<PAGE> 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, 2000
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 75-2541756
(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 4, 2000 was 54,787,990.
--------------------------------------------------------------------------------
<PAGE> 2
FELCOR LODGING TRUST INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. -- FINANCIAL INFORMATION
<S> <C>
Item 1. FINANCIAL STATEMENTS............................................................................... 3
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2000 (UNAUDITED)
AND DECEMBER 31, 1999...................................................................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS -- FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)................................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -- FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)................................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................................... 6
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2000 (UNAUDITED)
AND DECEMBER 31, 1999...................................................................... 14
CONSOLIDATED STATEMENTS OF OPERATIONS -- FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)................................................... 15
CONSOLIDATED STATEMENTS OF CASH FLOWS -- FOR THE SIX MONTHS
ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)................................................... 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................................... 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 19
GENERAL/SECOND QUARTER ACTIVITIES............................................................... 19
RESULTS OF OPERATIONS........................................................................... 20
LIQUIDITY AND CAPITAL RESOURCES................................................................. 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................... 30
PART II. -- OTHER INFORMATION
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................................................................... 31
SIGNATURE....................................................................................................... 33
</TABLE>
2
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotels, net of accumulated depreciation of $397,735
at June 30, 2000 and $330,555 at December 31, 1999 ............................... $ 3,796,755 $ 4,035,344
Investment in unconsolidated entities ............................................... 133,038 136,718
Assets held for sale ................................................................ 135,647
Cash and cash equivalents ........................................................... 50,852 36,123
Due from Lessees .................................................................... 28,598 18,394
Note receivable from unconsolidated entity .......................................... 7,728 7,760
Deferred expenses, net of accumulated amortization of $6,874
at June 30, 2000 and $4,491 at December 31, 1999 ................................. 17,093 15,473
Other assets ........................................................................ 7,054 5,939
------------ ------------
Total assets ............................................................. $ 4,176,765 $ 4,255,751
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt, net of discount of $1,288 at June 30, 2000
and $1,401 at December 31, 1999 .................................................. $ 1,882,743 $ 1,833,954
Distributions payable ............................................................... 35,237 39,657
Accrued expenses and other liabilities .............................................. 73,335 65,480
Deferred rent ....................................................................... 18,604
Minority interest in Operating Partnership, 7,597 and 2,991 units issued and
outstanding at June 30, 2000 and December 31, 1999, respectively ................. 221,878 90,078
Minority interest in other partnerships ............................................. 50,710 51,671
------------ ------------
Total liabilities ........................................................ 2,282,507 2,080,840
------------ ------------
Commitments and contingencies (Notes 5 and 6)
Shareholders' equity:
Preferred stock, $.01 par value, 20,000 shares authorized:
Series A Cumulative Preferred Stock, 6,031 and 6,050 shares issued and
outstanding at June 30, 2000 and December 31, 1999, respectively .............. 150,765 151,250
Series B Redeemable Preferred Stock, 58 shares issued and outstanding ............ 143,750 143,750
Common stock, $.01 par value, 200,000 shares authorized, 69,412 and 69,291
shares issued, including shares in treasury, at June 30, 2000
and December 31, 1999, respectively .............................................. 694 693
Additional paid-in capital .......................................................... 2,078,023 2,138,477
Distributions in excess of earnings ................................................. (206,783) (119,385)
------------ ------------
2,166,449 2,314,785
Common stock in treasury, at cost, 14,600 shares and 6,976 shares
at June 30, 2000 and December 31, 1999, respectively ........................... (272,191) (139,874)
------------ ------------
Total shareholders' equity ............................................... 1,894,258 2,174,911
------------ ------------
Total liabilities and shareholders' equity ............................... $ 4,176,765 $ 4,255,751
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE> 4
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue ................................. $ 133,286 $ 131,891 $ 256,335 $ 256,882
Equity in income from unconsolidated entities ............ 3,769 2,591 5,648 3,837
Other revenue ............................................ 810 705 2,687 1,385
---------- ---------- ---------- ----------
Total revenues .................................. 137,865 135,187 264,670 262,104
---------- ---------- ---------- ----------
Expenses:
Depreciation ............................................. 41,080 37,737 81,480 74,162
Reserve for assets held for sale ......................... 63,000 63,000
Interest expense ......................................... 39,740 30,750 77,644 59,172
Taxes, insurance, and other .............................. 17,234 15,425 35,877 32,372
Land leases .............................................. 6,151 4,479 11,711 8,485
General and administrative ............................... 2,713 2,509 6,112 4,753
Minority interest in Operating Partnership ............... (3,403) 1,519 (2,399) 2,839
Minority interest in other partnerships .................. 1,125 833 2,093 1,639
---------- ---------- ---------- ----------
Total expenses .................................. 167,640 93,252 275,518 183,422
---------- ---------- ---------- ----------
Net income (loss) before nonrecurring items ................ (29,775) 41,935 (10,848) 78,682
Gain on sale of land ....................................... 875 875
Extraordinary charge from write off of deferred
financing fees ........................................ (1,113) (1,113)
---------- ---------- ---------- ----------
Net income (loss) .......................................... (28,900) 40,822 (9,973) 77,569
Preferred dividends ........................................ 6,174 6,184 12,358 12,368
---------- ---------- ---------- ----------
Net income (loss) applicable to common shareholders ........ $ (35,074) $ 34,638 $ (22,331) $ 65,201
========== ========== ========== ==========
Per common share data:
Basic:
Net income (loss) applicable to common shareholders ...... $ (0.64) $ 0.51 $ (0.39) $ 0.96
========== ========== ========== ==========
Weighted average common shares outstanding ............... 54,714 68,013 56,930 68,011
Diluted:
Net income (loss) applicable to common shareholders ...... $ (0.64) $ 0.51 $ (0.39) $ 0.95
========== ========== ========== ==========
Weighted average common shares outstanding ............... 54,945 68,351 57,161 68,347
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .............................................................. $ (9,973) $ 77,569
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation ......................................................... 81,480 74,162
Gain on sale of land ................................................. (875)
Reserve for assets held for sale ..................................... 63,000
Amortization of deferred financing fees .............................. 2,383 1,303
Accretion of debt .................................................... (446) (494)
Amortization of unearned officers' and directors' compensation ....... 472 350
Equity in income from unconsolidated entities ........................ (5,648) (3,837)
Extraordinary charge for write off of deferred financing fees ........ 1,113
Minority interest in Operating Partnership ........................... (2,399) 2,839
Minority interest in other partnerships .............................. 2,093 1,639
Changes in assets and liabilities:
Due from Lessees ..................................................... (10,204) (13,356)
Deferred expenses .................................................... (4,003) (5,538)
Other assets ......................................................... (1,251) (1,140)
Deferred rent ........................................................ 18,604
Accrued expenses and other liabilities ............................... 5,510 15,343
------------ ------------
Net cash flow provided by operating activities ............. 138,743 149,953
------------ ------------
Cash flows used in investing activities:
Improvements and additions to hotels ........................................... (41,408) (148,519)
Acquisition of hotel assets .................................................... (10,802)
Proceeds from sale of assets ................................................... 1,071 15,091
Cash distributions from unconsolidated entities ................................ 11,708 13,297
------------ ------------
Net cash flow used in investing activities ................. (28,629) (130,933)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings ....................................................... 500,892 744,000
Repayment of borrowings ........................................................ (451,847) (630,899)
Purchase of treasury stock ..................................................... (56,733)
Buyback of assumed stock options ............................................... (1,860)
Other distributions ............................................................ (3,054)
Distributions paid to limited partners ......................................... (5,654) (4,273)
Distributions paid to preferred shareholders ................................... (12,368) (13,619)
Distributions paid to common shareholders ...................................... (64,761) (98,352)
------------ ------------
Net cash flow used in financing activities ................. (95,385) (3,143)
------------ ------------
Net change in cash and cash equivalents .................................................. 14,729 15,877
Cash and cash equivalents at beginning of periods ........................................ 36,123 34,692
------------ ------------
Cash and cash equivalents at end of periods .............................................. $ 50,852 $ 50,569
============ ============
Supplemental cash flow information--
Interest paid .................................................................. $ 73,259 $ 55,549
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
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"). At June 30, 2000, it owned
interests in 188 hotels with nearly 50,000 rooms and suites (collectively the
"Hotels") through its greater than 88% 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% of the interest 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 16 hotels.
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.
At June 30, 2000, 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"), 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 operated without a lease.
