<PAGE> 1
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 organization) Identification No.)
545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062
(Address of principal executive offices) (Zip Code)
(972) 444-4900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of Common Stock, par value $.01 per share, of
FelCor Lodging Trust Incorporated outstanding on November 6, 2000 was
52,891,850.
--------------------------------------------------------------------------------
<PAGE> 2
FELCOR LODGING TRUST INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................. 3
FELCOR LODGING TRUST INCORPORATED
Consolidated Balance Sheets -- September 30, 2000 (Unaudited)
and December 31, 1999....................................................................... 3
Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 2000 and 1999 (Unaudited)............................................... 4
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 2000 and 1999 (Unaudited)............................................... 5
Notes to Consolidated Financial Statements.................................................... 6
DJONT OPERATIONS, L.L.C.
Consolidated Balance Sheets -- September 30, 2000 (Unaudited)
and December 31, 1999....................................................................... 15
Consolidated Statements of Operations -- For the Three and Nine Months
Ended September 30, 2000 and 1999 (Unaudited)............................................... 16
Consolidated Statements of Cash Flows -- For the Nine Months
Ended September 30, 2000 and 1999 (Unaudited)............................................... 17
Notes to Consolidated Financial Statements.................................................... 18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20
General/Third Quarter Activities.............................................................. 20
Results of Operations......................................................................... 21
Liquidity and Capital Resources............................................................... 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 33
PART II. -- OTHER INFORMATION
Item 5. Other Information................................................................................ 34
Item 6. Exhibits and Reports on Form 8-K................................................................. 34
SIGNATURE..................................................................................................... 35
</TABLE>
2
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FELCOR LODGING TRUST INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in hotels, net of accumulated depreciation of $434,386
at September 30, 2000 and $330,555 at December 31, 1999 ..................... $ 3,759,672 $ 4,035,344
Investment in unconsolidated entities .......................................... 130,877 136,718
Assets held for sale ........................................................... 137,198
Cash and cash equivalents ...................................................... 46,005 36,123
Due from Lessees ............................................................... 34,447 18,394
Note receivable from unconsolidated entity ..................................... 7,712 7,760
Deferred expenses, net of accumulated amortization of $5,951
at September 30, 2000 and $4,491 at December 31, 1999 ....................... 23,683 15,473
her assets ................................................................... 9,294 5,939
----------- -----------
Total assets ...................................................... $ 4,148,888 $ 4,255,751
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt, net of discount of $6,672 at September 30, 2000 and $1,401 at December
31, 1999 .................................................................... $ 1,853,491 $ 1,833,954
Distributions payable .......................................................... 34,911 39,657
Accrued expenses and other liabilities ......................................... 91,348 65,480
Deferred rent .................................................................. 22,268
Minority interest in Operating Partnership, 7,597 and 2,991 units issued and
outstanding at September 30, 2000 and December 31, 1999, respectively ....... 221,472 90,078
Minority interest in other partnerships ........................................ 50,659 51,671
----------- -----------
Total liabilities ................................................. 2,274,149 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, 5,981 and 6,050 shares issued and
outstanding at September 30, 2000 and December 31, 1999, respectively .... 149,515 151,250
Series B Redeemable Preferred Stock, 58 shares issued and outstanding ....... 143,750 143,750
Common stock, $.01 par value, 200,000 shares authorized, 69,413 and 69,291
shares issued, including shares in treasury, at September 30, 2000
and December 31, 1999, respectively ......................................... 694 693
Additional paid-in capital ..................................................... 2,077,217 2,138,477
Distributions in excess of earnings ............................................ (211,843) (119,385)
----------- -----------
2,159,333 2,314,785
Common stock in treasury, at cost, 15,153 shares and 6,976 shares
at September 30, 2000 and December 31, 1999, respectively ................. (284,594) (139,874)
----------- -----------
Total shareholders' equity ........................................ 1,874,739 2,174,911
----------- -----------
Total liabilities and shareholders' equity ........................ $ 4,148,888 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Percentage lease revenue ......................... $ 132,240 $ 120,598 $ 388,575 $377,480
Equity in income from unconsolidated entities .... 7,162 2,353 12,810 6,190
Other revenue .................................... 1,074 1,131 3,761 2,516
--------- --------- --------- --------
Total revenues ........................ 140,476 124,082 405,146 386,186
--------- --------- --------- --------
Expenses:
Depreciation ..................................... 39,535 38,627 121,015 112,789
Reserve for assets held for sale ................. 63,000
Interest expense ................................. 40,168 31,520 117,812 90,692
Taxes, insurance, and other ...................... 18,698 14,519 54,575 46,891
Land leases ...................................... 5,217 5,010 16,928 13,495
General and administrative ....................... 2,778 2,943 8,890 7,696
Minority interest in Operating Partnership ....... 2,620 1,094 221 3,933
Minority interest in other partnerships .......... 607 348 2,700 1,987
--------- --------- --------- --------
Total expenses ........................ 109,623 94,061 385,141 277,483
--------- --------- --------- --------
Net income before nonrecurring items ............... 30,853 30,021 20,005 108,703
Gain on sale of assets ........................... 3,378 4,253
Extraordinary charge from write off of deferred
financing fees ................................ (3,865) (3,865) (1,113)
--------- --------- --------- --------
Net income ......................................... 30,366 30,021 20,393 107,590
Preferred dividends ........................... 6,155 6,184 18,513 18,551
--------- --------- --------- --------
Net income applicable to common shareholders ....... $ 24,211 $ 23,837 $ 1,880 $ 89,039
========= ========= ========= ========
Per common share data:
Basic:
Net income applicable to common shareholders ..... $ 0.45 $ 0.35 $ 0.03 $ 1.31
========= ========= ========= ========
Weighted average common shares outstanding ....... 54,336 68,014 56,059 68,012
Diluted:
Net income applicable to common shareholders ..... $ 0.44 $ 0.35 $ 0.03 $ 1.30
========= ========= ========= ========
Weighted average common shares outstanding ....... 54,579 68,221 56,290 68,262
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 20,393 $ 107,590
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation .................................................... 121,015 112,789
Gain on sale of assets .......................................... (4,253)
Reserve for assets held for sale ................................ 63,000
Amortization of deferred financing fees ......................... 3,434 2,035
Accretion of debt ............................................... (640) (725)
Amortization of unearned officers' and directors' compensation .. 1,043 526
Equity in income from unconsolidated entities ................... (12,810) (6,190)
Extraordinary charge for write off of deferred financing fees ... 3,865 1,113
Minority interest in Operating Partnership ...................... 221 3,933
Minority interest in other partnerships ......................... 2,700 1,987
Changes in assets and liabilities:
Due from Lessees ................................................ (16,053) (682)
Deferred expenses ............................................... (15,508) (6,211)
Other assets .................................................... (2,780) (1,755)
Deferred rent ................................................... 22,268
Accrued expenses and other liabilities .......................... 23,555 24,006
------------ ------------
Net cash flow provided by operating activities ............ 209,450 238,416
------------ ------------
Cash flows used in investing activities:
Improvements and additions to hotels .................................. (65,861) (192,847)
Acquisition of hotel assets ........................................... (10,802)
Proceeds from sale of assets .......................................... 24,915 15,091
Cash distributions from unconsolidated entities ....................... 21,047 17,187
------------ ------------
Net cash flow used in investing activities ................ (19,899) (171,371)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings .............................................. 937,424 782,000
Repayment of borrowings ............................................... (917,437) (674,200)
Purchase of treasury stock ............................................ (69,860)
Buyback of assumed stock options ...................................... (1,861)
Distributions paid to minority interest ............................... (4,474)
Distributions paid to limited partners ................................ (10,012) (5,916)
Distributions paid to preferred shareholders .......................... (18,542) (19,804)
Distributions paid to common shareholders ............................. (94,907) (135,790)
------------ ------------
Net cash flow used in financing activities ................ (179,669) (53,710)
------------ ------------
Net change in cash and cash equivalents ................................... 9,882 13,335
Cash and cash equivalents at beginning of periods ......................... 36,123 34,692
------------ ------------
Cash and cash equivalents at end of periods ............................... $ 46,005 $ 48,027
============ ============
Supplemental cash flow information -
Interest paid ......................................................... $ 107,929 $ 85,606
============ ============
</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 September 30, 2000, it
owned interests in 187 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 162 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 September 30, 2000, the Company leased 85 of the Hotels to DJONT
Operations, L.L.C., a Delaware limited liability company, or a consolidated
subsidiary thereof (collectively "DJONT"), and leased 100 of the Hotels to
Bristol Hotels & Resorts, or a consolidated subsidiary thereof ("Bristol" and,
together with DJONT, the "Lessees"). Two Hotels were operated without a lease.
