10-Q 1 d92172e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 -------------------------------------------------------------------------------- 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, 2001 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 333-3959-01 FELCOR LODGING LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) DELAWARE 75-2544994 (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 --- -------------------------------------------------------------------------------- FELCOR LODGING LIMITED PARTNERSHIP INDEX
PAGE ---- PART I. -- FINANCIAL INFORMATION Item 1. Financial Statements............................................................................. 3 Consolidated Balance Sheets - September 30, 2001 (Unaudited) and December 31, 2000.................................................................... 3 Consolidated Statements of Operations -- For the Three and Nine Months Ended September 30, 2001 and 2000 (Unaudited)............................................ 4 Consolidated Statements of Cash Flows -- For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)............................................ 5 Notes to Consolidated Financial Statements.................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 16 General/Third Quarter Activities.............................................................. 16 Results of Operations......................................................................... 19 Liquidity and Capital Resources............................................................... 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 28 PART II. -- OTHER INFORMATION Item 5. Other Information................................................................................ 29 Item 6. Exhibits and Reports on Form 8-K................................................................. 29 SIGNATURE.................................................................................................... 30
2 PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER DECEMBER 2001 2000 ------------ ------------ (UNAUDITED) ASSETS Investment in hotels, net of accumulated depreciation of $592,401 at September 30, 2001 and $473,101 at December 31, 2000 ....................... $ 3,690,275 $ 3,750,275 Investment in unconsolidated entities ............................................ 152,056 128,593 Assets held for sale ............................................................. 48,822 129,294 Cash and cash equivalents ........................................................ 69,608 26,060 Cash held in escrow in connection with senior note offering ...................... 318,903 Accounts receivable .............................................................. 72,202 31,241 Note receivable from unconsolidated entity ....................................... 7,695 Deferred expenses, net of accumulated amortization of $10,300 at September 30, 2001 and $7,146 at December 31, 2000 ......................... 27,865 23,944 Other assets ..................................................................... 24,196 6,501 ------------ ------------ Total assets ..................................................................... $ 4,403,927 $ 4,103,603 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Debt ............................................................................. $ 1,843,641 $ 1,838,241 Senior notes held in escrow and redeemed in October 2001 ......................... 300,000 Distributions declared but unpaid ................................................ 34,199 33,957 Accrued expenses and other liabilities ........................................... 209,926 94,232 Minority interest in other partnerships .......................................... 49,742 50,774 ------------ ------------ Total liabilities ................................................................ 2,437,508 2,017,204 ------------ ------------ Commitments and contingencies Redeemable units at redemption value ............................................. 121,239 205,800 Preferred units, $.01 par value, 20,000 units authorized: Series A Cumulative Preferred Units, 5,981 units issued and outstanding ....... 149,515 149,515 Series B Redeemable Preferred Units, 58 units issued and outstanding .......... 143,750 143,750 Partners' capital ................................................................ 1,551,915 1,587,334 ------------ ------------ Total liabilities and partners' capital .......................................... $ 4,403,927 $ 4,103,603 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER UNIT DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Revenues: Hotel operating revenue: Room ................................................ $ 271,419 $ 636,762 Food and beverage ................................... 47,508 100,658 Other operating departments ......................... 18,259 43,049 Percentage lease revenue .............................. $ 132,240 115,137 $ 388,575 Retail space rental and other revenue ................. 573 602 2,455 2,426 ---------- ---------- ---------- ---------- Total revenues ........................................... 337,759 132,842 898,061 391,001 ---------- ---------- ---------- ---------- Expenses: Hotel operating expenses: Room ................................................ 70,832 154,236 Food and beverage ................................... 40,725 79,866 Other operating departments ......................... 8,348 19,270 Other property operating costs ........................ 97,567 219,209 Management fees ....................................... 13,094 25,706 Taxes, insurance and lease expense .................... 31,438 23,915 107,898 71,503 Corporate expenses .................................... 2,937 2,778 9,309 8,890 Depreciation .......................................... 39,273 39,535 118,786 121,015 Lease termination costs ............................... 378 36,604 Merger termination costs .............................. 19,919 19,919 ---------- ---------- ---------- ---------- Total operating expenses ................................. 324,511 66,228 790,803 201,408 ---------- ---------- ---------- ---------- Operating income ......................................... 13,248 66,614 107,258 189,593 Interest expense, net Recurring financing ................................... (39,803) (39,696) (118,338) (116,477) Merger related financing .............................. (4,126) (5,212) Swap termination expense ................................. (4,824) Loss on assets held for sale ............................. (63,000) ---------- ---------- ---------- ---------- Income (loss) before equity in income from unconsolidated entities, minority interest, gain on sale of assets, and extraordinary items .... (30,681) 26,918 (21,116) 10,116 Equity in income from unconsolidated entities ......... 722 7,162 7,050 12,810 Minority interest ..................................... (650) (607) (2,932) (2,700) Gain on sale of assets ................................ 462 3,378 3,417 4,253 ---------- ---------- ---------- ---------- Income (loss) before extraordinary items ................. (30,147) 36,851 (13,581) 24,479 Extraordinary charge from write off of deferred financing fees ..................................... (1,045) (3,865) (1,270) (3,865) ---------- ---------- ---------- ---------- Net income (loss) ........................................ (31,192) 32,986 (14,851) 20,614 Preferred distributions ............................... (6,150) (6,155) (18,450) (18,513) ---------- ---------- ---------- ---------- Net income (loss) applicable to unitholders .............. $ (37,342) $ 26,831 $ (33,301) $ 2,101 ========== ========== ========== ========== Per unit data: Basic: Net income (loss) applicable to unitholders ......... $ (0.60) $ 0.43 $ (0.54) 0.03 ========== ========== ========== ========== Weighted average units outstanding .................. 61,648 61,933 61,637 62,685 Diluted: Net income (loss) applicable to unitholders ......... $ (0.60) $ 0.43 $ (0.54) 0.03 ========== ========== ========== ========== Weighted average units outstanding .................. 61,996 62,176 62,005 62,916