The following table provides a schedule of the Hotels, by brand,
operated by each of the Company's Lessees at June 30, 2000:
<TABLE>
<CAPTION>
NOT OPERATED
BRAND DJONT BRISTOL UNDER A LEASE TOTAL
----- ----- ------- ------------- -----
<S> <C> <C> <C> <C>
Embassy Suites 60 60
Holiday Inn 43 1 44
Crowne Plaza and Crowne Plaza Suites(R) 18 18
Doubletree and Doubletree Guest Suites(R) 14 14
Holiday Inn Select(R) 10 10
Sheraton(R)and Sheraton Suites(R) 10 10
Hampton Inn(R) 9 9
Holiday Inn Express(R) 5 5
Fairfield Inn(R) 5 5
Harvey Hotel(R) 4 4
Independents 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 86 100 2 188
=== ====== ==== =====
</TABLE>
The Hotels are located in the United States (35 states) and Canada,
with a concentration in Texas (41 hotels), California (20 hotels), Florida (18
hotels) and Georgia (15 hotels).
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. At June 30, 2000, DJONT had entered into management agreements pursuant
to which 72 of the Hotels leased by it were managed by
6
<PAGE> 7
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION -- (CONTINUED)
subsidiaries of Hilton Hotels Corporation ("Hilton"), 11 were managed by
subsidiaries of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood") and three
were managed by two unrelated management companies.
At June 30, 2000, Bristol, which became a subsidiary of Bass plc
("Bass") by virtue of the merger between Bristol and a subsidiary of Bass on
March 31, 2000, leased and managed 100 Hotels and managed and operated one
hotel, in which the Company owned a 50% interest, without a lease. Bass is one
of the largest hotel operating companies 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 shareholder's equity.
The financial information for the three and six months ended June 30,
2000 and 1999, is unaudited but includes all adjustments (consisting only of
normal recurring accruals) which the Company considers necessary for a fair
presentation of the results for the periods. The financial information should be
read in conjunction with the consolidated financial statements for the year
ended December 31, 1999, included in the Company's Annual Report on Form 10-K
("Form 10-K"). Operating results for the three and six months ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2000.
2. DEFERRED RENT
Effective January 2000, Percentage Leases with regard to 68 of the
Company's 188 hotels were changed to provide for the computation of rent on an
annual, rather than quarterly basis. This should result in no change in annual
Percentage Rent or cash flows. In accordance with Staff Accounting Bulletin No.
101 (SAB 101), this change requires that the Company defer Percentage Lease
revenue until annual thresholds are exceeded. This deferred rent is expected to
be fully earned and recognized as Percentage Lease Revenue by the end of 2000.
3. ASSETS HELD FOR SALE
The Company has identified 25 hotels that it considers non-strategic
and has announced its intention to sell such hotels within the next year. Three
of the hotels are leased by DJONT and the other 22 are leased and managed by
Bristol. The Company expects gross sales proceeds from these hotels to be
approximately $150 million and net proceeds to be approximately $136 million. In
connection with the decision to sell these hotels, FelCor has recorded, at June
30, 2000, a one-time reserve of $63 million representing the difference between
the net book value of these hotels and the estimated net proceeds. The results
of operations associated with the assets held for sale, included in the
Company's results of operations, for the six months ended June 30, 2000, is $6.1
million. The hotels were depreciated through June 30, 2000.
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company owned 50% interests in separate entities owning 16 hotels
at June 30, 2000, and 15 hotels at June 30, 1999, a parcel of undeveloped land,
and a condominium management company. The Company also owned a 97% nonvoting
interest in an entity that owns an annex to a hotel owned by the Company and
holds a 50% interest in an entity that is developing condominiums for sale. The
Company accounts for its investments in these unconsolidated entities under the
equity method.
7
<PAGE> 8
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT IN UNCONSOLIDATED ENTITIES -- (CONTINUED)
Summarized unaudited combined financial information for 100% of these
unconsolidated entities is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Balance sheet information:
Investment in hotels ........... $ 339,795 $ 269,123
Non-recourse mortgage debt ..... $ 265,874 $ 196,462
Equity ......................... $ 88,096 $ 93,524
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS INFORMATION:
Total revenues ................................... $ 21,245 $ 17,137 $ 39,173 $ 31,297
Net income ....................................... $ 8,715 $ 6,358 $ 13,649 $ 10,078
Net income attributable to the Company ........... $ 4,305 $ 3,127 $ 6,719 $ 4,908
Amortization of cost in excess of book value ..... (536) (536) (1,071) (1,071)
---------- ---------- ---------- ----------
Equity in income from unconsolidated entities .... $ 3,769 $ 2,591 $ 5,648 $ 3,837
========== ========== ========== ==========
</TABLE>
5. DEBT
Debt at June 30, 2000, and December 31, 1999, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
COLLATERAL INTEREST RATE MATURITY DATE 2000 1999
---------------- ------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
FLOATING RATE DEBT:
Line of credit (a) LIBOR + 163bp June 2001 $ 285,000 $ 351,000
Senior term loan (a) LIBOR + 275bp March 2004 249,000 250,000
Mortgage debt 3 hotels LIBOR + 200bp February 2003 62,239 62,553
Other Uncollateralized Up to LIBOR + 200bp Various 11,032 32,282
------------- -------------
Total floating rate debt 607,271 695,835
------------- -------------
FIXED RATE DEBT:
Line of credit - swapped (a) 7.18% June 2001 125,000 313,000
Publicly-traded term notes (a) 7.38% October 2004 174,441 174,377
Publicly-traded term notes (a) 7.63% October 2007 124,271 124,221
Mortgage debt 15 hotels 7.24% November 2007 141,367 142,542
Senior term loan - swapped (a) 8.56% March 2004 125,000 125,000
Mortgage debt 7 hotels 7.54% April 2009 98,354 99,075
Mortgage debt 6 hotels 7.55% June 2009 73,946 74,483
Mortgage debt 7 hotels 8.73% May 2010 144,865
Mortgage debt 8 hotels 8.70% May 2010 185,762
Other 13 hotels 6.96% - 7.23% 2000 - 2005 82,466 85,421
------------- -------------
Total fixed rate debt 1,275,472 1,138,119
------------- -------------
Total debt $ 1,882,743 $ 1,833,954
============= =============
</TABLE>
(a) Collateralized by stock and partnership interests in certain
subsidiaries of FelCor.
8
<PAGE> 9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT -- (CONTINUED)
Thirty-day LIBOR at June 30, 2000, was 6.649%.
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, 2000, the Company was not in default
with respect to any 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 non-recourse 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.
On April 26, 2000, the Company closed a 10-year, $145 million First
Mortgage Term Loan, which is secured by seven Sheraton hotels and carries an
8.73% fixed interest rate. On May 2, 2000, the Company closed $186 million of
10-year, First Mortgage Term Loans which are secured by eight Embassy Suites
hotels and carry an 8.70% fixed interest rate. The loans are non-recourse,
mature in May 2010, and amortize over 25 years. The proceeds of these loans were
used to reduce borrowings under the Company's $850 million Line of Credit.
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company is to receive rental income from the Lessees under the
Percentage Leases which expire in 2003 (six hotels), 2004 (11 hotels), 2005 (18
hotels), 2006 (22 hotels), 2007 (27 hotels), 2008 (44 hotels), and thereafter
(19 hotels). The rental income under the Percentage Leases between 15 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 noncancelable operating leases at June 30,
2000, excluding the 25 hotels that have been designated as held for sale, is as
follows (in thousands):
<TABLE>
<CAPTION>
LESSEES
-------------------------
DJONT BRISTOL TOTAL
---------- ---------- ----------
YEAR
<S> <C> <C> <C>
Remainder of 2000 ......... $ 72,351 $ 84,402 $ 156,753
2001 ...................... 148,009 168,805 316,814
2002 ...................... 148,240 168,816 317,056
2003 ...................... 137,190 166,123 303,313
2004 ...................... 132,584 158,827 291,411
2005 and thereafter ....... 447,848 620,570 1,068,418
---------- ---------- ----------
$1,086,222 $1,367,543 $2,453,765
========== ========== ==========
</TABLE>
9
<PAGE> 10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
Minimum future rental income (i.e., base rents) payable to the Company
under the noncancelable operating leases for the 25 hotels held for sale as of
June 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
LESSEES
-----------------------------
DJONT BRISTOL TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
YEAR
Remainder of 2000 ......... $ 1,575 $ 6,338 $ 7,913
2001 ...................... 3,150 12,676 15,826
2002 ...................... 3,150 12,676 15,826
2003 ...................... 3,150 12,578 15,728
2004 ...................... 3,150 12,382 15,532
2005 and thereafter ....... 4,696 34,255 38,951
------------ ------------ ------------
$ 18,871 $ 90,905 $ 109,776
============ ============ ============
</TABLE>
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 38
of the Hotels. No such loans were outstanding at June 30, 2000.