The following table provides a schedule of the Hotels, by brand,
operated by each of the Company's Lessees at September 30, 2000:
<TABLE>
<CAPTION>
NOT OPERATED
BRAND DJONT BRISTOL UNDER A LEASE TOTAL
----- ----- ------- ------------- -----
<S> <C> <C> <C> <C>
Embassy Suites 59 59
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 85 100 2 187
=== === === ===
</TABLE>
The Hotels are located in the United States (35 states) and Canada,
with a concentration in Texas (41 hotels), California (19 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 September 30, 2000, DJONT had entered into management agreements
pursuant to which 71 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 September 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 nine months ended September
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 nine months ended September
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 187 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 by June 30, 2001. 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, the Company 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. Percentage
rent income related to the assets held for sale, less costs associated with
those assets were included in the Company's results of operations for the nine
months ended September 30, 2000, and represented income of $8.9 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 September 30, 2000, and 15 hotels at September 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
Summarized unaudited combined financial information for 100% of these
unconsolidated entities is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
2000 1999
---- ----
<S> <C> <C>
Balance sheet information:
Investment in hotels........................................ $298,822 $286,379
Non-recourse mortgage debt.................................. $225,857 $203,444
Equity...................................................... $ 86,311 $ 95,083
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS INFORMATION:
Total revenues ................................... $ 24,030 $ 16,826 $ 63,204 $ 48,123
Net income ....................................... $ 11,881 $ 5,883 $ 25,530 $ 15,960
Net income attributable to the Company ........... $ 7,697 $ 2,888 $ 14,416 $ 7,796
Amortization of cost in excess of book value ..... (535) (535) (1,606) (1,606)
---------- ---------- ---------- ----------
Equity in income from unconsolidated entities .... $ 7,162 $ 2,353 $ 12,810 $ 6,190
========== ========== ========== ==========
</TABLE>
During the third quarter an entity in which the Company owns a 50%
equity interest completed the construction and closed on 200 presold condominium
units in the Brighton Tower, which is adjacent to the Embassy Suites hotel -
Myrtle Beach at Kingston Plantation, South Carolina. Included in equity in
income from unconsolidated entities is a $3.7 million after tax gain from this
transaction.
8
<PAGE> 9
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT
Debt at September 30, 2000, and December 31, 1999, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
COLLATERAL INTEREST RATE MATURITY DATE 2000 1999
---------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
FLOATING RATE DEBT:
Line of credit LIBOR + 200bp August 2003 $ 124,000 $ 351,000
Senior term loan LIBOR + 275bp March 2004 250,000
Mortgage debt 3 hotels LIBOR + 200bp February 2003 62,074 62,553
Promissory note LIBOR + 200bp June 2016 650 32,282
----------- -----------
Total floating rate debt 186,724 695,835
----------- -----------
FIXED RATE DEBT:
Line of credit - swapped 7.66% August 2003 250,000 313,000
Publicly-traded term notes 7.38% October 2004 174,473 174,377
Publicly-traded term notes 7.63% October 2007 124,295 124,221
Publicly-traded term notes 9.50% September 2008 394,560
Mortgage debt 15 hotels 7.24% November 2007 140,777 142,542
Senior term loan - swapped 8.56% March 2004 125,000
Mortgage debt 7 hotels 7.54% April 2009 97,982 99,075
Mortgage debt 6 hotels 7.55% June 2009 73,670 74,483
Mortgage debt 7 hotels 8.73% May 2010 144,453
Mortgage debt 8 hotels 8.70% May 2010 185,323
Other 13 hotels 6.96% - 7.23% 2000 - 2005 81,234 85,421
----------- -----------
Total fixed rate debt 1,666,767 1,138,119
----------- -----------
Total debt $ 1,853,491 $ 1,833,954
=========== ===========
</TABLE>
Thirty-day LIBOR at September 30, 2000, was 6.62%.
A portion of the Company's Line of Credit is matched with interest rate
swap agreements which effectively convert the variable rate on the Line of
Credit to a fixed rate.
The Line of Credit contains 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 September 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. 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 collateralized 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 collateralized by eight Embassy
Suites hotels and carry an 8.70% fixed interest rate. These 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 Line of Credit.
On August 1, 2000, the Company 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 on the
renewed Line of Credit ranges from 8.75 basis points to 250 basis points above
LIBOR
9
<PAGE> 10
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DEBT -- (CONTINUED)
depending on the Company's leverage and corporate rating. An extraordinary
charge of approximately $578,000 was recorded to write-off a portion of the
deferred financing costs associated with the Line of Credit.
On September 15, 2000, the Company completed the private placement of
$400 million of senior unsecured notes which mature in September, 2008 and bear
an interest rate of 9 1/2%. The notes were issued at a discount to yield 9.75%.
The proceeds were used to retire the $375 million floating rate senior term
loan, which matured in 2004, and to pay down the Line of Credit. An
extraordinary charge of approximately $3.3 million was recorded to write-off
unamortized deferred financing costs associated with the $375 million loan. On
October 30, 2000, the Company commenced an offer to exchange up to $400 million
in aggregate principal amount of the private placement senior notes for notes
with identical terms which have been registered under the Securities Act of
1933.
