- --------- --------
Income before extraordinary charge ............. $113,946 $25,142 $139,088 $ (52,853) $ 86,235
======== ========= ======== ========= ========
Funds From Operations:
Income before extraordinary charge ............. $113,946 $25,142 $139,088 $ (52,853) $ 86,235
Series B preferred dividends.................... (5,139) (5,139)
Depreciation.................................... 51,731 9,305 61,036 61,036
Depreciation for unconsolidated entities........ 7,604 7,604 7,604
Minority interest in Operating Partnership...... 5,452 5,452
-------- --------- -------- --------- --------
Funds from operations........................... $173,281 $34,447 $207,728 $ (52,540) $155,188
======== ========= ======== ========= ========
Weighted average common shares and
units outstanding (1)........................ 52,017
- ------------------
(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.
(2) Bristol information is presented from July 28, 1998, the date of
the Bristol Merger.
8. SUBSEQUENT EVENTS
On October 15, 1999, the Company and Starwood, in a 50/50 joint
venture, acquired the 437-room Sheraton Premier Hotel in Tysons Corner,
Virginia, a suburb of Washington, DC, for a purchase price of $52.9 million. The
purchase price consisted of approximately $52.8 million in cash and 3,571
Operating Partnership Units valued at $28 per unit. A subsidiary of Starwood
will manage the hotel under a 20-year management agreement.
Beginning in October of 1999 through November 10, 1999, FelCor had
repurchased approximately 2.1 million shares of its outstanding common stock on
the open market pursuant to its previously announced $100 million stock buyback
program.
13
14
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
ASSETS
Cash and cash equivalents ................................................... $ 27,174 $ 28,538
Accounts receivable, net .................................................... 33,742 27,561
Inventories ................................................................. 4,222 4,381
Prepaid expenses ............................................................ 2,067 471
Other assets ................................................................ 5,630 3,021
Investment in real estate, net of accumulated depreciation of $409 in 1999 .. 11,557
------------- -------------
Total assets ...................................................... $ 84,392 $ 63,972
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, trade ..................................................... $ 4,684 $ 6,514
Accounts payable, other ..................................................... 15,564 6,994
Due to FelCor Lodging Trust Incorporated .................................... 29,431 16,875
Accrued expenses and other liabilities ...................................... 35,685 41,820
Minority interest ........................................................... 6,270
Debt ........................................................................ 7,766
------------- -------------
Total liabilities ................................................. 99,400 72,203
------------- -------------
Commitments and contingencies (Note 2)
Shareholders' equity (deficit):
Capital ..................................................................... 1 1
Accumulated deficit ......................................................... (15,009) (8,232)
------------- -------------
Total shareholders' deficit ....................................... (15,008) (8,231)
------------- -------------
Total liabilities and shareholders' equity ........................ $ 84,392 $ 63,972
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
14
15
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenue:
Room and suite revenue .............. $ 160,594 $ 158,681 $ 495,434 $ 462,959
Food and beverage revenue ........... 20,039 18,567 63,506 53,678
Food and beverage rent .............. 1,233 1,122 3,847 3,592
Other revenue ....................... 12,654 11,780 41,284 36,171
----------- ----------- ----------- -----------
Total revenues ................. 194,520 190,150 604,071 556,400
----------- ----------- ----------- -----------
Expenses:
Property operating costs ............ 47,490 43,796 142,828 125,550
General and administrative .......... 14,744 15,116 45,474 41,597
Advertising and promotion ........... 14,048 13,289 41,778 37,751
Repair and maintenance .............. 9,609 9,660 28,715 26,590
Utilities ........................... 8,392 8,303 22,514 21,458
Management and incentive fees ....... 5,804 4,390 17,770 16,169
Franchise fees ...................... 4,856 4,705 14,703 13,626
Food and beverage expenses .......... 16,349 16,617 48,474 46,952
Percentage lease expenses ........... 71,042 75,935 240,600 221,393
Lessee overhead expenses ............ 247 468 814 1,309
Liability insurance ................. 784 354 1,938 923
Interest expense .................... 155 527
Depreciation ........................ 120 409
Minority interests in partnership ... (124) 33
Other ............................... 1,519 1,380 4,271 4,018
----------- ----------- ----------- -----------
Total expenses ................. 195,035 194,013 610,848 557,336
----------- ----------- ----------- -----------
Net loss ................................. $ (515) $ (3,863) $ (6,777) $ (936)
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
15
16
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss ....................................................... $ (6,777) $ (936)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ................................ 409
Minority interest in partnership income ...................... 33
Changes in assets and liabilities:
Accounts receivable .......................................... (6,181) (12,178)
Inventories .................................................. 159 (686)
Prepaid expenses ............................................. (1,596) 1,259
Other assets ................................................. (2,609) 3,300
Due to FelCor Lodging Trust Incorporated ..................... 12,556 2,007
Accounts payable, accrued expenses and other liabilities ..... 2,642 17,610
---------- ----------
Net cash flow provided by (used in) operating activities .. (1,364) 10,376
---------- ----------
Net change in cash and cash equivalents ......................... (1,364) 10,376
Cash and cash equivalents at beginning of periods ............... 28,538 25,684
---------- ----------
Cash and cash equivalents at end of periods ..................... $ 27,174 $ 36,060
========== ==========
The accompany notes are an integral part of these
consolidated financial statements.