The accompanying notes are an integral part of these consolidated financial statements. 4 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED, IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 2001 2000 ---------- ---------- Cash flows from operating activities: Net income (loss) ................................................................. $ (14,851) $ 20,614 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ............................................................ 118,786 121,015 Gain on sale of assets .................................................. (3,417) (4,253) Amortization of deferred financing fees ................................. 3,997 3,434 Accretion of debt ....................................................... (50) (640) Amortization of unearned officers' and directors' compensation .......... 1,440 1,043 Equity in income from unconsolidated entities ........................... (7,050) (12,810) Extraordinary write off of deferred financing fees ...................... 1,270 3,865 Lease termination costs ................................................. 36,304 Loss on assets held for sale ............................................ 63,000 Minority interests ...................................................... 2,932 2,700 Changes in assets and liabilities: Accounts receivable ..................................................... (8,956) (16,053) Deferred expenses ....................................................... (9,122) (15,508) Other assets ............................................................ (1,838) (2,780) Deferred rent ........................................................... 22,268 Accrued expenses and other liabilities .................................. 17,548 23,555 ---------- ---------- Net cash flow provided by operating activities ................ 136,993 209,450 ---------- ---------- Cash flows provided by (used in) investing activities: Improvements and additions to hotels .............................................. (48,103) (65,861) Proceeds from sale of interest in hotels .......................................... 47,644 Operating cash received in acquisition of lessees ................................. 29,731 Proceeds from sale of assets ...................................................... 11,429 24,915 Cash distributions from unconsolidated entities ................................... 7,024 21,047 ---------- ---------- Net cash flow provided by (used in) investing activities ...... 47,725 (19,899) ---------- ---------- Cash flows provided by (used in) financing activities: Restricted cash ................................................................... (318,903) Proceeds from borrowings .......................................................... 937,155 937,424 Repayment of borrowings ........................................................... (631,705) (917,437) Purchase of treasury stock ........................................................ (4,046) (69,860) Proceeds from exercise of stock option ............................................ 678 Buyback of assumed stock options .................................................. (1,861) Distributions paid to minority interest ........................................... (3,963) (4,474) Distributions paid to preferred unitholders ....................................... (18,450) (18,542) Distributions paid to unitholders ................................................. (101,936) (104,919) ---------- ---------- Net cash flow used in financing activities .................... (141,170) (179,669) ---------- ---------- Net change in cash and cash equivalents ..................................................... 43,548 9,882 Cash and cash equivalents at beginning of periods ........................................... 26,060 36,123 ---------- ---------- Cash and cash equivalents at end of periods ................................................. $ 69,608 $ 46,005 ========== ========== Supplemental cash flow information-- Interest paid ..................................................................... $ 118,409 $ 107,929 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 5 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION FelCor Lodging Limited Partnership and its subsidiaries (the "Company") on September 30, 2001, owned interests in 184 hotels in the United States and Canada with nearly 50,000 rooms and suites (collectively, the "Hotels"). The sole general partner of the Company is FelCor Lodging Trust Incorporated ("FelCor") the nation's second largest hotel real estate investment trust ("REIT"). At September 30, 2001 FelCor owned a greater than 85% equity interest in the Company. At September 30, 2001, the Company owned 100% of the interest in 151 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 entities that own 24 Hotels. Fourteen of the Company's Hotels are designated as held for sale. On May 9, 2001, the Company entered into an Agreement and Plan of Merger with MeriStar Hospitality Corporation ("MeriStar"). On September 21, 2001, the Company and MeriStar announced the termination of the merger. The decision to terminate the merger resulted from the September 11 terrorist attacks and their subsequent adverse impact on the financial markets. As a result of the merger termination the Company recorded expenses aggregating $19.9 million in the third quarter of 2001 associated with the termination of the merger and identified $4.1 million and $5.2 million for the three and nine months, respectively, of non-recurring merger financing costs. On January 1, 2001, the REIT Modernization Act ("RMA") went into effect. Among other things, the RMA permits a REIT to form taxable subsidiaries that lease hotels from the REIT, provided that the hotels continue to be managed by unrelated third parties. Effective January 1, 2001, the Company completed transactions that resulted in its newly formed taxable subsidiaries acquiring leases for 96 Hotels that were leased to either DJONT Operations, L.L.C. and its consolidated subsidiaries (collectively "DJONT") or subsidiaries of Six Continents Hotels, formerly Bass Hotels and Resorts ("Six Continents"). Effective July 1, 2001, the Company acquired the remaining 88 Hotel leases held by Six Continents. By acquiring these leases through its taxable subsidiaries, the Company acquired the economic benefits and risks of the operations of these Hotels and began reporting hotel revenues and expenses rather than percentage lease revenues. The following table provides a schedule of the Hotels by brand at September 30, 2001:
BRAND ----- Hilton(R) Brands: Embassy Suites(R).................................. 59 Doubletree(R)and Doubletree Guest Suites(R)........ 14 Hampton Inn(R)..................................... 7 Hilton Suites(R)................................... 1 Homewood Suites(R)................................. 1 Six Continents Brands: Holiday Inn(R)..................................... 44 Crowne Plaza(R)and Crowne Plaza Suites(R).......... 18 Holiday Inn Select(R).............................. 10 Holiday Inn Express(R)............................. 5 Starwood Brands: Sheraton(R)and Sheraton Suites(R).................. 10 Westin(R).......................................... 1 Other Brands............................................ 14 ---- Total Hotels.......................................... 184 ====