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 (26 hotels), 2008 (44 hotels), and thereafter
(18 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 September
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
------------ ------------ -----------
<S> <C> <C> <C>
YEAR
Remainder of 2000................................ $ 35,749 $ 42,201 $ 77,950
2001............................................. 146,305 168,805 315,110
2002............................................. 146,535 168,816 315,351
2003............................................. 135,486 166,123 301,609
2004............................................. 130,880 158,827 289,707
2005 and thereafter.............................. 444,156 620,570 1,064,726
------------ ------------ -----------
$ 1,039,111 $ 1,325,342 $ 2,364,453
============ ============ ===========
</TABLE>
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
September 30, 2000 is as follows (in thousands):
<TABLE>
<CAPTION>
LESSEES
-------
DJONT BRISTOL TOTAL
------------ ------------ -----------
<S> <C> <C> <C>
YEAR
Remainder of 2000................................ $ 787 $ 3,169 $ 3,956
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
------------ ------------ -----------
$ 18,083 $ 87,736 $ 105,819
============ ============ ===========
</TABLE>
10
<PAGE> 11
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED)
Certain entities owning interests in DJONT and managers for certain
hotels have agreed to make loans to DJONT of up to an aggregate of approximately
$17.3 million to the extent necessary to enable DJONT to pay rent and other
obligations due under the respective Percentage Leases relating to a total of 38
of the Hotels. No such loans were outstanding at September 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.
On July 21, 2000, FelCor's Independent Directors approved the
acquisition of 100% of DJONT Operations, LLC and its subsidiaries, including all
assets and liabilities, effective January 1, 2001 (the effective date for the
recently passed REIT Modernization Act). The Company will issue approximately
417,000 Operating Partnership units as consideration. The Company will record
the consideration issued plus the net deficit acquired as an expense in the
period in which the transaction is completed.
Bristol serves as both the lessee and manager of 100 Hotels leased to
it by the Company at September 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 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. Through July 27, 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.
7. GAIN ON SALE OF ASSETS
On September 27, 2000, the Company completed the sale of its Embassy
Suites hotel, Los Angeles International Airport - North, California (215 suites)
for a gross price of approximately $23.3 million. The Company recorded a gain of
approximately $2.5 million.
During the third quarter the Company sold two acres of vacant excess
land adjacent to its 359-room Embassy Suites hotel - Fort Lauderdale, Florida
and a billboard in Dallas, Texas, for an aggregate of $1.3 million and recorded
a gain of approximately $0.9 million.
8. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that
are consistent with the Company's method of internal reporting, which segments
its business by Lessee. The Company's Lessees at September 30, 2000, were DJONT
and Bristol.
11
<PAGE> 12
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SEGMENT INFORMATION -- (CONTINUED)
The following tables present information for the reportable segments
for the three and nine months ended September 30, 2000 and 1999 for both DJONT
and Bristol (in thousands):
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
THREE MONTHS ENDED SEPTEMBER 30, 2000 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
------------------------------------- ------------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues............................. $ 75,897 $ 63,505 $ 139,402 $ 1,074 $ 140,476
Net income (loss).......................... $ 47,438 $ 31,360 $ 78,798 $ (48,432) $ 30,366
Funds from operations...................... $ 68,062 $ 53,893 $ 121,955 $ (45,107) $ 76,848
Weighted average common shares and
units outstanding(1).................... 66,851
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
THREE MONTHS ENDED SEPTEMBER 30, 1999 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
------------------------------------- ------------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues............................. $ 60,612 $ 62,933 $ 123,545 $ 537 $ 124,082
Net income (loss).......................... $ 31,295 $ 32,084 $ 63,379 $ (33,358) $ 30,021
Funds from operations...................... $ 53,852 $ 50,471 $ 104,323 $ (35,443) $ 68,880
Weighted average common shares and
units outstanding(1).................... 75,898
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 2000 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
------------------------------------- ------------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues............................. $ 218,643 $ 182,742 $ 401,385 $ 3,761 $ 405,146
Net income (loss).......................... $ 117,331 $ 30,301 $ 147,632 $ (127,239) $ 20,393
Funds from operations...................... $ 200,521 $ 158,352 $ 358,873 $ (132,645) $ 226,228
Weighted average common shares and
units outstanding(1).................... 67,601
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
SEGMENT NOT ALLOCABLE CONSOLIDATED
NINE MONTHS ENDED SEPTEMBER 30, 1999 DJONT BRISTOL TOTAL TO SEGMENTS TOTAL
------------------------------------- ------------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues............................ $ 207,541 $ 177,659 $ 385,200 $ 986 $ 386,186
Net income (loss)......................... $ 119,886 $ 90,152 $ 210,038 $ (102,448) $ 107,590
Funds from operations..................... $ 187,124 $ 143,093 $ 330,217 $ (107,105) $ 223,112
Weighted average common shares and
units outstanding(1)................... 75,928
</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.
9. TREASURY STOCK REPURCHASE PROGRAM
On January 4, 2000, FelCor announced that its Board of Directors had
approved a $200 million increase in its stock repurchase program, authorizing
the Company to purchase up to an aggregate of $300 million of its outstanding
common shares. During the nine months ended September 30, 2000, FelCor had
repurchased approximately 3.73 million shares of FelCor common stock for
approximately $69.8 million.
12
<PAGE> 13
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BASS STOCK CONTRIBUTION
In connection with the efforts of Bass to acquire Bristol, a Bass
subsidiary (Bass America, Inc.) contributed approximately 4.7 million
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.
11. 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.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three and nine months ended September 30, 2000 and
1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER SEPTEMBER
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income applicable to common shareholders ................ $ 24,211 $ 23,837 $ 1,880 $ 89,039
Denominator:
Denominator for basic earnings per share -
weighted average shares ................................ 54,336 68,014 56,059 68,012
Effect of diluted securities:
Stock options ........................................ 12 142 185
Restricted shares .................................... 231 65 231 65
----------- ----------- ----------- -----------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions ...... 54,579 68,221 56,290 68,262
=========== =========== =========== ===========
Earnings per share data:
Basic ....................................................... $ 0.45 $ 0.35 $ 0.03 $ 1.31
Diluted ..................................................... $ 0.44 $ 0.35 $ 0.03 $ 1.30
</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.
13
<PAGE> 14
FELCOR LODGING TRUST INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS
Effective as of November 1, 2000 Bass America, Inc. contributed an
additional 1 million outstanding FelCor common shares held by it to the
Operating Partnership for a like number of units of limited partnership
interest. This exchange will not affect the Company's FFO or earnings per share,
although it resulted in further reducing FelCor's percentage ownership in the
Operating Partnership from more than 88% to approximately 87%. The shares will
be recorded in treasury at $21.75 per share which represented fair market value
on the date of exchange ($21.8 million) and will increase minority interest in
the Operating Partnership by a like amount.