16
17
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Thomas J. Corcoran, Jr, the President, Chief Executive Officer and a
Director of FelCor Lodging Trust Incorporated ("FelCor"), and Hervey A. Feldman,
Chairman Emeritus of FelCor, beneficially own 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-five of the hotels in which FelCor Lodging Limited Partnership
(the "Operating Partnership") had an ownership interest at September 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 September 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, and one is operated as a Hilton Suites(R) hotel. Seventy-two 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 & 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 (five 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 September 30, 1999 are as follows (in thousands):
YEAR AMOUNT
- ---- ----------
Remainder of 1999 ............................................. $ 41,469
2000 .......................................................... 167,436
2001 .......................................................... 170,810
2002 .......................................................... 171,167
2003 .......................................................... 157,646
2004 and thereafter ........................................... 599,173
----------
$1,307,701
==========
3. INVESTMENT IN REAL ESTATE
At September 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.
17
18
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN REAL ESTATE - (CONTINUED)
KPDC owns 100% of an entity owning the New Orleans Embassy Suites Hotel
Annex, subject to a mortgage note, and a 50% interest in an entity that is
developing condominiums for sale.
The 50% owned entity is accounted for under the equity method of
accounting and DJONT's equity investment of $2.1 million in KPDC is reflected in
other assets on DJONT's balance sheet. This unconsolidated entity had no
operating income or expense for the nine months ended September 30, 1999. The
unconsolidated entity's balance sheet consists of land, construction in progress
and $13.9 million of construction loans at September 30, 1999.
4. DEBT
DJONT has reflected as a liability, a mortgage note from a wholly-owned
subsidiary of KPDC to FelCor Lodging Limited Partnership. The note bears a fixed
interest rate of 8.0% per annum with a 30 year amortization and matures on
December 31, 2004. This indebtedness is collateralized by a Mortgage and
Assignment of Leases and Rents with respect to the New Orleans Embassy Suites
Hotel Annex.
18
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For background information relating to the Company and the definitions
of certain capitalized terms used herein, reference is made to Note 1 of Notes
to Consolidated Financial Statements of FelCor Lodging Trust Incorporated
appearing elsewhere herein.
THIRD QUARTER ACTIVITIES:
FINANCIAL PERFORMANCE (AS COMPARED TO THIRD QUARTER 1998):
o Revenues increased 14.3% to $124 million
o Net income applicable to common shareholders decreased 23%
to $24 million
o EBITDA increased 9.4% to $106 million
o Funds From Operations ("FFO") increased 1% to $69 million
o Comparable hotels (150 hotels) RevPAR increased 1.8%
o Non-comparable hotels (33 hotels) RevPAR increased 21.4%
o Total hotel portfolio (183 hotels) RevPAR increased 4.4%
HOTEL RENOVATION, REDEVELOPMENT AND REBRANDING:
o Completed $11.7 million in renovations at three hotels
including our 18th Crowne Plaza hotel, at Old Mill, Omaha,
Nebraska
o Fifteen additional hotels were undergoing renovation
o Capital expenditures to the hotel portfolio totaled $13
million
o Approximately 1% of room nights were out-of-service
CAPITALIZATION:
o Declared dividends of $0.55 per share on its Common Stock
(current annualized dividend yield of 13.1%), $0.4875 per
share on its $1.95 Series A Cumulative Convertible Preferred
Stock and $0.5625 per depositary share evidencing its 9%
Series B Cumulative Redeemable Preferred Stock.
RESULTS OF OPERATIONS
The Company
Nine Months Ended September 30, 1999 and 1998
For the nine months ended September 30, 1999 and 1998, the Company had
revenues of $386.2 million and $233.5 million, respectively, consisting
primarily of Percentage Lease revenues of $377.5 million and $223.8 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. Those hotels owned for all of the nine months ended
September 30, 1999 and 1998 recorded an increase in Percentage Lease revenues of
$6 million or 3.5%.