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 (14 hotels). 6 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION -- (CONTINUED) At September 30, 2001, (i) Six Continents managed 89 of the Hotels, (ii) Hilton managed 72 of the Hotels, (iii) Starwood Hotels & Resorts Worldwide, Inc. ("Starwood") managed 11 of the Hotels, (iv) Interstate Hotels Corporation ("IHC") managed eight of the Hotels and (v) three independent management companies managed the four remaining Hotels. 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 partners' capital. The financial information for the three and nine months ended September 30, 2001 and 2000, 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, 2000, 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, 2001 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2001. 2. ACQUISITION OF HOTEL LEASES Effective January 1, 2001, the Company acquired all the equity interests in DJONT, which leased 85 of the Hotels. In consideration for the acquisition, the Company issued 416,667 units of limited partnership interest valued at approximately $10 million which, together with DJONT's accumulated shareholders' deficit of $24.5 million, was expensed as lease termination cost in the first quarter of 2001. Effective January 1, 2001, the Company completed the acquisition of 12 of the leases that were held by Six Continents. In consideration for the acquisition and termination of these leases, together with the related management agreements, FelCor issued to Six Continents 413,585 shares of FelCor common stock valued at approximately $10 million. Of this $10 million in consideration, approximately $1.7 million was expensed as lease termination costs in the first quarter of 2001 and $8.3 million was expensed at June 30, 2001, in connection with the designation of certain of these Hotels as held for sale. Of the 12 hotels, three have been sold, eight have been contributed to a joint venture with IHC, and one will be retained. 7 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACQUISITION OF HOTEL LEASES -- (CONTINUED) The Company purchased certain assets and assumed certain liabilities in connection with the acquisition of the leases on these 96 Hotels. The fair values of the acquired assets and liabilities at January 1, 2001, are as follows (in thousands): Cash and cash equivalents...................................... $ 25,300 Accounts receivable............................................ 30,214 Other assets................................................... 17,318 --------- Total assets acquired.......................................... 72,832 --------- Accounts payable............................................... 18,656 Due to FelCor Lodging Trust.................................... 30,687 Accrued expenses and other liabilities......................... 40,072 --------- Total liabilities assumed...................................... 89,415 --------- Liabilities assumed in excess of assets acquired............... 16,583 Value of partnership units and FelCor common stock............. 19,721 --------- Lease termination costs................................... $ 36,304 =========
Effective July 1, 2001, the Company acquired leases for 88 Hotels from Six Continents. In consideration for the acquisition, FelCor issued to Six Continents 100 shares of its common stock and the Company entered into long-term management agreements with Six Continents with regard to such Hotels. The management fees payable to Six Continents include compensation to Six Continents for both management services and the acquisition of the 88 leases and, as such, are higher than those paid by the Company to other managers for comparable services. Management fees under these management contracts will be expensed as earned. The Company purchased certain assets and acquired certain liabilities with the acquisition of the 88 hotel leases. The fair value of the assets and liabilities assumed at July 1, 2001 are as follows (in thousands): Cash and cash equivalents.............................. $ 4,431 Accounts receivable.................................... 30,964 Other assets........................................... 6,941 -------- Total assets acquired........................ $ 42,336 ======== Accounts payable....................................... $ 7,660 Accrued expenses and liabilities....................... 34,676 -------- Total liabilities assumed.................... $ 42,336 ========
8 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ADOPTION OF SFAS 133 On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifically, SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and the nature of the hedging activity. Upon adoption of SFAS 133, on January 1, 2001, the Company recorded the fair value of its interest rate swap agreements, having a notional value of $250 million, as an asset of $248,000 with a corresponding credit to accumulated other comprehensive income reported in partners' capital. As of September 30, 2001, the Company held one interest rate swap agreement with a notional value of $50 million. The fixed interest rate paid on this swap was 5.56% and the floating swap rate received was 3.58% with a maturity of July 2003. The fair value of the Company's interest rate swap agreement at September 30, 2001 was a liability of $2.2 million, which was recorded in accrued expenses and accumulated other comprehensive income reported in shareholders' equity. Assuming no changes in the index rates over the next twelve months, the swap currently held by the Company would result in additional interest expense of approximately $990,000. In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives. It is the objective of the Company to use interest rate hedges to manage its fixed and floating interest rate position and not to be engaged in the speculation of interest rates. The Company manages interest rate risk based on the varying circumstances of anticipated borrowings, and existing floating and fixed rate debt, including the Company's revolving line of credit. The Company will generally seek to pursue interest rate risk mitigation strategies that will result in the least amount of reported earnings volatility under generally accepted accounting principles, while still meeting strategic economic objectives and maintaining adequate liquidity and flexibility. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. To determine the fair values of its derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. 4. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") approved SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001 and will require (1) intangible assets (as defined in SFAS No. 141) to be reclassified into goodwill, (2) goodwill amortization to cease, and (3) the testing of goodwill for impairment at transition and at interim periods (if an event or circumstance would result in an impairment). The Company does not believe that SFAS No. 142 will have a material impact on the Company's results of operations and financial position. 9 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS -- (CONTINUED) On August 15, 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of the liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002. An entity is required to recognize the cumulative effect of initially applying SFAS No. 143 as a change in accounting principal. On October 3, 2001 the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 by removing goodwill from its scope, by defining a probability-weighted cash flow estimation approach and establishing a "primary-asset" approach to determine the cash flow estimation period for a group of assets. It also replaces the provisions of APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business" for the disposal of segments of a business. SFAS No. 144 will be effective for fiscal years beginning after December 15, 2001 and is to be applied prospectively. The Company has not determined what impact, if any, SFAS No. 143 or 144 will have on the Company's results of operations or financial position. 