14
<PAGE> 15
DJONT OPERATIONS, L.L.C.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................... $ 28,554 $ 20,127
Accounts receivable, net ............................................ 37,890 28,601
Inventories ......................................................... 4,191 4,260
Prepaid expenses .................................................... 2,522 1,444
Other assets ........................................................ 3,498 5,791
Investment in real estate, net of accumulated depreciation of $891
in 2000 and $530 in 1999 ......................................... 11,075 11,436
------------ ------------
Total assets .............................................. $ 87,730 $ 71,659
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable, trade ............................................. $ 18,234 $ 12,742
Due to FelCor Lodging Trust Incorporated ............................ 33,504 22,064
Accrued expenses and other liabilities .............................. 42,511 37,121
Minority interest ................................................... 3,923 5,113
Debt ................................................................ 7,712 7,761
------------ ------------
Total liabilities ......................................... 105,884 84,801
------------ ------------
Commitments and contingencies (Note 3)
Shareholders' deficit:
Capital ............................................................. 1 1
Accumulated deficit ................................................. (18,155) (13,143)
------------ ------------
Total shareholders' deficit ............................... (18,154) (13,142)
------------ ------------
Total liabilities and shareholders' deficit ............... $ 87,730 $ 71,659
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
15
<PAGE> 16
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Room and suite revenue ................ $ 179,227 $ 160,594 $ 543,914 $ 495,434
Food and beverage revenue ............. 25,198 20,039 81,538 63,506
Food and beverage rent ................ 1,190 1,233 3,904 3,847
Other revenue ......................... 15,927 12,654 40,848 41,284
------------ ------------ ------------ ------------
Total revenues ................... 221,542 194,520 670,204 604,071
------------ ------------ ------------ ------------
Expenses:
Property operating costs .............. 50,130 47,490 147,929 142,828
General and administrative ............ 16,397 14,744 49,349 45,474
Advertising and promotion ............. 17,274 14,048 50,900 41,778
Repair and maintenance ................ 10,150 9,609 30,604 28,715
Utilities ............................. 8,867 8,392 23,631 22,514
Management and incentive fees ......... 5,627 5,804 18,318 17,770
Franchise fees ........................ 5,207 4,856 15,810 14,703
Food and beverage expenses ............ 19,776 16,349 61,644 48,474
Percentage lease expenses ............. 86,139 71,042 264,316 240,600
Lessee overhead expenses .............. 284 247 710 814
Liability insurance ................... 851 784 2,459 1,938
Interest expense ...................... 154 155 464 527
Depreciation .......................... 120 120 361 409
Minority interest in partnership ...... 3,613 (124) 3,366 33
Other ................................. 1,887 1,519 5,173 4,271
------------ ------------ ------------ ------------
Total expenses ................... 226,476 195,035 675,034 610,848
------------ ------------ ------------ ------------
Net loss ................................... $ (4,934) $ (515) $ (4,830) $ (6,777)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
16
<PAGE> 17
DJONT OPERATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (4,830) $ (6,777)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization ................................ 361 409
Minority interest in partnership income ...................... 3,366 33
Changes in assets and liabilities:
Accounts receivable .......................................... (9,289) (6,181)
Inventories .................................................. 69 159
Prepaid expenses ............................................. (1,078) (1,596)
Other assets ................................................. 1,951 (2,609)
Due to FelCor Lodging Trust Incorporated ..................... 11,440 12,556
Accounts payable, accrued expenses and other liabilities ..... 10,882 2,642
------------ ------------
Net cash flow provided by (used in) operating
activities ............................................ 12,872 (1,364)
------------ ------------
Cash flows from financing activities:
Repayment of borrowings ........................................... (49)
Distributions paid to minority interest ........................... (4,214)
Distributions to owners ........................................... (182)
------------
Net cash flow used in financing activities ................... (4,445)
------------
Net change in cash and cash equivalents ................................ 8,427 (1,364)
Cash and cash equivalents at beginning of periods ...................... 20,127 28,538
------------ ------------
Cash and cash equivalents at end of periods ............................ $ 28,554 $ 27,174
============ ============
</TABLE>
The accompany notes are an integral part of these
consolidated financial statements.
17
<PAGE> 18
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-five of the hotels in which FelCor Lodging Limited Partnership
(the "Operating Partnership") had an ownership interest at September 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 September 30,
2000.
At September 30, 2000, 59 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-one 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. 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 (22 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 and are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
Remainder of 2000............................................. $ 36,536
2001.......................................................... 149,455
2002.......................................................... 149,685
2003.......................................................... 138,636
2004.......................................................... 134,030
2005 and thereafter........................................... 448,852
------------
$ 1,057,194
============
</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 September 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.
18
<PAGE> 19
DJONT OPERATIONS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PENDING ACQUISITION BY FELCOR
On July 21, 2000, FelCor's Independent Directors approved the
acquisition of 100% of DJONT and its subsidiaries including all
assets and liabilities effective January 1, 2001. The operating partnership
will issue approximately 417,000 Operating Partnership units as consideration
for the acquisition of DJONT.
4. GAIN ON SALE OF ASSETS
DJONT holds a 3% equity interest and 100% voting interest in Kingston
Plantation Development Corporation ("KPDC") and records the results of its
operations on a consolidated basis. During the third quarter, an entity in which
KPDC owns a 50% equity interest completed the construction and sale of 200
condominium units adjacent to the Embassy Suites hotel - Myrtle Beach at
Kingston Plantation, SC. DJONT has included in total revenue for the third
quarter a $3.9 million gain on the sale of the condominiums by the venture.
KPDC's 97% non-voting interest is shown as minority interest expense. KPDC
distributed $4.2 million to its shareholders during the quarter.
During third quarter 2000, KPDC's unconsolidated subsidiary
distributed land with a carrying value of $342,000 to the minority interest
holder. Accordingly, KPDC has reduced its investment in the joint venture and
appropriately reduced minority interest by the corresponding amount.
19
<PAGE> 20
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.
FINANCIAL HIGHLIGHTS:
THIRD QUARTER 2000 (COMPARED TO THIRD QUARTER 1999):
o Revenues increased 16.1%, after adding back deferred rent, to $144.1
million from $124.1 million
o Total hotel portfolio RevPAR increased 7.5% (162 hotels), excluding
hotels held for sale
o EBITDA increased 16.5% to $123.0 million from $105.6 million
o Comparable hotels RevPAR increased 7.5% (142 hotels), excluding hotels
held for sale
o Non-comparable hotels RevPAR increased 7.4% (20 hotels), excluding
hotels held for sale
o Hotels held for sale RevPAR increased 2.1% (25 hotels)
NINE MONTHS ENDED SEPTEMBER 30, 2000 (COMPARED TO NINE MONTHS OF 1999):
o Revenues increased 10.7%, after adding back deferred rent, to $427.4
million from $386.2 million
o Total hotel portfolio RevPAR increased 8.0% (162 hotels), excluding
hotels held for sale
o EBITDA increased 9.9% to $361.7 million from $329.2 million
o Comparable hotels RevPAR increased 6.3% (109 hotels), excluding hotels
held for sale
o Non-comparable hotels RevPAR increased 12.2% (53 hotels), excluding
hotels held for sale
o Hotels held for sale RevPAR remain unchanged (25 hotels)
OTHER HIGHLIGHTS:
o Completed the sale of its Embassy Suites hotel - Los Angeles
International Airport-North, CA (215 suites) for a gross price of
approximately $23.3 million, which resulted in a third quarter gain on
sale of approximately $2.5 million
o Completed the construction and sold 200 condominium units in the
Brighton Tower, which is adjacent to the Embassy Suites hotel - Myrtle
Beach at Kingston Plantation, SC. The Company has a 50% equity interest
in the development venture (with Hilton owning the remaining interest)
and has recorded a $3.7 million ($0.06 per share and unit) after tax
gain in the third quarter representing its share of the gain on sale
o Sold two acres of vacant excess land adjacent to its 359-room Embassy
Suites hotel - Fort Lauderdale, FL and a billboard in Dallas, TX, for an
aggregate gain of approximately $0.9 million
o Completed renovations at seven hotels during the quarter, with seven
additional hotels undergoing renovation at the end of the quarter
o Renovation expenditures on the Company's hotel portfolio totaled $13.8
million during the quarter and an additional $12.6 million was spent on
maintenance capital expenditures. There is expected to be an additional
$14 million in renovation expenditures and $10 million in maintenance
capital expenditures during the remainder of 2000
20
<PAGE> 21
CAPITALIZATION:
o On September 15, 2000, the Company completed the private placement of
$400 million in Senior Unsecured Notes that mature in September, 2008
and bear interest at a rate of 9 1/2%. These notes were issued at a
discount to yield 9.75%. The proceeds were used to retire the $375
million floating rate Term B Loan, which would have matured in 2004, and
to pay down the Company's Line of Credit. On October 30, 2000, the
Company announced a registered Exchange Offer to exchange these
privately placed notes for new notes registered under the Securities Act
of 1933 and having identical terms
o During the third quarter 2000, FelCor repurchased approximately 593,000
common shares for approximately $13.1 million. For the year 2000, FelCor
has repurchased 3.73 million common shares for approximately $69.8
million
o FelCor declared third quarter dividends of $0.55 per share on its Common
Stock (an annualized dividend yield of approximately 10.0% as of October
31, 2000), $0.4875 per share on its $1.95 Series A Cumulative
Convertible Preferred Stock and $0.5625 per depositary share evidencing
its 9% Series B Cumulative Redeemable Preferred Stock
RESULTS OF OPERATIONS
The Company
Nine Months Ended September 30, 2000 and 1999
For the nine months ended September 30, 2000 and 1999, the Company had
revenues of $405.1 million and $386.2 million, respectively, consisting
primarily of Percentage Lease Revenues of $388.6 million and $377.5 million,
respectively. Percentage Lease Revenues were reduced in 2000 by approximately
$22.3 million of rent that was deferred in 2000 but not in 1999.