19
20
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 $130.2 million in the nine months ended
September 30, 1999, from $147.3 million to $277.5 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 71.9% for the nine months ended September 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 29.2% in the
nine months ended September 30, 1999, from 26.1% in the nine months ended
September 30, 1998. The relative increase in depreciation expense is primarily
attributed to depreciation on $230 million in capital expenditures made over the
past twelve months. A large percentage of these improvements are short-lived
assets.
Taxes, insurance, and other, as a percentage of total revenue,
increased from 12.6% to 15.6%. The majority of the increase, as a percentage of
total revenue, is attributed to land lease expenses, which represent 3.5% of
total revenue in 1999 but only 1.5% in 1998. Land lease expenses, as a
percentage of total revenue, increased principally because of the larger 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 23.5%
in the nine months ended September 30, 1999, from 19.9% in the nine months ended
September 30, 1998. This increase in interest expense is attributed to the
increased debt used to finance renovations, refinancing of debt at higher rates
which served to extend maturities and convert such debt from variable to fixed
rates, and the assumption of debt related to the more highly leveraged Bristol
assets.
Three Months Ended September 30, 1999 and 1998
For the three months ended September 30, 1999 and 1998, the Company had
revenues of $124.1 million and $108.6 million, respectively, consisting
primarily of Percentage Lease revenues of $120.6 million and $104.9 million,
respectively. The increase in total revenue is primarily attributed to the
Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of
interests in 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 for all of both quarters ended
September 30, 1999 and 1998, recorded a small decrease in Percentage Lease
revenues of $1.8 million for the three months ended September 30, 1999 versus
1998.
Total expenses increased $25.4 million in the three months ended
September 30, 1999, from $68.7 million to $94.1 million, compared to the same
period in 1998. This increase resulted primarily from the additional hotels
acquired on July 28, 1998 through the Bristol Merger. Total expenses as a
percentage of total revenue increased to 75.8% for the three months ended
September 30, 1999, from 63.3% in the same period of 1998.
The major components of the increase in expenses, as a percentage of
total revenue are general and administrative expenses; depreciation; taxes,
insurance, and other; and interest expense.
20
21
General and administrative expenses increased as a percentage of total
revenue from 1.3% in the quarter ended September 30, 1998 to 2.4% for the
quarter ended September 30, 1999. Included in the 1999 quarter was approximately
$600,000 (0.5% of total revenues) of one time costs primarily associated with
the write-off of costs of a public debt offering which was abandoned when
interest rates became unattractive.
Depreciation increased as a percentage of total revenue to 31.1% in the
three months ended September 30, 1999, from 25.5% in the three months ended
September 30, 1998. The relative increase in depreciation expense is primarily
related to depreciation on $230 million in capital expenditures made over the
past twelve months. A large percentage of these improvements are short-lived
assets.
Taxes, insurance and other, as a percentage of total revenue increased
from 13.5% to 15.7% for the three months ended September 30, 1999, as compared
to the same quarterly period in 1998. This increase is principally related to
increased assessments for property taxes. The property tax increases resulted
primarily from increases in property valuations on reappraisals, which typically
follow a change in ownership, as with the hotels acquired in the Bristol Merger,
and the redevelopment and rebranding of hotels.
Interest expense increased as a percentage of total revenue, to 25.4%
in the three months ended September 30, 1999, from 21.1% in the three months
ended September 30, 1998. The increase is related to approximately $200 million
additional debt outstanding at September 30, 1999, as compared to September 30,
1998, used principally for funding capital improvements and to the refinancing
of approximately $635 million of debt at higher interest rates in 1999 to extend
maturities and convert such debt from variable to fixed rates.
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
(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.