5. INVESTMENT IN UNCONSOLIDATED ENTITIES The Company owned 50% interests in joint venture entities that owned and operated 24 Hotels at September 30, 2001, and 16 Hotels at September 30, 2000. The Company also owned a 50% interest in entities that owned an undeveloped parcel of land, provided condominium management services and developed and sold condominiums in Myrtle Beach, South Carolina. The Company accounts for its investments in these unconsolidated entities under the equity method. Summarized unaudited combined financial information for 100% of these unconsolidated entities is as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ BALANCE SHEET INFORMATION: Investment in hotels................................... $ 365,430 $ 294,941 Non-recourse mortgage debt............................. $ 265,641 $ 225,302 Equity................................................. $ 115,846 $ 82,986
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- STATEMENTS OF OPERATIONS INFORMATION: Total revenues ................................... $ 16,126 $ 24,030 $ 55,823 $ 63,204 Net income ....................................... $ 2,344 $ 11,881 $ 16,468 $ 25,530 Net income attributable to the Company ........... $ 1,257 $ 7,697 $ 8,656 $ 14,416 Amortization of cost in excess of book value ..... (535) (535) (1,606) (1,606) ---------- ---------- ---------- ---------- Equity in income from unconsolidated entities .... $ 722 $ 7,162 $ 7,050 $ 12,810 ========== ========== ========== ==========
10 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. ASSETS HELD FOR SALE In the second quarter of 2000, the Company identified 25 hotels that it considered non-strategic and announced its intention to sell such hotels. In connection with the decision to sell these hotels, the Company recorded, at June 30, 2000, an expense of $63 million representing the difference between the net book value of these hotels and their estimated net sale proceeds. No depreciation expense has been recorded on these hotels since June 30, 2000. In March 2001, the Company contributed eight of the hotels held for sale to entities in which the Company owns a 50% equity interest and a subsidiary of IHC holds the other 50% equity interest. The Company contributed assets with a book value of approximately $77 million, and received net cash proceeds of $52 million. The Company retained an $8 million membership interest and a $17 million preferred interest. In June 2001, the Company sold the 140-room Hampton Inn located in Marietta, Georgia, for a net sales price of $7.1 million. In September 2001, the Company sold the 119-room Hampton Inn located in Jackson, Mississippi for a net sales price of $4 million. The Company is actively marketing the remaining 14 hotels held for sale. Revenues 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, 2001 and 2000, and represented income of $8.6 million and $8.9 million (net of $3.4 million in depreciation expense for 2000), respectively. 7. DEBT Debt at September 30, 2001, and December 31, 2000, consisted of the following (in thousands):
SEPTEMBER 31, DECEMBER 31, COLLATERAL INTEREST RATE MATURITY DATE 2001 2000 ---------- ------------- ------------- ------------- ------------ FLOATING RATE DEBT: Line of credit None LIBOR + 200bp October 2004 $ 112,000 Mortgage debt 3 hotels LIBOR + 200bp February 2003 61,909 Promissory note None LIBOR + 200bp June 2016 $ 650 650 ------------- ------------ Total floating rate debt 650 174,559 ------------- ------------ FIXED RATE DEBT: Line of credit - swapped None 7.56% October 2004 49,900 250,000 Publicly-traded term notes None 7.38% October 2004 174,601 174,505 Publicly-traded term notes None 7.63% October 2007 124,394 124,320 Publicly-traded term notes None 9.50% September 2008 101,640 Publicly-traded term notes None 9.50% September 2008 395,244 394,731 Publicly-traded term notes None 8.50% June 2011 297,593 Mortgage debt 15 hotels 7.24% November 2007 138,218 140,148 Mortgage debt 7 hotels 7.54% April 2009 96,426 97,604 Mortgage debt 6 hotels 7.55% June 2009 72,512 73,389 Mortgage debt 7 hotels 8.73% May 2010 142,713 144,032 Mortgage debt 8 hotels 8.70% May 2010 183,324 184,829 Other 13 hotels 6.96% - 7.23% 2000 - 2005 66,426 80,124 ------------- ------------ Total fixed rate debt 1,842,991 1,663,682 ------------- ------------ Total debt $ 1,843,641 $ 1,838,241 ============= ============ Senior notes held in escrow and redeemed October 2001 None 8.50% June 2011 $ 300,000 =============
One month and three month LIBOR at September 30, 2001, was 2.637% and 2.597%, respectively. 11 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DEBT -- (CONTINUED) At September 30, 2001, the Company's unsecured line of credit was matched with an interest rate swap agreement, which effectively converted the floating rate on the line of credit to a fixed rate. The existing interest swap matures July 2003. The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense. Interest expense is reported net of interest income of $2.3 million and $1.3 million for the nine months ended September 30, 2001 and 2000, respectively, and capitalized interest of $657,000 and $758,000, respectively. Non-recurring interest expense associated with the merger was $4.1 million and $5.2 million for the three and nine months ended September 30, 2001, respectively, this is presented net of $2.4 million and $3.2 million of interest income for the three and nine months ended September 30, 2000, respectively. On January 11, 2001, the Company completed the private placement of $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a premium to yield an effective rate of 91/8%. The proceeds were used initially to pay down the Company's line of credit. On September 13, 2001, the Company announced the commencement of offers to exchange the $100 million in privately placed senior notes for notes with identical terms that are registered under the Securities Act of 1933. This exchange offer was completed in October 2001. On June 4, 2001, the Company completed the private placement of $600 million in 8 1/2% senior unsecured notes that mature in June 2011. Approximately $315 million of the proceeds were placed in escrow pending the closing or termination of the merger with MeriStar. The remaining proceeds were used to pay down the line of credit and other floating rate debt. In connection with the pay down of the line of credit, the Company terminated interest rate swaps with a notional value of $200 million, resulting in a one-time $4.8 million swap termination cost, which was expensed in the second quarter. An extraordinary charge of $225,000 was also recorded in the second quarter to write-off unamortized deferred financing costs associated with the prepayment of this floating rate debt. On September 13, 2001, the Company announced the commencement of offers to exchange the $600 million in privately placed senior notes for notes with identical terms that are registered under the Securities Act of 1933. This exchange offer was completed in October 2001. As the result of the termination of the merger with MeriStar, in accordance with the requirements of the indenture governing these notes, the Company redeemed $300 million in principal amount of these notes in October, 2001. The redemption price was 101% of the principal amount redeemed plus accrued interest. The redemption price was paid out of the $315 million held in escrow. On July 26, 2001, the Company renewed and extended its $615 million unsecured line of credit. The line of credit has a term of up to five years, including extensions, a floating interest rate, and a tiered interest rate spread over LIBOR based on the Company's leverage ratio. An extraordinary charge of $1 million was recorded to write-off unamortized deferred financing costs associated with the renewal of the Company's line of credit. The Company's 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, 2001, the Company was in compliance with all such covenants. 