Effective January 2000, Percentage Leases for 68 of the Company's
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 nine months ended
September 30, 2000, increased 8.8% to $410.8 million as compared primarily to
the nine months ended September 30, 1999. The reason for this comparative
increase is attributed primarily to an overall increase in RevPAR of 7.5%. 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 $107.7 million for the nine months ended
September 30, 2000, to $385.1 million from $277.5 million, in the same period of
1999. Included in total expenses is a one-time reserve of $63.0 million recorded
in the second quarter of 2000, 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.
Deferred rent recorded in 2000 has been added back to total revenue for the
computation of expenses as a percent of total revenue since there was no
deferred rent recorded in 1999, for comparison purposes. Total expenses as a
percentage of total revenue after adding back deferred rent and the $63 million
reserve for sale of non-strategic assets, increased to 75.4% for the nine months
ended September 30, 2000, from 71.9% in the same period of 1999.
Other major components of the increase in expenses, as a percentage of
total revenue after adding back deferred rent, were interest expense, land lease
expenses and property taxes.
21
<PAGE> 22
Interest expense increased, as a percentage of total revenue, after
adding back deferred rent, to 27.6% in the nine months ended September 30, 2000,
from 23.5% in the nine months ended September 30, 1999. This increase in
interest expense is attributed to the following:
o increased debt, which was used to finance renovations and to fund
$168 million in 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 $4.7 million for the nine months ended September
30, 1999 to approximately $758,000 in 2000.
Land lease rent as a percent of total revenue, after adding back
deferred rent, increased to 4.0% from 3.5% for the nine months ended September
30, 2000 and 1999, respectively. The increase in land lease expense is primarily
attributed to current year land lease expense for two hotels and a reserve
established in June 2000, for prior year disputed land lease expense. The land
lease rent for the two hotels is computed as a percentage of hotel revenues and
these hotels had larger than average percentage increases in revenue for the
period.
Real estate and personal property taxes increased as a percentage of
total revenue, after adding back deferred rent, to 11.3% in the nine months
ended September 30, 2000 from 10.8% for the nine months ended September 30,
1999. The principal reason for this increase is the anticipated increases in
assessments resulting from the major renovations completed over the past two
years.
For the nine-month period ended September 30, 2000, the Company
reported net income available to common shareholders of $1.9 million compared to
$89.0 million for the same period a year ago, a decrease of 97.9%. Diluted
earnings per share decreased 97.4% for the nine months to $0.03, from $1.30 in
1999. Net income for 2000 includes the gain on the sale of its Embassy Suites
hotel - Los Angeles International Airport-North, CA for a gross price of
approximately $23.3 million that resulted in a third quarter gain on the sale of
approximately $2.5 million. The Company also recorded a gain of $918,000 on the
sale of excess land and a billboard adjacent to two hotels. Included in the
income from unconsolidated entities is a $3.7 million after tax gain from the
sale of Myrtle Beach condominiums developed by a joint venture with Hilton.
Offsetting these gains was the $63 million reserve established for the sale of
non-strategic assets and an extraordinary charge of $3.9 million of deferred
financing fees that were written off with the early retirement of a $375 million
term loan and the renewal of the line of credit.
Three Months Ended September 30, 2000 and 1999
For the three months ended September 30, 2000 and 1999, the Company had
revenues of $140.5 million and $124.1 million, respectively, consisting
primarily of Percentage Lease Revenues of $132.2 million and $120.6 million,
respectively.
After adding back rent deferred under SAB 101, Percentage Lease
Revenues for the three months ended September 30, 2000, increased 12.7% to
$135.9 million as compared to the three months ended September 30, 1999. The
reason for this comparative increase is attributed primarily to an overall
increase in RevPAR of 7.2%. 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 $15.6 million for the three months ended
September 30, 2000, to $109.6 million from $94.1 million, in the same period of
1999. Deferred rent recorded in 2000 has been added back to total revenue for
the computation of expenses as a percent of total revenue since there was no
deferred rent recorded in 1999, for comparison purposes. Total expenses as a
percentage of total revenue after adding back deferred rent, increased to 76.1%
for the nine months ended September 30, 2000, from 75.8% in the same period of
1999.
22
<PAGE> 23
Major components of the increase in expenses, as a percentage of total
revenue after adding back deferred rent, were interest expense and real estate
taxes.
Interest expense increased, as a percentage of total revenue after
adding back deferred rent, to 27.9% from 25.4% for the quarter over the prior
year period. The Company's total borrowings increased by approximately $146
million since September 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 86 basis points since the third quarter 1999 which resulted from
increases in short term interest rates.
Real estate and personal property taxes increased as a percentage of
total revenue to 11.5% from 10.4% in the third quarter of 1999. The principal
reason for this increase is the anticipated increases in assessments resulting
from the major renovations completed over the past two years.
For the three months ended September 30, 2000, the Company reported net
income available to common shareholders of $24.2 million compared to $23.8
million for the same period a year ago, an increase of 1.7%. Diluted earnings
per share increased 27% for the three months to $0.44, from $0.35 in 1999. Net
income for 2000 includes the gain on the sale of its Embassy Suites hotel - Los
Angeles International Airport-North, CA for a gross price of approximately
$23.3 million that resulted in a third quarter gain on the sale of approximately
$2.5 million. The Company also recorded a gain of $918,000 on the sale of excess
land and a billboard adjacent to two hotels. Included in the income from
unconsolidated entities is a $3.7 million after tax gain from the sale of Myrtle
Beach condominiums developed by a joint venture with Hilton. Partially
offsetting these gains was an extraordinary charge of $3.9 million of deferred
financing fees that were written off with the early retirement of $375 million
term loan and the renewal of the line of credit.