21
22
The following table details the computation of Funds From Operations
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
FUNDS FROM OPERATIONS (FFO):
Net income ...................................... $ 30,021 $ 37,335 $ 107,590 $ 83,160
Series B preferred dividends ................. (3,234) (3,234) (9,703) (5,139)
Extraordinary charge from write off
of deferred financing fees ................. 2,519 1,113 3,075
Depreciation ................................. 38,627 27,720 112,789 61,036
Depreciation for unconsolidated entities ..... 2,372 2,501 7,390 7,604
Minority interest in Operating Partnership ... 1,094 1,639 3,933 5,452
----------- ----------- ----------- -----------
FFO ............................................. $ 68,880 $ 68,480 $ 223,112 $ 155,188
=========== =========== =========== ===========
Weighted average common shares and units
outstanding ............................. 75,898 66,603 75,928 52,017
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 is developing condominiums for sale and owns a hotel
annex. The FFO contribution from these unconsolidated entities is derived as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS INFORMATION:
Percentage lease revenue ............................. $ 13,998 $ 13,575 $ 40,968 $ 40,144
Other income ......................................... 2,828 2,087 7,155 3,201
---------- ---------- ---------- ----------
Total revenue ................................ 16,826 15,662 48,123 43,345
---------- ---------- ---------- ----------
Expenses:
Depreciation .................................... 4,511 4,261 14,019 12,804
Taxes, insurance, and other ..................... 2,805 2,303 7,830 5,462
Interest expense ................................ 3,627 3,373 10,314 9,727
---------- ---------- ---------- ----------
Total expenses ............................... 10,943 9,937 32,163 27,993
---------- ---------- ---------- ----------
Net income ........................................... $ 5,883 $ 5,725 $ 15,960 $ 15,352
========== ========== ========== ==========
Percentage of net income attributable to the Company . $ 2,888 $ 2,862 $ 7,796 $ 7,676
Amortization of cost in excess of book value ......... (535) (416) (1,606) (1,247)
---------- ---------- ---------- ----------
Equity in income from unconsolidated entities ........ 2,353 2,446 6,190 6,429
Depreciation ......................................... 2,312 2,085 7,202 6,357
Amortization of cost in excess of book value ......... 535 416 1,606 1,247
---------- ---------- ---------- ----------
FFO from unconsolidated entities ..................... $ 5,200 $ 4,947 $ 14,998 $ 14,033
========== ========== ========== ==========
22
23
The Hotels
Upscale and full service hotels, like Embassy Suites, Crowne Plaza,
Holiday Inn and Holiday Inn Select, Doubletree and Doubletree Guest Suites,
Sheraton and Sheraton Suites, and Westin, 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 September
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
September 30, 1999. This information is presented regardless of the date of
acquisition.
COMPARABLE HOTELS (A)
THIRD QUARTER 1999 YEAR TO DATE 1999
----------------------------------------- -----------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
Original 75.1% $ 110.91 $ 83.26 73.7% $ 115.15 $ 84.90
CSS Hotels 75.6 121.01 91.43 75.5 126.65 95.68
1996 Acquisitions 75.6 127.93 96.73 74.4 129.73 96.48
1997 Acquisitions 72.2 113.32 81.84 72.9 116.24 84.77
1998 Acquisitions 70.4 97.41 68.58
Total DJONT Comparable Hotels 73.9 115.93 85.63 74.2 122.05 90.54
Total Bristol Comparable Hotels 71.6 84.83 60.75 70.4 79.90 56.25
Total Comparable Hotels 72.7% $ 99.72 $ 72.47 72.5% $ 103.53 $ 75.03
THIRD QUARTER 1998 YEAR TO DATE 1998
----------------------------------------- -----------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
Original Hotels 74.6% $ 109.05 $ 81.30 74.9% $ 113.56 $ 85.02
CSS Hotels 73.5 121.98 89.65 74.6 126.19 94.16
1996 Acquisitions 77.2 126.26 97.51 75.6 127.34 96.23
1997 Acquisitions 73.1 110.66 80.93 73.5 113.70 83.53
1998 Acquisitions 73.8 97.36 71.81
Total DJONT Comparable Hotels 74.1 114.63 84.97 74.5 120.39 89.68
Total Bristol Comparable Hotels 71.8 82.21 59.01 70.4 79.75 56.11
Total Comparable Hotels 72.9% $ 97.70 $ 71.20 72.6% $ 102.52 $ 74.44
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD
3RD QTR. 1999 VS. 3RD QTR. 1998 1999 vs. 1998 Year to Date
----------------------------------------- -----------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
Original Hotels 0.5 pts 1.7% 2.4% (1.2) pts 1.4% (0.1)%
CSS Hotels 2.1 (0.8) 2.0 0.9 0.4 1.6
1996 Acquisitions (1.6) 1.3 (0.8) (1.2) 1.9 0.3
1997 Acquisitions (0.9) 2.4 1.1 (0.6) 2.2 1.5
1998 Acquisitions (3.4) 0.1 (4.5)
Total DJONT Comparable Hotels (0.2) 1.1 0.8 (0.3) 1.4 1.0
Total Bristol Comparable Hotels (0.2) 3.2 2.9 0.0 0.2 0.2
Total Comparable Hotels (0.2) pts 2.1% 1.8% (0.1) pts 1.0% 0.8%
(A) DJONT Comparable Hotels includes 74 and 60 hotels, and Bristol Comparable
Hotels includes 76 and 49 hotels, in the third quarter and year to date,
respectively, which were not undergoing redevelopment in either the 1999 or
1998 periods reported.