12 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DEBT -- (CONTINUED) The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the line of credit. Most of the mortgage debt is non-recourse to the Company and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of the mortgage debt is prepayable; subject to various prepayment penalties, yield maintenance, or defeasance obligations. On November 8, 2001, the Company and its lenders executed an amendment to its unsecured line of credit to obtain relaxed financial covenants generally through September 2002. The relaxed financial covenants were necessary as a result of the decline in operating results subsequent to the September 11 terrorist attacks and softening economy. 8. DEFERRED RENT The Company deferred lease income, under Staff Accounting Bulletin No. 101 ("SAB 101"), of $3.7 million and $22.3 million for the three and nine months ended September 30, 2000, respectively. For the three and nine months ended September 30, 2001, SAB 101 had no financial statement impact on the Company. 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 FelCor to purchase up to an aggregate of $300 million of its outstanding common shares. Approximately 179,000 of FelCor's common shares were purchased in the open market from January 1, 2001 through March 27, 2001, for approximately $4.0 million. FelCor has not repurchased any additional shares in the open market since March 27, 2001. Since the inception of the stock repurchase program, FelCor has repurchased approximately 10.5 million shares of its common stock for approximately $189.1 million. FelCor has no current plans to repurchase additional shares of common stock in the foreseeable future. 10. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and displaying comprehensive income and its components. The Company's total comprehensive loss for the three and nine months ended September 30, 2001 is calculated as follows (in thousands):
SEPTEMBER 30, 2001 ----------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED -------------------- ------------------- Net loss........................................................ $ (25,762) $ (10,009) Unrealized loss on interest rate swap agreements................ (1,272) (2,171) Foreign currency translation adjustment......................... (82) (82) --------- --------- Total comprehensive loss........................................ $ (27,116) $ (12,262) ========= =========
11. INCOME TAXES Under the RMA, which became effective January 1, 2001, the Company leases certain of its hotels to wholly-owned taxable REIT subsidiaries that are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." Under SFAS 109, the Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to 13 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES -- (CONTINUED) differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. At September 30, 2001, the Company had a deferred tax asset of approximately $3.2 million, prior to any valuation allowance, relating to losses of the taxable REIT subsidiaries during the nine months ended September 30, 2001. Management has provided a 100% valuation allowance against this asset due to the uncertainty of realization and, accordingly, no provision or benefit for income taxes is reflected in the accompanying Consolidated Statements of Operations. 12. GAIN ON SALE OF ASSETS In the second quarter of 2001, the Company received $3.9 million from the condemnation of three parcels of land and recorded a gain of $3.0 million. In the third quarter of 2001, the Company sold a parcel of land adjacent to one of its Hotels in Atlanta and recorded a gain of $462,000. 13. EARNINGS PER UNIT The following table sets forth the computation of basic and diluted earnings per unit for the three and nine months ended September 30, 2001 and 2000 (in thousands, except per unit data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Numerator: Income (loss) before extraordinary items ......... $ (30,147) $ 36,851 $ (13,581) $ 24,479 Less: Preferred distributions ................. (6,150) (6,155) (18,450) (18,513) ---------- ---------- ---------- ---------- Income (loss) available to unitholders ........... (36,297) 30,696 (32,031) 5,966 Extraordinary charge .......................... (1,045) (3,865) (1,270) (3,865) ---------- ---------- ---------- ---------- Net income (loss) applicable to unitholders ...... $ (37,342) $ 26,831 $ (33,301) $ 2,101 ========== ========== ========== ========== Denominator: Denominator for basic earnings per unit - weighted average units ......................... 61,648 61,933 61,637 62,685 Effect of dilutive securities: Stock options .................................... 1 12 21 Restricted units ................................. 347 231 347 231 ---------- ---------- ---------- ---------- Denominator for diluted earnings per unit - adjusted weighted average units and assumed conversions .................................... 61,996 62,176 62,005 62,916 ========== ========== ========== ========== Earnings (loss) per unit data: Basic Net income (loss) before extraordinary item ...... $ (0.58) $ 0.50 $ (0.52) $ 0.10 Extraordinary item ............................... (0.02) (0.07) (0.02) (0.07) ---------- ---------- ---------- ---------- Net income (loss) ................................ $ (0.60) $ 0.43 $ (0.54) $ 0.03 ========== ========== ========== ========== Diluted Net income (loss) before extraordinary item ...... $ (0.58) $ 0.49 $ (0.52) $ 0.09 Extraordinary item ............................... (0.02) (0.06) (0.02) (0.06) ---------- ---------- ---------- ---------- Net income (loss) ................................ $ (0.60) $ 0.43 $ (0.54) $ 0.03 ========== ========== ========== ==========
The Series A preferred units and the majority of stock options granted are anti-dilutive and are not included in the calculation of diluted earnings per unit. 14 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. PRO FORMA INFORMATION (UNAUDITED) The following unaudited pro forma information for the nine months ended September 30, 2001 and 2000 is based in part upon the Consolidated Statements of Operations of the Company, DJONT and Six Continents for the nine months ended September 30, 2001 and 2000. The pro forma information for the nine months ended September 30, 2001 and 2000 assumes that all the following occurred on January 1 of the fiscal period presented: o The Company's acquisition of DJONT, effective January 1, 2001, for 416,667 units of limited partnership interest valued at approximately $10 million; o The Company's acquisition of 12 hotel leases from Six Continents on January 1, 2001, for 413,585 shares of FelCor common stock valued at approximately $10 million; o The Company's acquisition of the remaining 88 leases held by Six Continents, on July 1, 2001; In the opinion of the Company's management, all material adjustments necessary to reflect the effects of the preceding transactions have been made. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of what the actual results of operations would have been had and the transactions described above occurred on the indicated dates, nor do they purport to represent the Company's results of operations for future periods.