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 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 June 30, 2000, 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, 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 June 30, 2000, totaled $9.1 million.
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, 2000, were DJONT and
Bristol.
10
<PAGE> 11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION -- (CONTINUED)
The following tables present information for the reportable segments
for the three and six months ended June 30, 2000 and 1999 for both DJONT and
Bristol (in thousands):
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 2000 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
---------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues ......................... $ 74,338 $ 62,717 $ 137,055 $ 810 $ 137,865
Net income (loss) ...................... $ 33,193 $ (23,785) $ 9,408 $ (38,308) $ (28,900)
Funds from operations .................. $ 68,567 $ 57,197 $ 125,764 $ (44,879) $ 80,885
Weighted average common shares and
units outstanding(1) ................ 67,232
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 1999 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
---------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues ......................... $ 72,845 $ 62,114 $ 134,959 $ 228 $ 135,187
Net income (loss) ...................... $ 43,252 $ 33,233 $ 76,485 $ (35,663) $ 40,822
Funds from operations .................. $ 65,385 $ 51,264 $ 116,649 $ (36,266) $ 80,383
Weighted average common shares and
units outstanding(1) ................ 76,029
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 2000 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
---------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues ......................... $ 142,746 $ 119,237 $ 261,983 $ 2,687 $ 264,670
Net income (loss) ...................... $ 69,892 $ (1,059) $ 68,833 $ (78,806) $ (9,973)
Funds from operations .................. $ 132,459 $ 104,459 $ 236,918 $ (87,538) $ 149,380
Weighted average common shares and
units outstanding(1) ............... 67,987
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 1999 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
---------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues ......................... $ 146,901 $ 114,752 $ 261,653 $ 451 $ 262,104
Net income (loss) ...................... $ 87,200 $ 57,795 $ 144,995 $ (67,426) $ 77,569
Funds from operations .................. $ 131,827 $ 92,348 $ 224,175 $ (69,943) $ 154,232
Weighted average common shares and
units outstanding(1) ................ 76,008
</TABLE>
(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.
8. TREASURY STOCK REPURCHASE PROGRAM
On January 4, 2000, FelCor announced that its Board of Directors had
approved a stock repurchase program, authorizing the Company to purchase up to
an aggregate of $200 million of its outstanding common shares. During the six
months ended June 30, 2000, FelCor had repurchased approximately 3.1 million
shares of FelCor common stock for approximately $56.7 million.
11
<PAGE> 12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BASS STOCK CONTRIBUTION
In connection with the efforts of Bass to acquire Bristol, a Bass
subsidiary (Bass America, Inc.) contributed 4,713,185 outstanding FelCor common
shares held by it to the Operating Partnership in exchange for a like number of
units of limited partnership interest on February 28, 2000. This exchange did
not affect the Company's FFO or earnings per share, although it resulted in
reducing FelCor's percentage ownership in the Operating Partnership from
approximately 95% to approximately 88%. The shares were recorded in treasury at
$17 per share which represented fair market value on date of exchange ($80.1
million) and increased minority interest in the Operating Partnership for a like
amount.
10. BUYBACK OF ASSUMED STOCK OPTIONS
In the second quarter of 2000 the Company purchased options covering an
aggregate of 349,443 shares of FelCor's Common Stock for approximately $1.9
million. The options were held by employees of Bristol Hotels & Resorts and were
issued in substitution for stock options previously granted by Bristol Hotel
Company that were outstanding at the time of its merger with FelCor in 1998. The
options so purchased and retired had exercise prices ranging from $10.33 to
$16.95 per share and the majority of these options were scheduled to vest in the
third quarter of 2000.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the three and six months ended June 30, 2000 and
1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE JUNE
---------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) applicable to common shareholders ........ $(35,074) $ 34,638 $(22,331) $ 65,201
Denominator:
Denominator for basic earnings per share -
weighted average shares ............................... 54,714 68,013 56,930 68,011
Effect of diluted securities:
Stock options ....................................... 273 271
Restricted shares ................................... 231 65 231 65
-------- -------- -------- --------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions ..... 54,945 68,351 57,161 68,347
======== ======== ======== ========
Earnings (loss) per share data:
Basic ...................................................... $ (0.64) $ 0.51 $ (0.39) $ 0.96
Diluted .................................................... $ (0.64) $ 0.51 $ (0.39) $ 0.95
</TABLE>
The Series A Preferred Shares and most of the options granted are
anti-dilutive and not included in the calculation of diluted earnings per share.
12
<PAGE> 13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENTS
On July 14, FelCor entered into a binding sale contract to sell its
Embassy Suites hotel, Los Angeles International Airport-North, California (215
suites) for a gross price of approximately $24 million. The Company expects the
sale will close by the end of August 2000, and FelCor will record a gain on sale
of approximately $3 million, in the third quarter of 2000. This hotel is not
included in the 25 hotels held for sale.
On August 1, 2000, FelCor renewed its Line of Credit. The Line of
Credit was reduced from $850 million to $600 million and the maturity was
extended from July 2001 to August 2003. The effective interest rate ranges from
87.5 basis points to 250 basis points above LIBOR depending on the Company's
leverage and corporate rating.
On July 21, 2000, FelCor's Independent Directors approved the
acquisition of 100% of DJONT effective January 1, 2001. The purchase price is
approximately 417,000 units of the Operating Partnership.
13
<PAGE> 14
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents .............................................. $ 28,494 $ 20,127
Accounts receivable, net ............................................... 38,200 28,601
Inventories ............................................................ 4,319 4,260
Prepaid expenses ....................................................... 1,193 1,444
Other assets ........................................................... 4,737 5,791
Investment in real estate, net of accumulated depreciation of $771
in 2000 and $530 in 1999 ............................................ 11,195 11,436
------------ ------------
Total assets ................................................. $ 88,138 $ 71,659
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable, trade ................................................ $ 21,356 $ 12,742
Due to FelCor Lodging Trust Incorporated ............................... 25,655 22,064
Accrued expenses and other liabilities ................................. 41,570 37,121
Minority interest ...................................................... 4,867 5,113
Debt ................................................................... 7,728 7,761
------------ ------------
Total liabilities ............................................ 101,176 84,801
------------ ------------
Commitments and contingencies (Note 3)
Shareholders' deficit:
Capital ................................................................ 1 1
Accumulated deficit .................................................... (13,039) (13,143)
------------ ------------
Total shareholders' deficit .................................. (13,038) (13,142)
------------ ------------
Total liabilities and shareholders' deficit .................. $ 88,138 $ 71,659
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
14
<PAGE> 15
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Room and suite revenue ............... $ 186,395 $ 167,109 $ 364,687 $ 334,840
Food and beverage revenue ............ 29,396 22,280 56,340 43,467
Food and beverage rent ............... 1,390 1,349 2,714 2,614
Other revenue ........................ 12,467 14,618 24,921 28,630
---------- ---------- ---------- ----------
Total revenues .................. 229,648 205,356 448,662 409,551
---------- ---------- ---------- ----------
Expenses:
Property operating costs ............. 50,481 49,110 97,799 95,338
General and administrative ........... 16,699 15,784 32,952 30,730
Advertising and promotion ............ 17,532 13,823 33,626 27,730
Repair and maintenance ............... 10,296 9,548 20,454 19,106
Utilities ............................ 7,575 6,969 14,764 14,122
Management and incentive fees ........ 6,769 5,573 12,691 11,966
Franchise fees ....................... 5,414 4,929 10,603 9,847
Food and beverage expenses ........... 21,550 16,600 41,868 32,125
Percentage lease expenses ............ 90,828 83,714 178,177 169,558
Lessee overhead expenses ............. 269 301 426 567
Liability insurance .................. 812 589 1,608 1,154
Interest expense ..................... 248 156 310 372
Depreciation ......................... 121 289 241 289
Minority interest in partnership ..... (216) 157 (247) 157
Other ................................ 1,678 1,310 3,286 2,752
---------- ---------- ---------- ----------
Total expenses .................. 230,056 208,852 448,558 415,813
---------- ---------- ---------- ----------
Net income (loss) ......................... $ (408) $ (3,496) $ 104 $ (6,262)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
15
<PAGE> 16
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 104 $ (6,262)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization .............................. 241 289
Minority interest in partnership income .................... (247) 157
Changes in assets and liabilities:
Accounts receivable ........................................ (9,599) (5,686)
Inventories ................................................ (59) 224
Prepaid expenses ........................................... 251 (2,750)
Other assets ............................................... 1,054 (1,903)
Due to FelCor Lodging Trust Incorporated ................... 3,591 17,989
Accounts payable, accrued expenses and other liabilities ... 13,064 5,104
------------ ------------
Net cash flow provided by operating activities ........ 8,400 7,162
------------ ------------
Cash flows from financing activities:
Repayment of borrowings ......................................... (33)
------------
Net cash flow used in financing activities ................. (33)
------------
Net change in cash and cash equivalents .............................. 8,367 7,162
Cash and cash equivalents at beginning of periods .................... 20,127 28,538
------------ ------------
Cash and cash equivalents at end of periods .......................... $ 28,494 $ 35,700
============ ============
</TABLE>
The accompany notes are an integral part of
these consolidated financial statements.