23
24
NON-COMPARABLE HOTELS (B)
THIRD QUARTER 1999 YEAR TO DATE 1999
----------------------------------------- -----------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
DJONT Non-comparable Hotels 64.4% $ 92.37 $ 59.51 68.5% $ 107.16 $ 73.41
Bristol Non-comparable Hotels 67.1% $ 92.38 $ 62.02 67.8% $ 89.26 $ 60.55
Total Non-comparable Hotels 66.2% $ 92.38 $ 61.16 68.1% $ 95.08 $ 64.71
THIRD QUARTER 1998 YEAR TO DATE 1998
----------------------------------------- -----------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
DJONT Non-comparable Hotels 61.6% $ 89.74 $ 55.32 70.9% $ 104.91 $ 74.44
Bristol Non-comparable Hotels 59.1% $ 80.78 $ 47.72 67.4% $ 83.75 $ 56.42
Total Non-comparable Hotels 60.0% $ 84.01 $ 50.38 68.5% $ 90.91 $ 62.31
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD
3RD QTR. 1999 VS. 3RD QTR. 1998 1999 VS. 1998 YEAR TO DATE
----------------------------------------- ----------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
DJONT Non-comparable Hotels 2.8pts 2.9% 7.6% (2.4) pts 2.1% (1.4)%
Bristol Non-comparable Hotels 8.0pts 14.4% 30.0% 0.4 pts 6.6% 7.3%
Total Non-comparable Hotels 6.2pts 10.0% 21.4% (0.4) pts 4.6% 3.8%
(B) DJONT Non-comparable Hotels includes 12 and 26 hotels and Bristol
Non-comparable Hotels includes 21 and 48 hotels, in the third quarter
and year to date, respectively, undergoing redevelopment in either the
1999 or 1998 periods reported. The Bristol Non-comparable Hotels
excludes four hotels targeted for sale.
ALL HOTELS (C)
THIRD QUARTER 1999 YEAR TO DATE 1999
----------------------------------------- ------------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
Comparable Hotels 72.7% $ 99.72 $ 72.47 72.5% $ 103.53 $ 75.03
Non-comparable Hotels 66.2% $ 92.38 $ 61.16 68.1% $ 95.08 $ 64.71
Total Hotels 71.5% $ 98.47 $ 70.40 70.5% $ 99.89 $ 70.42
THIRD QUARTER 1998 YEAR TO DATE 1998
----------------------------------------- ------------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
Comparable Hotels 72.9% $ 97.70 $ 71.20 72.6% $ 102.52 $ 74.44
Non-comparable Hotels 60.0% $ 84.01 $ 50.38 68.5% $ 90.91 $ 62.31
Total Hotels 70.5% $ 95.60 $ 67.44 70.8% $ 97.53 $ 69.06
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD
3RD QTR. 1999 VS. 3RD QTR. 1998 1999 VS. 1998 YEAR TO DATE
----------------------------------------- ------------------------------------------
OCCUPANCY ADR RevPAR OCCUPANCY ADR RevPAR
---------- ---------- ---------- ---------- ---------- ----------
Comparable Hotels (0.2)pts 2.1% 1.8% (0.1) pts 1.0% 0.8%
Non-comparable Hotels 6.2pts 10.0% 21.4% (0.5) pts 4.6% 3.8%
Total Hotels 1.0pts 3.0% 4.4% (0.3) pts 2.4% 2.0%
(C) Excludes four hotels targeted for sale.
24
25
Comparison of The Hotels' Operating Statistics for the Three and Nine Months
Ended September 30, 1999 and 1998
The Company measures hotel operating statistics by looking at hotels
that were not undergoing major renovation during either the current year period
or the prior year period ("Comparable Hotels"). Major renovations generally
adversely affect the earnings of the hotel by taking rooms out of service and
disrupting hotel operations.
For the three and nine months ended September 30, 1999 the Company's
Comparable Hotels had increases in RevPAR, compared to the same period in 1998,
of 1.8% and 0.8%, respectively. In both the quarter and nine months ended
September 30, 1999 the Comparable Hotels had higher ADR than in the prior year,
increasing 2.1% and 1.0%, respectively, but occupied rooms ("Occupancy") fell
0.2 percentage points and 0.1 percentage points, respectively. In general, the
Company is encouraged by the relative firming of rates compared to the prior
year. This appears to be indicative of the absorption of the new rooms
introduced in certain markets during the past year.
The strongest improvements in the quarter ended September 30, 1999,
compared to the same period of 1998, came in the Comparable DJONT Original
Hotels, DJONT CSS Hotels and the Comparable Bristol Hotels.