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.
23
<PAGE> 24
The following table details the computation of FFO (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FFO:
Net income .............................................. $ 30,366 $ 30,021 $ 20,393 $ 107,590
Deferred rent ........................................ 3,664 22,268
Gain on sale of hotel ................................ (2,460) (2,460)
Reserve for assets held for sale ..................... 63,000
Series B preferred dividends ......................... (3,235) (3,234) (9,703) (9,703)
Extraordinary charge from write off of deferred
financing fees .................................. 3,865 3,865 1,113
Depreciation ......................................... 39,535 38,627 121,015 112,789
Depreciation for unconsolidated entities ............. 2,493 2,372 7,629 7,390
Minority interest in Operating Partnership ........... 2,620 1,094 221 3,933
---------- ---------- ---------- ----------
FFO ..................................................... $ 76,848 $ 68,880 $ 226,228 $ 223,112
========== ========== ========== ==========
Weighted average common shares and units
outstanding(1) ..................................... 66,851 75,898 67,601 75,928
========== ========== ========== ==========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
EBITDA:
Funds from Operations ...................................... $ 76,848 $ 68,880 $ 226,228 $ 223,112
Interest expense ..................................... 40,168 31,520 117,812 90,692
Interest expense of unconsolidated subsidiaries ...... 2,162 1,814 6,949 5,157
Amortization expense ................................. 569 184 1,043 559
Series B preferred dividends ......................... 3,235 3,234 9,703 9,703
---------- ---------- ---------- ----------
EBITDA ..................................................... $ 122,982 $ 105,632 $ 361,735 $ 329,223
========== ========== ========== ==========
</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.
24
<PAGE> 25
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 September 30, 2000. This
information is presented regardless of the date of acquisition.
<TABLE>
<CAPTION>
OCCUPANCY
--------------------------------------------------------------------------
THIRD QUARTER YEAR TO DATE
------------------------------------ ------------------------------------
2000 1999 VARIANCE 2000 1999 VARIANCE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
DJONT Comparable Hotels ............................... 74.9% 73.5% 1.4 pts 75.1% 73.0% 2.1 pts
Bristol Comparable Hotels ............................. 72.8% 71.4% 1.4 pts 72.3% 70.7% 1.6 pts
Total Comparable Hotels(A) ........................ 73.9% 72.4% 1.5 pts 73.8% 72.0% 1.8 pts
Non-comparable Hotels(B) .............................. 71.9% 69.6% 2.3 pts 72.4% 66.1% 6.3 pts
Total Hotels excluding hotels held for sale ... 73.6% 72.1% 1.5 pts 73.3% 70.0% 3.3 pts
Hotels held for sale(C) ............................... 61.6% 64.1% (2.5)pts 60.6% 61.7% (1.1)pts
Total Hotels ............................ 72.6% 71.5% 1.1 pts 72.3% 69.3% 3.0 pts
</TABLE>
<TABLE>
<CAPTION>
ADR
--------------------------------------------------------------------------
THIRD QUARTER YEAR TO DATE
----------------------------------- -----------------------------------
2000 1999 VARIANCE 2000 1999 VARIANCE
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
DJONT Comparable Hotels ............................... $ 123.13 $ 115.46 6.6% $ 125.89 $ 121.29 3.8%
Bristol Comparable Hotels ............................. $ 91.02 $ 87.69 3.8% $ 93.91 $ 90.96 3.2%
Total Comparable Hotels(A) ........................ $ 107.31 $ 101.78 5.4% $ 111.16 $ 107.27 3.6%
Non-comparable Hotels(B) .............................. $ 93.35 $ 89.77 4.0% $ 96.75 $ 94.47 2.4%
Total Hotels excluding hotels held for sale ... $ 105.74 $ 100.47 5.3% $ 106.48 $ 103.32 3.1%
Hotels held for sale(C) ............................... $ 69.99 $ 65.86 6.3% $ 71.33 $ 70.10 1.8%
Total Hotels ............................ $ 103.23 $ 97.88 5.5% $ 104.04 $ 100.86 3.2%
</TABLE>
<TABLE>
<CAPTION>
REVPAR
--------------------------------------------------------------------------
THIRD QUARTER YEAR TO DATE
----------------------------------- -----------------------------------
2000 1999 VARIANCE 2000 1999 VARIANCE
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
DJONT Comparable Hotels ............................... $ 92.25 $ 84.83 8.7% $ 94.60 $ 88.58 6.8%
Bristol Comparable Hotels ............................. $ 66.28 $ 62.61 5.9% $ 67.91 $ 64.34 5.5%
Total Comparable Hotels(A) ........................ $ 79.27 $ 73.72 7.5% $ 82.05 $ 77.18 6.3%
Non-comparable Hotels(B) .............................. $ 67.10 $ 62.47 7.4% $ 70.01 $ 62.41 12.2%
Total Hotels excluding hotels held for sale ... $ 77.87 $ 72.45 7.5% $ 78.09 $ 72.34 7.9%
Hotels held for sale(C) ............................... $ 43.11 $ 42.22 2.1% $ 43.22 $ 43.24 0.0%
Total Hotels ............................ $ 74.99 $ 69.94 7.2% $ 75.20 $ 69.93 7.5%
</TABLE>
(A) DJONT Comparable Hotels include 77 and 63 hotel and Bristol
Comparable Hotels include 65 and 46 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 20 and 53 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.