16
<PAGE> 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 LLC, a Delaware limited liability company. The
remaining 50% non-voting common equity interest is beneficially owned by the
children of Charles N. Mathewson, a Director and major initial investor in
FelCor.
Eighty-six of the hotels in which FelCor Lodging Limited Partnership
(the "Operating Partnership") had an ownership interest at June 30, 2000 (the
"Hotels"), were leased to DJONT Operations LLC or a consolidated subsidiary
thereof ("DJONT") pursuant to percentage leases ("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 due under the respective Percentage Leases relating to a total of 38
of the Hotels. No loans were outstanding under such agreements at June 30, 2000.
At June 30, 2000, 60 of the Hotels were operated as Embassy Suites(R)
hotels, 14 were operated as Doubletree(R) or Doubletree Guest Suites(R) hotels,
ten were operated as Sheraton(R) or Sheraton Suites(R) hotels, one was operated
as a Westin(R) hotel and one was operated as a Hilton Suites(R) hotel.
Seventy-two of the Hotels were managed by subsidiaries of Hilton Hotels
Corporation ("Hilton"). Hilton is the largest operator of all-suite,
full-service hotels in the United States. Of the remaining Hotels, 11 were
managed by subsidiaries of Starwood Hotels & Resorts Worldwide, Inc.
("Starwood") and three were managed by two unrelated management companies.
2. ASSETS HELD FOR SALE
FelCor has identified three hotels leased by DJONT, which it considers
non-strategic and has announced its intention to sell such hotels within the
next year. The results of operations associated with the hotels held for sale,
included in DJONT's results of operations for the six months ended June 30,
2000, was an operating loss of $245,000.
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS
DJONT has future lease commitments under the Percentage Leases which
expire in 2003 (4 hotels), 2004 (6 hotels), 2005 (13 hotels), 2006 (17 hotels),
2007 (23 hotels), 2008 (11 hotels), and thereafter (12 hotels). Minimum future
rental payments are computed based on the base rent as defined under the
noncancelable operating leases, excluding the three hotels that have been
designated as held for sale, and are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
Remainder of 2000............................................. $ 72,351
2001.......................................................... 148,009
2002.......................................................... 148,240
2003.......................................................... 137,190
2004.......................................................... 132,584
2005 and thereafter........................................... 447,848
------------
$ 1,086,222
============
</TABLE>
17
<PAGE> 18
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
Minimum future rental payments (i.e., base rents) under the
noncancelable operating leases for the three DJONT hotels held for sale are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ---------
<S> <C>
Remainder of 2000.................................................. $ 1,575
2001............................................................... 3,150
2002............................................................... 3,150
2003............................................................... 3,150
2004............................................................... 3,150
2005 and thereafter................................................ 4,696
---------
$ 18,871
=========
</TABLE>
DJONT has agreed that during the term of the Percentage Leases it will
maintain a ratio of total debt to consolidated net worth (as defined in the
Percentage Leases) of less than or equal to 50%, exclusive of capital leases.
All of the debt recorded in DJONT's balance sheet at June 30, 2000, is held in
the 3% owned consolidated subsidiary and is not considered for this test. In
addition, the Lessee has agreed that it will not pay fees to any affiliate of
the Lessee.
DJONT shares the executive offices and certain employees with FelCor
and FelCor, Inc., and each company bears its share of the costs thereof,
including an allocated portion of the rent, compensation of certain personnel,
office supplies, telephones and depreciation of office furniture, fixtures and
equipment. Such allocation of shared expenses is approved by a majority of
FelCor's Independent Directors.
4. SUBSEQUENT EVENTS
On July 21, 2000, FelCor's Independent Directors approved the
acquisition of 100% of DJONT effective January 1, 2001. The purchase price is
approximately 417,000 units of the Operating Partnership.
18
<PAGE> 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.
SECOND QUARTER ACTIVITIES:
FINANCIAL PERFORMANCE (AS COMPARED TO SECOND QUARTER 1999):
o Total revenues, after adding back deferred rent of $9.8
million, increased 9.2% to $147.6 million from $135.2 million
o Total hotel portfolio, excluding hotels held for sale, (163
hotels) revenue per available room ("RevPAR") increased 9.9%
o Comparable hotels, excluding hotels held for sale, (131
hotels) RevPAR increased 8.2%
o Non-comparable hotels, excluding hotels held for sale, (32
hotels) RevPAR increased 18.8%
o Hotels held for sale (25 hotels) RevPAR decreased 2.1%
OTHER HIGHLIGHTS:
o FelCor has agreed in principle to purchase DJONT Operations,
LLC, one of its two Lessees, currently leasing 86 hotels,
effective January 1, 2001, for approximately 417,000 Operating
Partnership units.
o The Company has identified 25 non-strategic hotels to be sold,
with estimated aggregate net sale proceeds of approximately
$136 million. In connection with the decision to sell these
hotels, the Company has recorded a one-time reserve of $63
million in the second quarter of 2000.
o On July 14, the Company entered into a binding sale contract
for its Embassy Suites(R) hotel- Los Angeles International
Airport-North, California (215 suites) for a gross price of
approximately $24 million ($112,000 per room). The Company
expects that the sale will close by the end of August 2000,
and will record a gain on sale of approximately $3 million in
the third quarter of 2000.
o The Company sold 31 acres of vacant excess land adjacent to
its 179-room Whispering Woods Hotel, Conference Center and
Golf Course in Olive Branch, Mississippi, for approximately $1
million.
o Renovations were completed at three hotels during the quarter
and 13 additional hotels were undergoing renovation at the end
of the quarter.
o Renovation expenditures on the Company's hotel portfolio
totaled $8.3 million during the quarter and an additional
$10.4 million was spent on maintenance capital expenditures.
The Company expects to spend an additional $28 million in
renovation expenditures and $33 million in maintenance capital
expenditures during the remainder of 2000.
o Construction was started on a 90 room addition at the Holiday
Inn-French Quarter hotel located on Royal Street in New
Orleans, Louisiana at an expected cost of $10 million.
19
<PAGE> 20
CAPITALIZATION:
o During the second quarter 2000, FelCor repurchased a total
of approximately 718,000 common shares for approximately
$14.0 million. For the Year 2000 FelCor has repurchased 3.1
million common shares for approximately $56.7 million.
o FelCor declared second quarter dividends of $0.55 per share
on its Common Stock, $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.
o On August 1, 2000, FelCor renewed, reduced in size, and
extended for two years its Senior Revolving Credit Facility.
The new $600 million Line of Credit matures in August 2003.
The effective interest rate ranges from 87.5 basis points to
250 basis points above LIBOR depending on the Company's
leverage and corporate rating. The initial spread is 200
basis points.
RESULTS OF OPERATIONS
The Company
Six Months Ended June 30, 2000 and 1999
For the six months ended June 30, 2000 and 1999, the Company had
revenues of $264.7 million and $262.1 million, respectively, consisting
primarily of Percentage Lease revenues of $256.3 million and $256.9 million,
respectively. The reason for the decline in Percentage Lease revenues is
approximately $18.6 million of deferred rent recorded in 2000 but not in 1999.
Effective January, 2000, Percentage Leases for 68 of FelCor's 188
hotels were changed to provide for the computation of rent on an annual, rather
than quarterly basis. This should result in no change in annual Percentage Rent
or cash flows. However, this change requires the deferral of Percentage Lease
revenue until annual thresholds are exceeded in accordance with Staff Accounting
Bulletin No. 101 (SAB 101). The deferred rent is expected to be fully earned and
recognized as Percentage Lease Revenue by the end of 2000. After adding back
rent deferred under SAB 101, Percentage Lease revenues for the six months ended
June 30, 2000, increased 7.0% to $274.9 million as compared to the six months
ended June 30, 1999. The reason for this comparative increase is attributed to
an overall increase in RevPAR of 7.7%. This change in hotel RevPAR is more fully
discussed under "The Hotels" section of this "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Total expenses increased $92.1 million for the six months ended June
30, 2000, from $183.4 million to $275.5 million, compared to the same period in
1999. Since there was no deferred rent recorded in 1999, for comparison purposes
deferred rent recorded in 2000 has been added back to total revenue for the
computation of expenses as a percent of total revenue. Total expenses as a
percentage of total revenue after adding back deferred rent, increased to 97.3%
for the six months ended June 30, 2000, from 70.0% in the same period of 1999.