Much of the strength from the Comparable DJONT Original Hotels and CSS
Hotels came from those parts of Florida that were not directly threatened by
hurricanes in the quarter. Additionally, California and New Orleans continue to
generate strong demand and room rates. These hotels recorded increased Occupancy
over the same quarter last year and ADR was either up or essentially flat to the
prior year. For the nine months ended September 30, 1999, these hotels had
improvements in ADR compared to the same period in 1998 and the CSS Hotels also
had an increase in Occupancy of 0.9 percentage points for the nine months ended
September 30, 1999 over 1998. The Original Hotels, however, had a 1.2 percentage
point decline in Occupancy for the nine months ended September 30, 1999,
compared to 1998.
The DJONT Comparable Hotels that did not trend upward in the third
quarter of 1999 were from the 1996 Acquisitions and 1998 Acquisitions. RevPAR
performance at these hotels was adversely affected by over building in certain
markets, such as Atlanta, Dallas and Phoenix. The Company anticipates that as
the excess supply from recent building is absorbed in these markets, RevPAR
performance will strengthen. However, the 1996 Acquisitions continued to show an
increase in ADR for the nine months ended September 30, 1999 compared to the
same period in 1998.
The Bristol Comparable Hotels continue to have strong showings from the
Holiday Inn-branded hotels which make up approximately 70% of the quarterly
Bristol Comparable room revenues. These Comparable Hotels had a 4.7% RevPAR
growth over the same quarterly period in 1998, which brought up the increase in
RevPAR for the nine months ended September 30, 1999 to 1.5%. The Company
attributes the strong performance at the Holiday Inn-branded hotels to recently
completed renovation programs and the strong RevPAR increases being recognized
at Bass Hotels & Resorts-branded hotels from an overall repositioning of the
brands. The Company anticipates that these favorable trends for the Bristol
Comparable Hotels will continue at least through the end of the year.
The Non-comparable Hotel performance for the quarter was most
profoundly affected by the Allerton Crowne Plaza, which was closed in the third
quarter 1998 for renovation. This hotel reopened in the second quarter of 1999
and generated a nearly 380% increase in its RevPAR for the third quarter 1999,
as compared to the same period in 1998. The remainder of the Bristol
Non-comparable Hotels also showed strong improvements in RevPAR during the
quarter which are attributed to the completion of the renovation at many of
these hotels. The DJONT Non-comparable Hotels are also generally showed strong
RevPAR increases for the third quarter, compared to the same period last year,
in spite of being partially offset by decreases in ADR at six hotels that were
undergoing renovations during the third quarter of 1999.
25
26
DJONT
The Nine Months Ended September 30, 1999 and 1998
Total revenues increased to $604.1 million in the first nine months of
1999, from $556.4 million in the first nine months of 1998, an increase of 8.6%.
Total revenues consisted primarily of room and suite revenue of $495.4 million
and $463.0 million in the first nine months of 1999 and 1998, respectively.
The increase in total revenues is primarily a result of the addition
of 90 new rooms at one hotel and the acquisition of an additional hotel in the
fourth quarter of 1998. Room and suite revenues from the 59 DJONT Comparable
Hotels, for the nine months ended September 30, 1999 over 1998, increased 1.6%
or $5.5 million. The increase in revenues at these hotels is due primarily to an
improvement in ADR to $121.68 for the nine months ended September 30, 1999, from
$120.02 for the nine months ended September 30, 1998. The 26 DJONT
Non-comparable Hotels were undergoing renovation or rebranding during at least a
portion of the last nine months, which resulted in a decrease in their combined
occupancy and RevPAR to 68.5% and $73.41, respectively, for the nine months
ended September 30, 1999, as compared to 70.9% and $74.44, respectively, for the
nine months ended September 30, 1998.
DJONT's income before Percentage Lease rent decreased as a percentage
of total revenues from 39.6% in the nine months ended September 30, 1998 to
38.7% in the nine months ended September 30, 1999. This is largely due to
increased property operating costs resulting from higher labor costs and related
payroll benefits.
For the first nine months of 1999, DJONT incurred losses of $6.7
million, however, management currently expects DJONT to recover a significant
portion of this loss in the fourth quarter.
The Three Months Ended September 30, 1999 and 1998
Total revenues increased to $194.5 million in the third quarter of 1999
from $190.1 million in the third quarter of 1998, an increase of 2.3%. Total
revenues consisted primarily of room and suite revenue of $160.6 million and
$158.7 million in the third quarter of 1999 and 1998, respectively.