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- (IN THOUSANDS, EXCEPT PER UNIT DATA) 2001 2000 ------------ ------------ Total revenue .................................... $ 1,140,063 $ 1,267,248 ============ ============ Net income (loss) applicable to unitholders ...... $ (1,287) $ 20,060 ============ ============ Basic: Net income (loss) applicable to unitholders ... $ (0.02) $ 0.31 ============ ============ Weighted average units outstanding ............ 61,637 63,716 ============ ============ Diluted: Net income (loss) applicable to unitholders ... $ (0.02) $ 0.31 ============ ============ Weighted average units outstanding ............ 62,005 63,746 ============ ============
15. SUBSEQUENT EVENTS On November 8, 2001, the Company amended its line of credit. Prior to the amendment, the Company met all its existing covenants under its unsecured line of credit. However, it was necessary to amend the line of credit in anticipation of the continued negative RevPAR environment. The amendment allows for the relaxation of certain financial covenants through September 30, 2002, including the unsecured interest coverage, fixed charge coverage, and total leverage tests. Pricing remains on the same floating rate basis with a tiered spread based on the Company's leverage ratio, but with added tiers to reflect the higher permitted leverage. At the maximum permitted leverage under the line, the Company would pay a spread of 325 basis points LIBOR (over 90-day was 2.01% as of the close of business, November 13, 2001). Commitments remain at $615 million, with $110 million outstanding under the facility, and approximately $85 million in cash and cash equivalents as of November 13, 2001. Management currently anticipates that the Company will meet its financial covenants under the RevPAR guidance provided by the Company at its third quarter earnings conference call on November 1, 2001. The guidance that was provided for RevPAR in the fourth quarter 2001 was a decline of 20% to 25%, while in 2002 RevPAR was expected to be within a range from flat to a decline of 5%. The Company anticipates a gradual sequential recovery in 2002, by quarter, with easier comparable periods in the second half of the year. The Company currently anticipates a first half RevPAR decline of approximately 10% with the first quarter being more challenging than the second quarter of 2002. On November 13, 2001, the Company's line of credit represents approximately 5% of its debt, with $110 million outstanding. The Company also maintains flexibility in working with its lenders, with its $85 million of cash and equivalents on hand, $2.5 billion of unencumbered assets, and a breakeven occupancy, after debt service and preferred equity distributions, of approximately 50%. The $505 million of capacity under the line of credit is expected to be available to take advantage of opportunities that may present themselves as the industry begins to recover in late 2002 and 2003. The Company does not expect that the amendment to its line of credit will have an adverse impact on its business plan, which emphasizes capital preservation and maintenance of appropriate leverage in this challenging operating environment. 15 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Notes 1 and 2 of Notes to Consolidated Financial Statements of FelCor Lodging Limited Partnership appearing elsewhere herein. During the first quarter of 2001, the Company's taxable REIT subsidiaries acquired the leases covering 96 of its Hotels and acquired the remaining 88 Hotel leases on July 1, 2001. As the result of the acquisition of these leases, the Company began reporting hotel revenues and expenses, whereas prior to the acquisition of the leases percentage lease revenue was reported. FINANCIAL COMPARISON
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ----------------------------------- --------------------------------- 2001 2000 % CHANGE 2001 2000 % CHANGE --------- -------- -------- -------- -------- -------- (IN MILLIONS, (IN MILLIONS, EXCEPT REVPAR) EXCEPT REVPAR) Revenue Per Available Room ("RevPAR")...................... $ 62.03 $ 75.14 (17.4) $ 69.62 $ 75.38 (7.8) Funds From Operations ("FFO") ...... $ 33.1 $ 76.8 (57.0) $ 169.8 $ 226.2 (24.9) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") ...................... $ 80.1 $ 123.0 (34.9) $ 308.8 $ 361.7 (14.6) Net income (loss) .................. $ (31.2)(1) $ 33.0 (194.5)(1) $ (14.9)(2) $ 20.6 (172.3)(2)
(1) The net loss for the three months ended September 30, 2001 includes $25.5 million of non-recurring expenses made up of merger termination costs of $19.9 million, merger related financing costs of $4.1 million, lease termination costs of approximately $378,000 and $1.0 million of extraordinary loss from the write-off of deferred loan costs. (2) The net loss for the nine months ended September 30, 2001 includes $63 million of non-recurring expenses made up of merger termination costs of $19.9 million, merger related financing costs of $5.2 million, lease termination costs of approximately $36.6 million and $1.3 million of extraordinary loss from the write-off of deferred loan costs. MERGER TERMINATION On May 9, 2001, the Company entered into an Agreement and Plan of Merger with MeriStar and MeriStar LP. On September 21, 2001, the Company and MeriStar jointly announced the termination of the merger. The decision to terminate the merger resulted from the September 11 terrorist attacks and their subsequent adverse impact on the financial markets. As a result of the merger termination, the Company recorded expenses aggregating $19.9 million in the third quarter of 2001 associated with the termination of the merger and identified non-recurring merger financing costs of $4.1 million for the quarter ended September 30, 2001 and $5.2 million for the nine months ended September 30, 2001. The registration statement on Form S-4 that the Company filed with the SEC in connection with the merger has been withdrawn. 16 ACQUISITION OF HOTEL LEASES The Company completed the acquisition of DJONT (which leased 85 of the Company's Hotels) effective January 1, 2001. In consideration for the acquisition, the Company issued approximately 417,000 units of limited partnership interest, valued at approximately $10 million which, together with DJONT's accumulated deficit of $24.5 million, was recorded as a lease termination cost in the first quarter of 2001. On January 1, 2001, the Company acquired the leases on 12 of the Company's Hotels, together with the associated management contracts, for approximately 414,000 shares of FelCor common stock valued at approximately $10 million, of which $1.7 million was included in lease termination costs and the remainder had been previously accrued for in the reserve related to hotels held for sale. Of these hotels, three have been sold, eight have been contributed to a joint venture with IHC and one will be retained. Effective July 1, 2001, the Company acquired the remaining 88 Hotel leases held by Six Continents in exchange for long-term management agreements,. In exchange for the assignment of the leases to a wholly-owned TRS of the Company, FelCor issued 100 shares of its common stock and the Company entered into long-term management agreements with Six Continents covering the 88 Hotels. The management fees payable to Six Continents under the new management agreements on the 88 Hotels were structured so that the historical cash flows for the year ended December 31, 2000, for both the Company and Six Continents, would have been approximately the same had the management agreements replaced the leases on January 1, 2000. These management fees, which are higher than those paid