Included in total expenses is a one-time reserve of $63.0 million
related to the 25 non-strategic hotels the Company has identified as held for
sale. This reserve represents the difference between the net book value of the
hotels and the estimated net sale proceeds.
Other major components of the increase in expenses, as a percentage of
total revenue after adding back deferred rent, were interest expense and land
lease expenses.
20
<PAGE> 21
Interest expense increased, as a percentage of total revenue, after
adding back deferred rent, to 27.4% in the six months ended June 30, 2000, from
22.6% in the six months ended June 30, 1999. This increase in interest expense
is attributed to the following:
o increased debt, which was used to finance renovations and to fund
$155 million stock repurchased in 1999 and 2000,
o higher average interest rates for debt refinanced in 2000 to
extend maturities and convert variable rates to fixed,
o an increase in the LIBOR rate which affects the Company's
variable rate debt and
o reduction of interest capitalized on major renovations and
construction from $3.2 million for the six months ended June 30,
1999 to approximately $497,000 in 2000.
Land leases as a percent of total revenue, after adding back deferred
rent, increased from 3.2% to 4.1% for the six months ended June 30, 1999 and
2000, respectively. The increase in land lease expense is primarily attributed
to a reserve established in June 2000, for prior year disputed land lease
expense and current year land lease expense for two hotels. The land lease rent
for these hotels is computed as a percentage of hotel revenues and these two
hotels had larger than average percentage increases in revenue for the period.
Three Months Ended June 30, 2000 and 1999
For the three months ended June 30, 2000 and 1999, the Company had
revenues of $137.9 million and $135.2 million, respectively, consisting
primarily of Percentage Lease revenues of $133.3 million and $131.9 million,
respectively.
After adding back rent deferred under SAB 101, Percentage Lease
revenues for the three months ended June 30, 2000, increased 9.2% to $147.6
million as compared to the three months ended June 30, 1999. The reason for this
comparative increase is attributed to an overall increase in RevPAR of 9.3%.
This change in RevPAR is more fully discussed under "The Hotels" section of this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Total expenses increased $74.4 million for the three months ended June
30, 2000, from $93.2 million to $167.6 million, compared to the same period in
1999. Since there was no deferred rent recorded in 1999, for comparison purposes
deferred rent recorded in 2000 has been added back to total revenue for the
computation of expenses as a percent of total revenue. Total expenses as a
percentage of total revenue after adding back deferred rent, increased to 113.6%
for the six months ended June 30, 2000, from 69.0% in the same period of 1999.
Included in the second quarter total expenses is a one-time reserve of
$63.0 million related to the 25 non-strategic hotels the Company has identified
as held for sale. This reserve represents the difference between the net book
value of the hotels and the estimated net sale proceeds.
Other major components of the increase in expenses, as a percentage of
total revenue after adding back deferred rent, were interest expense and land
lease expenses.
Interest expense increased, as a percentage of total revenue after
adding back deferred rent, from 22.7% to 26.9% for the quarter over the prior
year period. The Company's total borrowings increased by approximately $170
million since June 30, 1999, primarily to fund its stock repurchase program and
its renovation, redevelopment and rebranding program. In addition, the average
interest rate on the Company's floating rate debt increased approximately 130
basis points since the second quarter 1999, as a result of corresponding
increases in short term interest rates.
21
<PAGE> 22
Land leases as a percent of total revenue, after adding back deferred
rent, increased from 3.3% to 4.2% for the quarters ended June 30, 1999 and 2000,
respectively. The increase in land lease expense is primarily attributed to a
reserve established in June 2000, for prior year disputed land lease expense and
current year land lease expense for two hotels. The land lease rent for these
hotels is computed as a percentage of hotel revenues and these two hotels had
larger than average percentage increases in revenue for the period.
Funds From Operations and EBITDA
The Company considers Funds From Operations ("FFO") and earnings before
interest, taxes, depreciation and amortization ("EBITDA") to be key measures 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 FFO 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 FFO and EBITDA are 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, they provide 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 FFO in accordance
with standards established by NAREIT, except that the Company adds back rent
deferred under SAB 101 to derive FFO. This may not be comparable to FFO reported
by other REITs that do not define the term in accordance with the current NAREIT
definition, that interpret the current NAREIT definition differently than the
Company or that do not adjust FFO for rent deferred under SAB 101. FFO and
EBITDA do 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. FFO and EBITDA 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.
22
<PAGE> 23
The following table details the computation of FFO (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
FFO:
Net income (loss) ..................................... $(28,900) $ 40,822 $ (9,973) $ 77,569
Deferred rent ...................................... 9,750 18,604
Reserve for assets held for sale ................... 63,000 63,000
Series B preferred dividends ....................... (3,234) (3,234) (6,468) (6,468)
Extraordinary charge from write off of deferred
financing fees ................................ 1,113 1,113
Depreciation ....................................... 41,080 37,737 81,480 74,162
Depreciation for unconsolidated entities ........... 2,592 2,426 5,136 5,017
Minority interest in Operating Partnership ......... (3,403) 1,519 (2,399) 2,839
-------- -------- --------- ---------
FFO ................................................... $ 80,885 $ 80,383 $ 149,380 $ 154,232
======== ======== ========= =========
Weighted average common shares and units
outstanding (1) .................................. 67,232 76,029 67,987 76,008
======== ======== ========= =========
</TABLE>
----------
(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.
The following table details the computation of EBITDA (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EBITDA:
Funds from Operations .................................... $ 80,885 $ 80,383 $149,380 $154,232
Interest expense ................................... 39,740 30,750 77,644 59,172
Interest expense of unconsolidated subsidiaries .... 2,157 1,734 4,787 3,343
Amortization of unearned compensation .............. 312 185 474 375
Series B preferred dividends ....................... 3,234 3,234 6,468 6,468
-------- -------- -------- --------
EBITDA ................................................... $126,328 $116,286 $238,753 $253,590
======== ======== ======== ========
</TABLE>
The Hotels
The Company believes that when analyzing the performance of the Hotels,
looking at "Comparable Hotels" is the most meaningful. The Company defines
"Comparable Hotels" as those not undergoing renovation, redevelopment or
rebranding in either of the comparison periods. Major renovations generally have
an adverse affect on hotel earnings by taking rooms out of service and
disrupting hotel operations. "Non-comparable Hotels" are those undergoing
renovation, redevelopment or rebranding during either period presented.
23
<PAGE> 24
The following table sets forth historical Occupancy, ADR and RevPAR and
the percentage changes therein between the periods presented for the Hotels in
which the Company had an ownership interest at June 30, 2000. This information
is presented regardless of the date of acquisition.