The increase in total revenues is primarily a result of the addition of
90 new rooms at one hotel and the acquisition of an additional hotel in the
fourth quarter of 1998. Room and suite revenues from the 73 DJONT Comparable
Hotels for the three months ended September 30, 1999 over 1998 increased 1.3% or
$1.8 million. The increase in revenues at these hotels is due primarily to the
improvement in ADR to $115.86 for the three months ended September 30, 1999, as
compared to $114.52 for the three months ended September 30, 1998. Six of the 12
DJONT Non-comparable Hotels had undergone renovation or rebranding during 1998
third quarter, which resulted in this group's increase in RevPAR to $59.51 for
the three months ended September 30, 1999, from $55.32 for the three months
ended September 30, 1998.
DJONT's income before Percentage Lease rent decreased as a percentage
of total revenues from 37.9% in the quarter ended September 30, 1998 to 36.3% in
the quarter ended September 30, 1999. This is largely due to higher labor costs
and related payroll benefits.
For the three months ended September 30, 1999, DJONT incurred a loss of
$515,000; however, management currently expects DJONT to recover a significant
portion of its year-to-date 1999 losses in the fourth quarter.
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.
26
27
RENOVATION, REDEVELOPMENT, REBRANDING, AND OTHER CAPITAL EXPENDITURES
Through September 30, 1999, FelCor had spent $193 million (of a planned
$225 million) on its 1999 program for the renovation, redevelopment, or
rebranding of over 60 hotels, and capital expenditures to maintain the remaining
hotels in a competitive condition. In the third quarter of 1999, approximately
$13.1 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 90% complete as of the end of the third quarter.
Renovations were completed at the Allerton Crowne Plaza hotel in Chicago,
Illinois, which was closed during most of the first half of 1999. The Company
presently expects to spend approximately an additional $30 million to complete
the 15 projects in process at the end of the third quarter, to complete 2
additional smaller renovation projects and for other capital improvements in
1999. In 2000, FelCor currently expects to spend approximately $40 million on
the renovation, redevelopment and rebranding of its existing hotels.
Eighteen hotels (8 of which are Bristol-operated hotels) were
undergoing renovation, redevelopment, or rebranding during the quarter, which
resulted in approximately 40,000 room nights out-of-service, or approximately
1.0% of available room nights. Approximately 2.3% of available rooms were
out-of-service during the first nine 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.
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 nine months ended September 30, 1999, net cash flow provided by operating
activities, consisting primarily of Percentage Lease revenue, was $238 million
and Funds From Operations was $223 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 September 30, 1999, DJONT had a cumulative shareholders' deficit of
$15 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 in the fourth quarter and to recognize only a small loss for the
year. 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
September 30, 1999.
Bristol has entered into an absolute and unconditional guarantee of the
obligations of the Bristol Lessees under the Percentage Leases, and is required
to maintain a minimum liquid net worth. A portion of this liquid net worth is
being satisfied through a letter of credit for the benefit of the Company. This
letter of credit is subject to periodic reductions upon satisfaction of certain
conditions and, at September 30, 1999, was in the amount of $9.1 million.
According to Bristol's financial statements filed with the SEC, for the three
and nine months ended September 30, 1999, Bristol had net income of $1.9 and
$7.5 million, respectively, and at September 30, 1999, had stockholders' equity
of $43.0 million.
27
28
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.
The board of directors has authorized FelCor to repurchase up to $100
million of its outstanding common shares and the stock repurchases may, at the
discretion of the Company's management, be made from time to time at prevailing
prices in the open market or through privately negotiated transactions. FelCor
expects to fund the repurchase program through the use of cash, existing credit
facilities, proceeds from the sale of assets and debt refinancings. Beginning in
October of 1999 through November 10, 1999 FelCor repurchased approximately 2.1
million shares of its outstanding common stock on the open market pursuant to
its previously announced $100 million stock buyback program.
The Line of Credit and the Senior Term Loan contain various affirmative
and negative covenants, including limitations on total indebtedness, total
secured indebtedness, restricted payments (such as stock repurchases and cash
distributions), as well as the obligation to maintain certain minimum tangible
net worth and certain minimum interest and debt service coverage ratios. At
September 30, 1999, the Company was in compliance with all such covenants.