by the Company to other managers for comparable services, include compensation to Six Continents for both management services and the acquisition of the 88 leases. Beginning with the third quarter of 2001, the Company's financial statements reflected the hotel revenues and expenses of these additional 88 Hotels. Unlike the leases, where the rent payable to the Company would vary only as a result of changes in hotel revenues, the Company's future cash flow and net income from the Hotels also will vary as a result of changes in the operating margins of the Hotels. The Company entered into the transactions to acquire the leases based upon its belief that, in the long term, lodging demand will exceed new supply and that operational efficiencies will increase industry-wide for a variety of reasons, including the impact of new technologies allowing lower-cost delivery of services and providing new revenue sources that are not labor-intensive, such as in-room entertainment and direct and in-room marketing to guests. The recent economic slowdown combined with the sharp reduction in travel following the terrorist attacks of September 11, have resulted in declines in RevPAR and in an erosion in operating margins during the three and nine months ended September 30, 2001, as compared to the same periods of 2000. So long as the operating margins for the Hotels remain below the levels experienced during 2000, the Company expects the hotel operating results to be generally less favorable to it than the leases would have been. HIGHLIGHTS: FIRST QUARTER o The Company contributed seven Marriott(R)-branded hotels and one Hilton(R)-branded hotel to a 50/50 joint venture between the Company and IHC. Net cash proceeds to the Company were $52 million. In addition to its 50% equity interest in the joint venture, the Company retains a $17 million preferred interest. o Project capital expenditures for improvements totaled $9.7 million during the quarter. An additional $6.3 million was spent on maintenance capital expenditures. SECOND QUARTER o In June, the Company sold the 140-room Hampton Inn(R) hotel located in Marietta, Georgia, for net sales proceeds of $7.1 million. This hotel had been previously designated as held for sale and no gain or loss was recorded on this sale. o Project capital expenditures for improvements totaled $8.3 million during the quarter. An additional $7.8 million was spent on maintenance capital expenditures. 17 THIRD QUARTER o In September, the Company sold the 119-room Hampton Inn located in Jackson, Mississippi, for net sale proceeds of $4.0 million. This hotel had been previously designated as held for sale and no gain or loss was recorded on this sale. o Project capital improvements totaled $8.9 million during the quarter. An additional $8.8 million was spent on maintenance capital expenditures. CAPITALIZATION: FIRST QUARTER o On January 11, 2001, the Company completed the private placement of $100 million of senior unsecured notes that mature in September, 2008 and bear interest at an effective rate of 9 1/8%. The proceeds were used initially to pay down the Company's line of credit. o FelCor repurchased approximately 179,000 shares of its common stock for approximately $4.0 million. o The Company declared first quarter distributions of $0.55 per unit, $0.4875 per unit on its $1.95 Series A cumulative convertible preferred units and $0.5625 per depositary unit evidencing its 9% Series B cumulative redeemable preferred units. SECOND QUARTER o On June 4, 2001, the Company issued $600 million of 10-year, 8 1/2% senior unsecured notes. Approximately $315 million of the proceeds were placed in escrow pending the completion or termination of the merger with MeriStar. Non-recurring merger related financing costs related to the escrowed funds, reduced earnings by $1.1 million. The remaining proceeds were used initially to pay down the Company's line of credit and other floating rate debt. In connection with the prepayment of floating rate debt, the Company terminated $200 million of interest rate swaps resulting in a one-time $4.8 million swap termination cost. o The Company declared second quarter distributions of $0.55 per unit, $0.4875 per unit on its $1.95 Series A cumulative convertible preferred units and $0.5625 per depositary unit evidencing its 9% Series B cumulative redeemable preferred units. THIRD QUARTER o In July 2001, the Company renewed its line of credit in the amount of $615 million and extended its maturity to July 2006, including extension options. o On September 13, 2001, the Company announced exchange offers for its $100 million 9 1/2% senior notes due 2008 and its $600 million 8 1/2% senior notes due 2011 under which it offered to exchange the privately placed senior notes for notes with identical terms that are registered under the Securities Act of 1933. These offerings were completed in October 2001. o On September 21, 2001, the Company and MeriStar jointly announced an agreement to terminate their merger. Merger termination costs of $19.9 million were recorded in the quarter. As a result of the merger termination, in accordance with the requirements of the indenture governing the Company's outstanding $600 million in 8 1/2% Senior Notes Due 2011, the Company redeemed $300 million in principal amount of these Notes. The redemption price was at 101% of the principal amount being redeemed plus accrued interest and was paid out of the $315 million previously escrowed. Non-recurring merger related financing costs, relating to the escrowed funds, reduced earnings by $4.1 million. o The Company declared third quarter distributions of $0.55 per unit, $0.4875 per unit on its $1.95 Series A cumulative convertible preferred units and $0.5625 per depositary unit evidencing its 9% Series B cumulative redeemable preferred units. 18 RESULTS OF OPERATIONS The Company Three Months Ended September 30, 2001 and 2000 Through December 31, 2000, the Company leased 184 Hotels to either DJONT or Six Continents and reported lease revenue from percentage lease agreements. Effective January 1, 2001, the Company, through its TRSs, acquired 96 of these Hotel leases and, effective July 1, 2001, acquired the leases on the remaining 88 Hotels. As the result of acquiring these leases, the Company reported hotel operating revenues and expenses with regard to the Hotels for the three months ended September 30, 2001. Accordingly, the operating results for this period are not directly comparable to the same period in 2000, where the Company reported only percentage lease revenue from the Hotels. Total revenue for the quarter ended September 30, 2001 increased $204.9 million over the same period in 2000. The increase is principally associated with reporting hotel operating revenues for the Hotels, compared to the percentage lease revenue reported by the Company in the prior year. On a pro forma basis, assuming that the leases had been acquired January 1, 2000, total revenue would have decreased $81.6 million in the third quarter of 2001, compared to the same period in 2000. The decrease in pro forma total revenue is principally attributed to a 17.4% decrease in RevPAR. The recent economic slowdown combined with the sharp reduction in travel following the terrorist attacks of September 11, were the principal reasons for this decrease in RevPAR. Total operating expenses increased by $258.3 million for the three months ended September 30, 2001 over the same three month period in 2000. This increase primarily resulted from the inclusion of hotel operating expenses, management fees and other property related costs that were not included in the same period of 2000, prior to the Company's acquisition