<TABLE>
<CAPTION>
SECOND QUARTER 2000 YEAR TO DATE 2000
-------------------------------- -------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
<S> <C> <C> <C> <C> <C> <C>
DJONT Comparable Hotels 77.7% $ 123.92 $96.31 75.4% $ 126.27 $95.07
Bristol Comparable Hotels 75.1% $ 92.12 $69.23 72.3% $ 91.48 $66.14
Total Comparable Hotels (A) 76.5% $ 108.87 $83.26 73.8% $ 109.00 $80.49
Non-comparable Hotels (B) 74.3% $ 99.58 $73.97 71.6% $ 101.04 $72.32
Total Hotels excluding hotels held for sale 76.0% $ 107.03 $81.37 73.2% $ 106.92 $78.30
Hotels held for sale (C) 60.8% $ 70.42 $42.84 60.1% $ 72.02 $43.28
Total Hotels 74.8% $ 104.57 $78.19 72.1% $ 104.52 $75.41
</TABLE>
<TABLE>
<CAPTION>
SECOND QUARTER 1999 YEAR TO DATE 1999
-------------------------------- --------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
<S> <C> <C> <C> <C> <C> <C>
DJONT Comparable Hotels 74.3% $ 119.27 $88.66 73.2% $ 123.07 $90.04
Bristol Comparable Hotels 71.8% $ 89.70 $64.41 70.0% $ 89.81 $62.84
Total Comparable Hotels 73.1% $ 105.28 $76.98 71.5% $ 106.68 $76.33
Non-comparable Hotels 64.2% $ 96.98 $62.28 62.1% $ 99.18 $61.54
Total Hotels excluding hotels held for sale 71.3% $ 103.78 $74.02 69.0% $ 104.88 $72.39
Hotels held for sale 63.0% $ 69.47 $43.74 60.5% $ 72.38 $43.76
Total Hotels 70.6% $ 101.25 $71.51 68.3% $ 102.50 $70.02
</TABLE>
<TABLE>
<CAPTION>
CHANGE FROM PRIOR PERIOD CHANGE FROM PRIOR PERIOD
2ND QTR. 2000 VS. 2ND QTR. 1999 2000 VS. 1999 YEAR TO DATE
-------------------------------- -------------------------------
OCCUPANCY ADR REVPAR OCCUPANCY ADR REVPAR
--------- --- ------ --------- --- ------
<S> <C> <C> <C> <C> <C> <C>
DJONT Comparable Hotels 3.4 pts 3.9% 8.6% 2.2 pts 2.4% 5.6%
Bristol Comparable Hotels 3.3 pts 2.7% 7.5% 2.3 pts 1.9% 5.3%
Total Comparable Hotels 3.4 pts 3.4% 8.2% 2.3 pts 2.2% 5.5%
Non-comparable Hotels 10.1 pts 2.7% 18.8% 9.5 pts 1.9% 17.5%
Total Hotels excluding hotels held for sale 4.7 pts 3.1% 9.9% 4.2 pts 1.9% 8.2 %
Hotels held for sale (2.2)pts 1.4% (2.1)% (0.4) pts (0.5)% (1.1)%
Total Hotels 4.2 pts 3.3% 9.3% 3.8 pts 2.0% 7.7%
</TABLE>
----------
(A) DJONT Comparable Hotels include 73 and 65 hotels and Bristol
Comparable Hotels include 58 and 56 hotels in the second quarter and
year-to-date which were not undergoing renovation, redevelopment, or
rebranding in either the 2000 or 1999 periods reported, and exclude
hotels held for sale.
(B) Non-comparable Hotels include 32 and 42 hotels in the second quarter
and year-to-date undergoing redevelopment in either the 2000 or 1999
periods reported, and exclude hotels held for sale.
(C) Hotels held for sale includes three DJONT lease hotels and 22 Bristol
leased hotels, consisting of two Courtyard by Marriott hotels, five
Fairfield Inn hotels, six Hampton Inn hotels, eight Holiday-branded
hotels, three Doubletree Guest Suites hotels, and one Four Points by
Sheraton.
24
<PAGE> 25
Comparison of The Hotels' Operating Statistics for the Three and Six Months
Ended June 30, 2000 and 1999
For the six months ended June 30, 2000, the Company's Comparable
Hotels' RevPAR, excluding hotels held for sale, increased compared to the same
period in 1999, by 5.5%. For the same period the Comparable Hotels' ADR and
Occupancy increased 2.2% and 2.3 percentage points, respectively. A large
portion of the increase in year-to-date 2000 RevPAR came from the second quarter
2000 hotel performance. For the quarter, the Company's Comparable Hotels'
RevPAR, excluding hotels held for sale, increased 8.2%. The ADR and Occupancy
for these hotels increased 3.4% and 3.4 percentage points, respectively. The
total hotel portfolio RevPAR, excluding hotels held for sale, increased 9.9%.
This represents the fourth consecutive quarter that the Company's hotels
reported increases in both ADR and Occupancy.
The DJONT Comparable Hotels are predominately Embassy Suites,
Doubletree and Doubletree Guest Suites, and Sheraton hotels. The Bristol
Comparable Hotels are predominately Holiday Inn and Crowne Plaza hotels. The
following table shows the Comparable Hotel RevPAR changes (excluding hotels held
for sale) for the second quarter 2000, compared to 1999:
<TABLE>
<CAPTION>
RevPAR Percentage of Total
Change Room Revenue
------ -------------------
<S> <C> <C>
Embassy Suites (54 hotels) 9.6% 46.0%
Holiday -branded (34 hotels) 9.4% 24.4%
Crowne Plaza (14 hotels) 9.0% 11.7%
Doubletree -branded (9 hotels) 6.2% 5.1%
Sheraton (7 hotels) 5.4% 6.9%
Other (13 hotels) (3.2)% 5.9%
---- -----
8.2% 100.0%
==== =====
</TABLE>
The Company attributes much of the improvement in RevPAR to the
renovation, rebranding and repositioning program in which the Company has spent
approximately $465 million in 1998, 1999 and the first six months of 2000. The
Company's Hotels outperformed most other hotels in their respective markets
during the second quarter and the Company expects this strong performance to
continue.
The Company's Embassy Suites hotels experienced their third consecutive
quarterly increase in occupancy with 54 Comparable Embassy Suites hotels
achieving a 9.6% RevPAR improvement for the quarter compared to prior year.
These hotels, which constitute nearly 46% of Comparable Hotel room revenues,
increased ADR by 5.0% and Occupancy by 3.3 percentage points over the same three
month period in 1999. The Company's Comparable Doubletree hotels had a 6.2%
RevPAR gain for the quarter. The Company believes, in addition to the renovation
program, the recent Hilton/Promus merger and the addition of the Hilton
HHonors(R) program has had a positive impact on its Embassy Suite and Doubletree
portfolios.
Bass completed its merger with Bristol Hotels & Resorts at the end of
the first quarter of 2000. The Company expects the integration of the Bristol
management team with Bass will continue to be beneficial to the development and
strengthening of the Crowne Plaza and Holiday brands.
The Company's 14 Comparable Crowne Plaza hotels (all of which were
renovated and rebranded from Holiday Inn and Harvey hotels), reported increased
RevPAR of 9% for the second quarter for 2000 compared to the same period in
1999. This increase resulted from an increase of 7.0 percentage points in
occupancy, which brought the average occupancy for these hotels up to 75.1% for
the quarter. In addition to the recent renovations, the Company attributes a
portion of this improvement to the change in marketing for the brand, which now
supports the marketing of Crowne Plaza with the Inter-Continental(R) brand.
25
<PAGE> 26
The Company's Holiday Inn and Holiday Inn Select hotels continue to
outperform their competition. The Company's Holiday-branded hotels increased
RevPAR for the quarter by 9.4%. The second quarter increase in RevPAR resulted
from a 3.3 percentage point increase in Occupancy and a 4.6% increase in ADR.
The Company's 20 Comparable Holiday-branded hotels with greater than 250 rooms
(representing nearly 81% of the Company's Holiday-branded revenue) reported an
increase in RevPAR of 8.8% for the quarter, which came from Occupancy and ADR
increases of 4.0 percentage points and 3.2%, respectively.
Nearly 58.3% of the Company's Comparable Hotel room revenues in the
quarter were derived from four states: Texas, California, Florida and Georgia.
Changes in Comparable Hotel RevPAR during the quarter for these states,
excluding hotels held for sale, compared to the same period in 1999, are
illustrated in the following table:
<TABLE>
<CAPTION>
RevPAR Percentage of Total
Change Room Revenue
------ -------------------
<S> <C> <C>
Texas (31 hotels) 5.2% 19.2%
California (17 hotels) 17.1% 21.7%
Florida (12 hotels) 7.5% 10.4%
Georgia (10 hotels) 0.8% 7.0%
</TABLE>
The Comparable Hotels in Texas, which account for approximately 19.2%
of FelCor's Comparable Hotel total room revenue, experienced the second
consecutive quarter with positive RevPAR growth compared to prior year. The
growth in supply from new hotels in most major markets in Texas appears to have
slowed and management believes that their recently renovated hotels will
continue to effectively compete in their market segments. The Company's 17
hotels located in Dallas, which had been adversely affected by new competition
in recent quarters, had RevPAR increases of 5.5% for the quarter and 3.7%
year-to-date.
The Company's Non-comparable Hotels (32 hotels) reported an increase in
RevPAR of 18.8% for the quarter and the 42 Non-comparable Hotels had a RevPAR
increase of 17.5% year-to-date. These hotels were profoundly affected by the
Allerton Crowne Plaza (increased RevPAR by 236% for the second quarter), which
was closed for renovation in the third quarter 1998 and partially reopened in
the second quarter of 1999. The Non-comparable Hotels, excluding the Allerton,
reported increased RevPAR of 11.6%.
DJONT
The Six Months Ended June 30, 2000 and 1999
Total revenues increased to $448.7 million in the first six months of
2000, from $409.6 million in the first six months of 1999, an increase of 9.5%
Total revenues consisted primarily of room and suite revenue of $364.7 million
and $334.8 million in the first six months of 2000 and 1999, respectively.
The increase in room and suite revenue resulted from a 2.7 percentage
point increase in Occupancy combined with a 2.3% increase in ADR and the
addition of one hotel to the DJONT portfolio in January of 2000, which
contributed $14.4 million in room and suite revenue.