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 September 30, 1999, the Company had $48.0 million of cash and cash
equivalents and had utilized $545 million of the $850 million available under
the Line of Credit. Certain significant credit and debt statistics at September
30, 1999 are as follows:
o Interest coverage ratio of 3.4x
o Total debt to annualized EBITDA of 4.1x
o Borrowing capacity of $305 million under the Line of Credit
o Consolidated debt equal to 39.4% of investment in hotels, at cost
o Fixed interest rate debt equal to 60% 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 $5 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 September 30, 1999, are summarized in the following table:
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 9/30/99 MATURITY
--------------- ------------ ---------- ------------- --------------
$ 50 million 6.111% 7.736% 5.309% October 1999
$ 25 million 5.955% 7.580% 5.373% November 1999
$ 25 million 5.558% 7.183% 5.371% July 2001
$ 25 million 5.548% 7.173% 5.371% July 2001
$ 75 million 5.555% 7.180% 5.371% July 2003
$100 million 5.796% 8.296% 5.371% July 2003
$ 25 million 5.826% 8.326% 5.371% July 2003
------------
$325 million
============
28
29
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.
During the third quarter 1999, the Company entered into Forward Rate
Agreements which fix three month LIBOR on $188 million of floating rate debt at
an average rate of 5.93%, effective December 8, 1999.
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.
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 $8 million through the third
quarter of 1999 to remediate Year 2000 issues and anticipates spending an
additional $1 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 and the managers of
the Hotels are confident this phase of the project will be completed by December
15, 1999.
29
30
Concurrent with the assessment of the Year 2000 issue, the Company and
its hotel managers and Lessees are developing contingency plans intended to
mitigate and respond to disruptions in business operations that may result from
Year 2000 issues, and are developing cost estimates for such plans. This phase
of the Year 2000 project will extend into 2000.
The Company and the operators of the Hotels rely upon operational and
financial systems provided by independent, external providers of products and
services. These businesses include suppliers of electricity, natural gas,
telephone service and other public utilities, financial institutions, and
airlines. Since the Company does not control these external businesses, it
cannot ensure they will be ready for Year 2000, which in turn could disrupt the
operations of the Hotels or cause potential hotel guests to postpone or cancel
their travel plans. The Company has received assurances from the managers of the
Hotels, the franchisors of the Hotels and the Lessees, that they have
implemented appropriate steps to assure that the Year 2000 readiness of these
external businesses. However, if these external businesses were to experience a
Year 2000 problem, the resulting business disruption could have a material
adverse effect on our results of operations and financial condition.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Portions of this Quarterly Report on Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's current
expectations are disclosed herein and in the Company's other filings under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, (collectively, "Cautionary Disclosures"). The forward looking
statements included herein, and all subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf, are
expressly qualified in their entirety by the Cautionary Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information and disclosures regarding market risks applicable to FelCor
is incorporated herein by reference to the discussion under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" contained elsewhere in this
Quarterly Report on Form 10-Q for the three and nine months ended September 30,
1999.
30
31
PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to asset acquisitions and certain other
transactions by the Company through September 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description
------ -----------
3.1.1 Certificate of Correction to the Articles of Merger
between FelCor Lodging Trust Incorporated and Bristol
Hotel Company, dated August 31, 1999.
10.9 Non-Qualified Deferred Compensation Plan, as amended
and restated July 1999.
10.19.1 Second Amendment to Credit Agreement dated as of
August 20, 1999, among FelCor Lodging Trust
Incorporated and FelCor Lodging Limited Partnership,
as Borrower, the financial institutions party
thereto, and The Chase Manhattan Bank, as
administrative agent.
10.22.4 Second Amendment to Loan Agreement dated as of August
20, 1999, among FelCor Lodging Trust Incorporated and
FelCor Lodging Limited Partnership, as Borrower, the
financial institutions party thereto, and The Chase
Manhattan Bank, as administrative agent.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Registrant did not file any reports on Form 8-K during the third
quarter of 1999.
31
32
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: November 15, 1999
FELCOR LODGING TRUST INCORPORATED
By: /s/ Lester C. Johnson
---------------------------------
Lester C. Johnson
Vice President and Controller
(Chief Accounting Officer)
32
33
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1.1 Certificate of Correction to the Articles of Merger
between FelCor Lodging Trust Incorporated and Bristol
Hotel Company, dated August 31, 1999.
10.9 Non-Qualified Deferred Compensation Plan, as amended
and restated July 1999.
10.19.1 Second Amendment to Credit Agreement dated as of
August 20, 1999, among FelCor Lodging Trust
Incorporated and FelCor Lodging Limited Partnership,
as Borrower, the financial institutions party
thereto, and The Chase Manhattan Bank, as
administrative agent.
10.22.4 Second Amendment to Loan Agreement dated as of August
20, 1999, among FelCor Lodging Trust Incorporated and
FelCor Lodging Limited Partnership, as Borrower, the
financial institutions party thereto, and The Chase
Manhattan Bank, as administrative agent.
27 Financial Data Schedule.