25
<PAGE> 26
Comparison of The Hotels' Operating Statistics for the Three and Nine Months
Ended September 30, 2000 and 1999
For the three months ended September 30, 2000, the Company's Comparable
Hotels' RevPAR, excluding hotels held for sale, increased compared to the same
period in 1999, by 7.5%. For the same period the Comparable Hotels' ADR and
Occupancy increased 5.4% and 1.5 percentage points, respectively. For the nine
months ended September 30, 2000, the Company's Comparable Hotels' RevPAR,
excluding hotels held for sale, increased 6.3%. The ADR and Occupancy for these
hotels increased 3.6% and 1.8 percentage points, respectively. A large portion
of the increase in year-to-date 2000 RevPAR came from the second and third
quarter 2000 hotel performance. The total hotel portfolio RevPAR, excluding
hotels held for sale, increased 7.9%. This represents the fifth 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 third quarter 2000 and nine months, compared to 1999:
<TABLE>
<CAPTION>
HOTELS THIRD QUARTER YEAR TO DATE
--------- ----------------------------- -----------------------------
REVPAR PERCENTAGE OF TOTAL REVPAR PERCENTAGE OF TOTAL
QTR YTD CHANGE ROOM REVENUE CHANGE ROOM REVENUE
--- --- ------ ------------------- ------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Embassy Suites 56 49 9.3% 44.2% 7.3% 49.4%
Holiday-branded 43 27 5.5% 26.8% 7.5% 22.6%
Crowne Plaza 16 13 9.0% 12.3% 5.6% 12.6%
Doubletree-branded 9 7 10.2% 7.6% 5.3% 5.0%
Sheraton 9 4 3.4% 4.7% 2.1% 4.2%
Other 9 9 3.2% 4.4% 0.5% 6.2%
---- --- ---- ------
Total 142 109 7.5% 100.0% 6.3% 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 $478.8 million in 1998, 1999 and the first nine 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 fourth
consecutive quarterly increase in occupancy with 56 Comparable Embassy Suites
hotels achieving a 9.3% RevPAR improvement for the quarter compared to prior
year. These hotels, which constitute nearly 44.2% of Comparable Hotel room
revenues, increased ADR by 7.6% and Occupancy by 1.2 percentage points over the
same three month period in 1999. On a year-to-date basis, the Comparable Embassy
Suites hotels had a 7.3% increase in RevPAR as a result of a 4.6% increase in
ADR and an increase in average occupancy of 1.9 percentage points. The Company's
Comparable Doubletree hotels had a 10.2% RevPAR gain for the quarter and a 5.3%
gain for the nine month period. 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 Suites 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 16 Comparable Crowne Plaza hotels (all of which were
renovated and rebranded from Holiday Inn and Harvey hotels), reported increased
RevPAR of 9.0% for the third quarter for 2000 compared to the same period in
1999. This increase resulted primarily from an increase of 4.1 percentage
26
<PAGE> 27
points in occupancy, which brought the average occupancy for these hotels up to
72.4% for the quarter. For the nine months ended September 30, 2000, the 13
Comparable Crowne Plaza hotels had a 5.6% increase in RevPAR which was primarily
a result of an increase in the average occupancy of 4.4 percentage points. 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.
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 4.3%. The third quarter increase in RevPAR resulted
from a 0.6 percentage point increase in Occupancy and a 3.5% increase in ADR.
The Company's 23 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 5.6% for the quarter, which came from Occupancy and ADR
increases of 0.7 percentage points and 4.6%, respectively.
Nearly 57.9% 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 and nine months for these
states, excluding hotels held for sale, compared to the same period in 1999, are
illustrated in the following table:
<TABLE>
<CAPTION>
HOTELS THIRD QUARTER YEAR TO DATE
--------- ----------------------------- -----------------------------
REVPAR PERCENTAGE OF TOTAL REVPAR PERCENTAGE OF TOTAL
QTR YTD CHANGE ROOM REVENUE CHANGE ROOM REVENUE
--- --- ------ ------------------- ------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Texas 35 29 5.5% 18.7% 3.9% 20.8%
California 18 16 16.3% 23.2% 14.4% 24.6%
Florida 13 10 5.8% 8.5% 4.0% 10.4%
Georgia 12 9 6.4% 7.6% 4.1% 7.5%
</TABLE>
The Comparable Hotels in Texas, which account for approximately 18.7%
of FelCor's Comparable Hotel total room revenue, experienced the third
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 16
comparable hotels located in Dallas, which had been adversely affected by new
competition in recent quarters, had RevPAR increases of 5.9% for the quarter and
3.8% year-to-date.
The Company's Non-comparable Hotels (20 hotels) reported an increase in
RevPAR of 7.4% for the quarter and the 53 Non-comparable Hotels had a RevPAR
increase of 12.2% year-to-date. These hotels were profoundly affected by the
Allerton Crowne Plaza (increased RevPAR by 48.7% for the third 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 1.6%.
DJONT
The Nine Months Ended September 30, 2000 and 1999
Total revenues increased to $670.2 million in the first nine months of
2000, from $604.1 million in the first nine months of 1999, an increase of 10.9%
Total revenues consisted primarily of room and suite revenue of $543.9 million
and $494.4 million in the first nine months of 2000 and 1999, respectively.
The increase in room and suite revenue resulted from a 2.3 percentage
point increase in Occupancy combined with a 3.8% increase in ADR for the DJONT
hotels and the addition of one hotel to the DJONT portfolio in January of 2000,
which contributed $12.4 million in room and suite revenue.
27
<PAGE> 28
Included in the total revenue for third quarter is $3.9 million gain on
the sale of the condominiums in Myrtle Beach, SC in which DJONT holds a 3%
equity interest but 100% of the voting interest, and as a result is included in
the consolidated revenues for DJONT. FelCor's 97% non-voting interest is shown
as minority interest expense.
DJONT's total expenses decreased as a percentage of total revenues from
101.1% in the nine months ended September 30, 1999, to 100.7% in the nine months
ended September 30, 2000. This is partially due to reductions of Percent Rent as
a percentage of total revenue from 39.8% to 39.4%.
Total expenses before percentage rent were $410.7 million. This
represents 61.3% of total revenue for the nine months ended September 30, 2000
compared to $370.2 million or 61.3% for the nine months ended September 30,
1999.
Net loss for DJONT for the nine months ended September 30, 2000, was
$4.8 million compared to a loss of $6.8 million in the same period in 1999.
The Three Months Ended September 30, 2000 and 1999
Total revenues increased to $221.5 million in the third quarter of 2000
from $194.5 million in the third quarter of 1999, an increase of 13.9%. Total
revenues consisted primarily of room and suite revenue of $179.2 million and
$160.6 million in the third quarter of 2000 and 1999, respectively.
The increase in total revenues is primarily a result of a 1.4
percentage point increase in occupancy coupled with a 6.9% increase in ADR. The
addition of one hotel to the DJONT portfolio in January 2000 contributed $4.1
million to third quarter revenues.
Included in the total revenue for third quarter is $3.9 million gain on
the sale of the condominiums in Myrtle Beach, SC in which DJONT holds a 3%
equity interest but 100% of the voting interest, and as a result is included in
the consolidated revenues for DJONT. FelCor's 97% non-voting interest is shown
as minority interest expense.
DJONT's total expenses increased as a percentage of total revenues from
100.3% for the three months ended September 30, 1999, to 102.2% for the three
months ended September 30, 2000.
Total expenses, excluding percentage rent, were $140.3 million or 63.3%
of total revenue for the third quarter of 2000 compared to $124.0 million or
63.7% for the third quarter 1999.
Net loss for DJONT for the three months ending September 30, 2000, was
$4.9 million compared to a loss of $515,000 in the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders and repayments of indebtedness, is its
share of the Operating Partnership's cash flow from the Percentage Leases. For
the nine months ended September 30, 2000, net cash flow provided by operating
activities, consisting primarily of Percentage Lease Revenue, was $209.5 million
and Funds From Operations was $76.8 million.
28
<PAGE> 29
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 loss of $4.8 million for the nine months ended
September 30, 2000 and had a cumulative shareholders' deficit of $18.0 million.
Consistent with the operating results for the nine months ended September 30,
2000, management anticipates revenue growth at the DJONT hotels during 2000, but
DJONT should record an 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 including all
assets and liabilities, effective January 1, 2001 (the effective date for the
recently passed REIT Modernization Act). The Company will issue approximately
417,000 Operating Partnership units as consideration. The benefits to the
Company 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. The Company
will record the consideration issued plus the net deficit acquired as an expense
in the period in which the transaction is completed.