DJONT's total expenses decreased as a percentage of total revenues from
101.5% in the six months ended June 30, 1999, to 100.0% in the six months ended
June 30, 2000. This is largely due to reductions of Percent Rent as a percentage
of total revenue from 41.4% to 39.7%.
Net income for DJONT for the six months ended June 30, 2000, was
$104,000 compared to a loss of $6.3 million in the same period in 1999.
26
<PAGE> 27
The Three Months Ended June 30, 2000 and 1999
Total revenues increased to $229.6 million in the second quarter of
2000 from $205.4 million in the second quarter of 1999, an increase of 11.8%.
Total revenues consisted primarily of room and suite revenue of $186.4 million
and $167.1 million in the second quarter of 2000 and 1999, respectively.
The increase in total revenues is primarily a result of a 3.9
percentage point increase in occupancy coupled with a 3.7% increase in ADR. The
addition of one hotel to the DJONT portfolio in January 2000 contributed $8
million to second quarter revenues.
DJONT's total expenses decreased as a percentage of total revenues from
102% for the three months ended June 30, 1999, to 100% for the three months
ended June 30, 2000.
Net loss for DJONT for the quarter ending June 30, 2000, was $408,000
compared to a loss of $3.5 million in the same period in 2000.
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, 2000, net cash flow provided by operating
activities, consisting primarily of Percentage Lease revenue, was $138.7 million
and Funds From Operations was $149.4 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.
DJONT recorded net income of $104,000 for the six months ended June 30,
2000, but had a cumulative shareholders' deficit of $13.0 million, largely as a
result of losses in prior years. Consistent with the operating results for the
six months ended June 30, 2000, management anticipates revenue growth at the
DJONT hotels during 2000, but DJONT may record a small operating loss for the
year 2000.
On July 21, 2000, FelCor's Independent Directors approved the
acquisition of 100% of DJONT Operations, LLC and its subsidiaries effective
January 1, 2001 (the effective date for the recently passed REIT Modernization
Act). The purchase price is approximately 417,000 Operating Partnership units.
The benefits to FelCor from the purchase of DJONT include: (i) a more direct
relationship with the hotel and brand managers, (ii) elimination of potential
conflicts of interest and (iii) consolidated hotel level financial reporting.
Bristol had 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. At June 30, 2000, a portion of this
liquid net worth was being satisfied through a letter of credit for the benefit
of the Company, in the amount of $9.1 million. On July 27, 2000, the letter of
credit was replaced with an absolute and unconditional guarantee not to exceed
$20 million, by a wholly owned subsidiary of Bass.
The Company currently expects to acquire the Bristol Percentage Leases
from Bass by January 1, 2001, but at this date has not entered into any
agreements to acquire the Bristol Lessees or their leasehold interests.
27
<PAGE> 28
The Company has identified 25 non-strategic hotels which it intends to
sell. The Company expects gross sales proceeds from these hotels to be
approximately $150 million and net proceeds to be approximately $136 million
(after deducting estimated transaction costs). The Company anticipates that the
sale of these hotels will result in a book loss of approximately $63 million.
Accordingly, FelCor's Board of Directors approved the establishment of a $63
million reserve for hotels held for sale, to reflect the lower of cost or market
for these hotels.
In January 2000 FelCor's Board of Directors authorized the repurchase
of up to $200 million of its outstanding common shares. 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. The Company expects to fund the repurchase of stock through the
use of cash, existing credit facilities, and proceeds from the sale of assets.
From January 2000 through June 30, 2000, FelCor repurchased approximately 3.1
million shares of its outstanding common stock on the open market for
approximately $56.7 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 and asset sales are
insufficient for such purposes.
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 June
30, 2000, the Company was in not in default with respect to any 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 June 30, 2000, the Company had $50.8 million of cash and cash
equivalents and had utilized $410 million of the $850 million available under
the Line of Credit. Certain significant credit and debt statistics at June 30,
2000, are as follows:
o Interest coverage ratio of 2.9x
o Borrowing capacity of $440 million under the Line of Credit
o Consolidated debt equal to 41% of investment in hotels, at cost
o Fixed interest rate debt equal to 68% of total debt
o Weighted average maturity of fixed interest rate debt of
approximately six years
o Mortgage debt to total assets of 19%
o Debt of approximately $17 million maturing for the remainder of
2000
On August 1, 2000, FelCor renewed, reduced in size, and extended for
two years its Senior Revolving Credit Facility. The new $600 million Line of
Credit matures in August 2003. The effective interest rate ranges from 87.5
basis points to 250 basis points above LIBOR depending on the Company's leverage
and corporate rating. The initial spread is 200 basis points.
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
28
<PAGE> 29
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, 2000, are summarized in the following table:
<TABLE>
<CAPTION>
EFFECTIVE
SWAP RATE
RECEIVED
SWAP RATE EFFECTIVE (VARIABLE) AT SWAP
NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 6/30/00 MATURITY
--------------- ------------ ---------- ------------- ---------
<S> <C> <C> <C> <C>
$ 25 million 5.5575% 7.1825% 8.2663% July 2001
$ 25 million 5.5480% 7.1730% 8.2663% July 2001
$ 75 million 5.5550% 7.1800% 8.2663% July 2001
$ 100 million 5.7955% 8.5455% 9.3913% July 2003
$ 25 million 5.8260% 8.5760% 9.3913% July 2003
-------------
$ 250 million
=============
</TABLE>
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 in 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,
who are limited to major banks and financial institutions, and does not
anticipate nonperformance by the counterparties.
The Company spent approximately $8.3 million during the quarter on
upgrading and renovating its Hotels during the three months ended June 30, 2000
and a total of $22.9 million for the year 2000. It had completed renovations at
three hotels during the quarter and had 13 additional hotels undergoing
renovation at the end of the quarter. Room nights out-of-service, due to
renovation, were less than 1% during the quarter. The Company currently plans to
spend an additional $30 million on hotel renovations during the remainder of
2000 and expects an insignificant number of room nights to be lost as a result
of such renovations.
Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is to changes in interest
rates on its floating rate debt. The Company manages the risk of increasing
interest rates on its floating rate debt through the use of interest rate swaps,
which effectively convert variable rate debt to a fixed rate, by locking the
interest rates paid. The Company had entered into interest rate swap contracts
relating to debt of $250 million at June 30, 2000.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations at June 30, 2000, the
table presents scheduled maturities and weighted average interest rates, by
maturity dates. For interest rate swaps, the table presents notional amounts and
weighted average interest rates, by contractual maturity dates. Weighted average
variable rates are based on implied forward rates in the yield curve as of June
30, 2000. The Fair Value of the Company's fixed rate debt indicates the
estimated principal amount of debt having the same debt service requirements
which could have been borrowed at June 30, 2000 at then current market interest
rates. The Fair Value of the Company's variable to fixed interest rate swaps
indicates the estimated amount that would have been received by the Company had
they been sold at June 30, 2000.
29
<PAGE> 30
(in thousands, except rates)
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-------------------------------------------------------------------------------
REMAINDER
OF
2000 2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
------- -------- ------- -------- --------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES
Debt:
Fixed rate $ 6,656 $ 23,721 $13,040 $ 34,905 $ 188,669 $43,090 $715,391 $1,025,472 $913,929
Average interest rate 8.01% 9.38% 8.19% 8.09% 7.44% 8.67% 8.05%
Variable rate $10,712 $411,711 $ 1,785 $ 61,413 $ 371,000 $ 650 $ 857,271 $857,271
Average interest rate 8.29% 8.84% 9.92% 9.57% 10.31% 9.63%
INTEREST RATE DERIVATIVES
Interest rate swaps:
Variable to fixed $125,000 $125,000 $ 250,000 $ 6,207
Average pay rate 5.55% 5.80%
Average receive rate 7.21% 7.56%
</TABLE>
Swap contracts, such as those described above, contain a credit risk,
in that the counterparties may be unable to fulfill the terms of the agreement.
The Company minimizes that risk by evaluating the creditworthiness of its
counterparties, who are limited to major banks and financial institutions, and
does not anticipate nonperformance by the counterparties.
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.
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 six months ended June 30, 2000.
30
<PAGE> 31
PART II. -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
FelCor held its 2000 Annual Meeting of Stockholders on May 24, 2000
(the "Annual Meeting"). At the Annual Meeting, the stockholders of FelCor
elected Richard S. Ellwood, Richard O. Jacobson and Charles N. Mathewson to
serve, as Class III directors, until the Annual Meeting of Stockholders to be
held in 2003. The stockholders also approved the proposed amendment to the 1998
Restricted Stock and Stock Option Plan, which removed the limitation on the
number of shares that may be awarded as restricted stock.
The total number of shares entitled to vote at the Annual Meeting was
55,752,852 shares of Common Stock. A total of 43,925,043 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 case for, and the number of votes withheld, with respect to his election:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
<S> <C> <C>
Richard S. Ellwood 43,389,360 535,683
Richard O. Jacobson 43,423,036 502,007
Charles N. Mathewson 42,591,225 1,333,818
</TABLE>
There were 39,418,858 votes cast for the proposed amendment to the 1998
Restricted Stock and Stock Option Plan, 4,182,748 votes cast against and 323,437
votes withheld.
ITEM 5. OTHER INFORMATION.
On May 25, 2000 FelCor's Board of Directors voted to increase the
number of directors from ten to eleven and elected Melinda J. Bush to fill the
vacancy so created. Ms. Bush will serve as a Class I Director, whose term will
expire in 2001. Ms. Bush is Executive Vice President, Editorial and Publishing
Director of "Premier Hotels & Resorts", a division of Advanstar Communications,
and serves as a director and trustee of the American Hotel Foundation.
For information relating to certain other transactions by the Company
through June 30, 2000, see Note 1 of Notes to Consolidated Financial Statements
of FelCor Lodging Trust Incorporated contained in Item 1 of Part I of this
Quarterly Report on Form 10-Q. Such information is incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description
------ -----------
10.24 Form Deed of Trust and Security Agreement and
Fixture Filing with Assignment of Leases and Rents,
each dated as of April 20, 2000, from FelCor/MM S-7
Holdings, L.P., as Mortgagor, in favor of
Massachusetts Mutual Life Insurance Company and
Teachers Insurance and Annuity Association of
America, as Mortgagee, each covering a separate
hotel and securing one of the separate Promissory
Notes described in Exhibit 10.24.2.
10.24.1 Form of Accommodation Cross-Collateralization
Mortgage and Security Agreement, each dated as of
April 20, 2000, executed by FelCor/MM S-7 Holdings,
L.P., in favor of Massachusetts Mutual Life
Insurance Company and Teachers Insurance and
Annuity Association of America.
31
<PAGE> 32
10.24.2 Form of fourteen separate Promissory Notes each
dated April 20, 2000, each made by FelCor/MM S-7
Holdings, L.P., each separately payable to the
order of Massachusetts Mutual Life Insurance
Company and Teachers Insurance and Annuity
Association of America, respectively, in the
respective original principal amounts of
$13,500,000 (Phoenix (Crescent), Arizona),
$13,500,000 (Phoenix (Crescent), Arizona),
$6,500,000 (Cypress Creek/Ft. Lauderdale, Florida),
$6,500,000 (Cypress Creek/Ft. Lauderdale, Florida),
$9,000,000 (Atlanta Galleria, Georgia), $9,000,000
(Atlanta Galleria, Georgia), $12,500,000 (Chicago
O'Hare Airport, Illinois), $12,500,000 (Chicago
O'Hare Airport, Illinois), $3,500,000 (Lexington,
Kentucky), $3,500,000 (Lexington, Kentucky),
$17,000,000 (Philadelphia Society Hill,
Philadelphia), $17,000,000 (Philadelphia Society
Hill, Philadelphia), $10,500,000 (South Burlington,
Vermont), and, $10,500,000 (South Burlington,
Vermont).
10.25 Form Deed of Trust and Security Agreement, each
dated as of May 2, 2000, from each of FelCor/CMB
Buckhead Hotel, L.L.C., FelCor/CMB Marlborough
Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C.,
FelCor/CMB Corpus Holdings, L.P., FelCor/CMB
Orsouth Holdings, L.P., FelCor/CMB New Orleans
Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C.,
and FelCor/CMB SSF Holdings, L.P., each as
Borrower, in favor of The Chase Manhattan Bank, as
Beneficiary, each covering a separate hotel and
securing one of the separate Promissory Notes
described in Exhibit 10.25.1.
10.25.1 Form of eight separate Promissory Notes each dated
May 2, 2000, made by FelCor/CMB Buckhead Hotel,
L.L.C., FelCor/CMB Marlborough Hotel, L.L.C.,
FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB
Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings,
L.P., FelCor/CMB New Orleans Hotel, L.L.C.,
FelCor/CMB Piscataway Hotel, L.L.C., and FelCor/CMB
SSF Holdings, L.P., each separately payable to the
order of The Chase Manhattan Bank in the respective
original principal amounts of $38,250,000 (Atlanta
Buckhead, Georgia), $20,500,000 (Boston
Marlborough, Massachusetts), $16,575,000 (Chicago
Deerfield, Illinois), $5,338,000 (Corpus Christi,
Texas), $25,583,000 (Orlando South, Florida),
$32,650,000 (New Orleans, Louisiana), $20,728,000
(Piscataway, New Jersey), and $26,268,000 (South
San Francisco, California).
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 2000.
32
<PAGE> 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 14, 2000
FELCOR LODGING TRUST INCORPORATED
By: /s/ Lester C. Johnson
-------------------------------------
Lester C. Johnson
Vice President and Controller
(Principal Financial Officer
and Principal Accounting Officer)
33
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.24 Form Deed of Trust and Security Agreement and Fixture Filing with
Assignment of Leases and Rents, each dated as of April 20, 2000, from
FelCor/MM S-7 Holdings, L.P., as Mortgagor, in favor of Massachusetts
Mutual Life Insurance Company and Teachers Insurance and Annuity
Association of America, as Mortgagee, each covering a separate hotel
and securing one of the separate Promissory Notes described in Exhibit
10.24.2.
10.24.1 Form of Accommodation Cross-Collateralization Mortgage and Security
Agreement, each dated as of April 20, 2000, executed by FelCor/MM S-7
Holdings, L.P., in favor of Massachusetts Mutual Life Insurance
Company and Teachers Insurance and Annuity Association of America.
10.24.2 Form of fourteen separate Promissory Notes each dated April 20, 2000,
each made by FelCor/MM S-7 Holdings, L.P., each separately payable to
the order of Massachusetts Mutual Life Insurance Company and Teachers
Insurance and Annuity Association of America, respectively, in the
respective original principal amounts of $13,500,000 (Phoenix
(Crescent), Arizona), $13,500,000 (Phoenix (Crescent), Arizona),
$6,500,000 (Cypress Creek/Ft. Lauderdale, Florida), $6,500,000
(Cypress Creek/Ft. Lauderdale, Florida), $9,000,000 (Atlanta Galleria,
Georgia), $9,000,000 (Atlanta Galleria, Georgia), $12,500,000 (Chicago
O'Hare Airport, Illinois), $12,500,000 (Chicago O'Hare Airport,
Illinois), $3,500,000 (Lexington, Kentucky), $3,500,000 (Lexington,
Kentucky), $17,000,000 (Philadelphia Society Hill, Philadelphia),
$17,000,000 (Philadelphia Society Hill, Philadelphia), $10,500,000
(South Burlington, Vermont), and, $10,500,000 (South Burlington,
Vermont).
10.25 Form Deed of Trust and Security Agreement, each dated as of May 2,
2000, from each of FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB
Marlborough Hotel, L.L.C., FelCor/CMB Deerfield Hotel, L.L.C.,
FelCor/CMB Corpus Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P.,
FelCor/CMB New Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel,
L.L.C., and FelCor/CMB SSF Holdings, L.P., each as Borrower, in favor
of The Chase Manhattan Bank, as Beneficiary, each covering a separate
hotel and securing one of the separate Promissory Notes described in
Exhibit 10.25.1.
10.25.1 Form of eight separate Promissory Notes each dated May 2, 2000, made
by FelCor/CMB Buckhead Hotel, L.L.C., FelCor/CMB Marlborough Hotel,
L.L.C., FelCor/CMB Deerfield Hotel, L.L.C., FelCor/CMB Corpus
Holdings, L.P., FelCor/CMB Orsouth Holdings, L.P., FelCor/CMB New
Orleans Hotel, L.L.C., FelCor/CMB Piscataway Hotel, L.L.C., and
FelCor/CMB SSF Holdings, L.P., each separately payable to the order of
The Chase Manhattan Bank in the respective original principal amounts
of $38,250,000 (Atlanta Buckhead, Georgia), $20,500,000 (Boston
Marlborough, Massachusetts), $16,575,000 (Chicago Deerfield,
Illinois), $5,338,000 (Corpus Christi, Texas), $25,583,000 (Orlando
South, Florida), $32,650,000 (New Orleans, Louisiana), $20,728,000
(Piscataway, New Jersey), and $26,268,000 (South San Francisco,
California).
27 Financial Data Schedule.
</TABLE>