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 in 2001, but at this date has not entered into any agreements to
acquire the Bristol Lessees or their leasehold interests, other than with
respect to certain hotels held for sale. Should the Company acquire the Bristol
Percentage Leases the consideration paid would be recorded as an expense in the
period that the transaction is completed.
The Company has identified 25 non-strategic hotels which it intends to
sell by June 30, 2001. 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 a $200 million
increase in its share repurchase program up to an aggregate of $300 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
September 30, 2000, FelCor repurchased approximately 3.7 million shares of its
outstanding common stock on the open market for approximately $69.8 million.
On September 27, 2000, the Company completed the sale of its Embassy
Suites hotel - Los Angeles International Airport-North, CA (215) suites for a
gross price of approximately $23.3 million ($112,000 per room) which resulted in
a third quarter gain on sale of approximately $2.5 million. The Company also
sold two acres of vacant excess land adjacent to its 359-room Embassy Suites
hotel - Fort Lauderdale, FL and a billboard in Dallas, TX, for an aggregate gain
of approximately $0.9 million.
29
<PAGE> 30
During the third quarter an entity in which the Company owns a 50%
equity interest completed the construction and sold 200 condominium units in the
Brighton Tower, which is adjacent to the Embassy Suites hotel - Myrtle Beach at
Kingston Plantation, SC. The Company recorded a $3.7 million gain in the third
quarter representing its share of the after tax gain on sale.
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 contains various affirmative and negative covenants,
including limitations on total indebtedness, total secured indebtedness,
restricted payments (such as stock repurchases and cash distributions), as well
as the obligation to maintain certain minimum tangible net worth and certain
minimum interest and debt service coverage ratios. At September 30, 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. Most of the mortgage debt is nonrecourse to the Company (with certain
exceptions) and contains provisions allowing for the substitution of collateral
upon satisfaction of certain conditions. Most of the mortgage debt is
prepayable, subject, however, to various prepayment penalties, yield
maintenance, or defeasance obligations.
At September 30, 2000, the Company had $46.0 million of cash and cash
equivalents and had utilized $374 million of the $600 million available under
the Line of Credit. Certain significant credit and debt statistics at September
30, 2000, are as follows:
o Interest coverage ratio of 2.9x
o Borrowing capacity of $226 million under the Line of Credit
o Consolidated debt equal to 40% of investment in hotels, at cost
o Fixed interest rate debt equal to 90% of total debt
o Weighted average maturity of fixed interest rate debt of
approximately seven years
o Mortgage debt to total assets of 19%
o Debt of approximately $4 million maturing for the remainder of 2000
On April 26, 2000, the Company closed a 10-year, $145 million First
Mortgage Term Loan, which is collateralized 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 collateralized by eight Embassy
Suites hotels and carry an 8.70% fixed interest rate. These 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 Line of Credit.
On August 1, 2000, the Company 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.
On September 15, 2000, the Company completed the private placement of
$400 million in Senior Unsecured Notes that mature in September 2008 and bear
interest at a rate of 9 1/2%. These notes were issued at a discount to yield
9.75%. The proceeds were used to retire the $375 million floating rate Senior
Term Loan, which would have matured in 2004, and to pay down the Company's Line
of Credit. On October 30, 2000, the Company announced a registered Exchange
Offer to exchange these privately placed notes for new notes registered under
the Securities Act of 1933 and having identical terms.
30
<PAGE> 31
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 without an exchange of the underlying principal amount and effectively
convert variable rate debt to a fixed rate. The fixed rates to be paid, the
effective fixed rate, and the variable rate to be received by the Company at
September 30, 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 9/30/00 MATURITY
--------------- ------------ ---------- ------------- ---------
<S> <C> <C> <C> <C>
$ 25 million 5.5575% 7.5575% 8.6275% July 2001
$ 25 million 5.5480% 7.5480% 8.6275% July 2001
$ 75 million 5.5550% 7.5550% 8.6275% July 2001
$100 million 5.7955% 7.7955% 8.6275% July 2003
$ 25 million 5.8260% 7.8260% 8.6275% 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. The interest rate swaps served to reduce interest expense
by $1.2 million for the nine months ended September 30, 2000. 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 $13.8 million during the quarter on
upgrading and renovating its Hotels during the three months ended September 30,
2000 and a total of $36.7 million for the year 2000. It had completed
renovations at seven hotels during the quarter and had seven 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 September 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 September 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
September 30, 2000. The Fair Value of the Company's fixed rate debt indicates
the estimated
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<PAGE> 32
principal amount of debt having the same debt service requirements which could
have been borrowed at September 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 September 30, 2000.
<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>
(IN THOUSANDS, EXCEPT RATES)
LIABILITIES
Debt:
Fixed rate $ 3,338 $ 23,718 $13,039 $ 34,906 $188,701 $43,090 $1,109,974 $1,416,766 $1,260,881
Average interest rate 7.97% 9.38% 8.19% 8.09% 7.44% 8.67% 5.19%
Variable rate $ 165 $ 711 $ 785 $434,413 $ 650 $ 436,724 $ 436,724
Average interest rate 9.01% 9.21% 9.50% 9.24% 9.63%
INTEREST RATE DERIVATIVES
Interest rate swaps:
Variable to fixed $125,000 $125,000 $ 250,000 $ 3,448
Average pay rate 5.55% 5.80%
Average receive rate 6.81% 6.88%
</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.
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<PAGE> 33
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.
RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) requires that all
derivatives be recorded on the balance sheet at fair value. Changes in fair
value of derivatives are recorded each period in current hedge transaction, and
the type of hedge transaction. The Company will adopt these standards effective
January 1, 2001 and is currently assessing the initial effects of adoption.
During 1999, Financial Accounting Standards Board Statement No. 137 "Accounting
for Derivative Instruments and Hedging Activities - deferral of the Effective
Date of Statement of Financial Accounting Standards Board Statement No. 137
("SFAS 137") was issued. This statement amended SFAS 133 deferring effective
date to fiscal quarters of all fiscal years beginning after June 15, 2000.
During 2000, Financial Accounting Standards Board Statement No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging - an Amendment to the
statement of Financial Accounting Standards No. 133 ("SFAS 138") was issued.
This statement amends the accounting and reporting standards of SFAS 133 for
certain derivative instruments and certain hedging activities.
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 the
Company is incorporated herein by reference to the discussion under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" contained elsewhere in this
Quarterly Report on Form 10-Q for the three and nine months ended September 30,
2000.
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<PAGE> 34
PART II. -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
For information relating to certain other transactions by the Company
through September 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
27 Financial Data Schedule.
(b) Reports on Form 8-K:
A current report on Form 8-K was filed by the Company on October 4,
2000. This filing was to satisfy the financial statement
requirements of FelCor Lodging Trust Incorporated and its
subsidiary applicable to the full and unconditional guarantee
issued jointly and severally by FelCor Lodging Trust Incorporated
and one of its wholly owned subsidiaries on its $400 million 9 1/2%
Senior Notes issued September 15, 2000.
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<PAGE> 35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 10, 2000
FELCOR LODGING TRUST INCORPORATED
By: /s/ Lester C. Johnson
---------------------------------
Lester C. Johnson
Vice President and Controller
(Principal Financial Officer
and Principal Accounting Officer)
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<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