of the Hotel leases. Also included in total operating expenses are merger termination costs, lease termination costs, depreciation, and taxes, insurance and lease expenses. The Company wrote off approximately $19.9 million of costs associated with the termination of the MeriStar merger and approximately $378,000 in expenses related to the acquisition of its leases. Taxes, insurance and lease expense increased by $7.5 million in the three months ended September 30, 2001, compared to the prior year period. The majority of this increase consists of percentage lease expense paid to unconsolidated joint ventures from which the hotels are leased by DJONT. Net income decreased $64.2 million for the three months ended September 30, 2001, compared to the same period in 2000. Major items affecting the change in net income are the changes in revenues and operating expenses discussed above, non-recurring merger financing costs, equity in income of unconsolidated entities, gain on sale of assets, and extraordinary items. In the quarter ended September 30, 2001, the Company recognized $4.1 million of non-recurring merger financing costs related to the $300 million in senior debt which was repaid in October 2001 from the $315 million in previously escrowed funds. Equity in income of unconsolidated entities decreased by $6.4 million compared to the same quarterly period in 2000. The principal reasons for the decrease in 2001 were (i) a one time gain of $3.7 million was recorded in 2000 from the development and sale of condominiums by an entity in which the Company owns a 50% equity interest and (ii) the decline in percentage lease revenue of unconsolidated entities related to a 29.6% decline in RevPAR for these hotels. Gain on sale of assets decreased by $2.9 million compared to the third quarter of 2000 as the result of the one time sale of assets in 2000. Extraordinary charge from write off of deferred loan costs decreased by $2.8 million. The decrease resulted from approximately $3.9 million written off in 2000 related to deferred loan costs associated with debt which was retired prior to maturity compared to only $1.0 million being written off in 2001 associated with the renewal and extension of the Company's unsecured line of credit. 19 Nine Months Ended September 30, 2001 and 2000 Through December 31, 2000, the Company leased 184 Hotels to either DJONT or Six Continents and reported lease revenue from percentage lease agreements. Effective January 1, 2001, the Company, through its TRSs, acquired 96 of these Hotels and, effective July 1, 2001, acquired the leases on the remaining 88 Hotels. As the result of acquiring these leases, the Company reported hotel operating revenue and expenses with regard to the Hotels beginning in 2001. Accordingly, the operating results for this period are not directly comparable to the same period in 2000, where the Company reported only percentage lease revenue from the Hotels. Total revenue for the nine months ended September 30, 2001 increased $507.1 million over the same period in 2000. The increase is principally associated with hotel operating revenues for the Hotels compared to the percentage lease revenue reported by the Company in the prior year. On a pro forma basis, assuming that the leases had been acquired January 1, 2000, total revenue would have decreased $127.2 million for the nine months ended September 30, 2001, compared to the same nine month period in 2000. The decrease in total revenue, on a pro forma basis, is principally attributed to a decrease in RevPAR of 7.8%. The recent economic slowdown combined with the sharp reduction in travel following the terrorist attacks of September 11, were the principal reasons for this decrease in RevPAR. Total operating expenses increased by $589.4 million for the nine months ended September 30, 2001 over the same nine month period in 2000. This increase primarily resulted from the inclusion of hotel operating expenses, management fees and other property related costs that were not included in the same period of 2000, prior to the Company's acquisition of the Hotel leases. Also included in total operating expenses are merger termination costs, depreciation expense and taxes, insurance and lease expenses. The Company wrote off approximately $19.9 million of costs associated with the termination of the MeriStar merger and approximately $36.6 million in expenses related to the acquisition of its leases. Taxes, insurance and lease expense increased by $36.4 million in the nine months ended September 30, 2001, compared to the prior year period. The majority of this increase consists of percentage lease expense paid to unconsolidated joint ventures from which the hotels are leased by DJONT. Net income decreased $35.5 million for the nine months ended September 30, 2001 compared to the same period in 2000. Major items affecting the change in net income are the changes in revenues and operating expenses discussed above, non-recurring merger financing costs, equity in income of unconsolidated entities, gain on sale of assets, interest expense and extraordinary items. Interest expense had a net increase of $1.9 million, principally related to the issuance of $600 million in senior debt in June 2001. In the nine months ended September 30, 2001 the Company recognized $5.2 million of non-recurring merger financing costs related to the $300 million senior debt which was repaid in October from the $315 million in previously escrowed funds. Equity in income of unconsolidated entities decreased by $5.8 million compared to the same period in 2000. The principal reasons for the decrease in 2001 were (i) a one time gain of $3.7 million was recorded in 2000 from the development and sale of condominiums by an entity in which the Company owns a 50% equity interest and (ii) the decline in percentage lease revenue of unconsolidated entities related to the 8.2% decline in RevPAR for these hotels. Gain on sale of assets decreased by $836,000 compared to the same nine months of 2000 as the result of the one time sale of assets in 2000, offset in part by condemnation proceeds received in 2001. Extraordinary charge from write off of deferred loan costs decreased by $2.6 million. The decrease resulted from approximately $3.9 million written off in 2000 related to deferred loan costs associated with debt which was retired prior to maturity compared to $1.3 million written off in 2001 associated with the renewal and extension of the Company's unsecured line of credit. 20 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 extraordinary items 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 lease termination costs, merger termination costs, non-recurring merger financing costs and interest rate swap termination expense 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 lease termination costs, merger termination costs, non-recurring merger financing costs and interest rate swap termination expense. 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. The following table details the computation of FFO (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- FUNDS FROM OPERATIONS (FFO)(1): Net income (loss) ................................. $ (31,192) $ 32,986 $ (14,851) $ 20,614 Deferred rent ................................ 3,664 22,268 Gain on sale of hotel ........................ (2,460) (2,460) Extraordinary charge ......................... 1,045 3,865 1,270 3,865 Loss on assets held for sale ................. 63,000 Swap termination expense ..................... 4,824 Lease termination costs ...................... 378 36,604 Merger costs: Termination costs ....................... 19,919 19,919 Non-recurring financing costs ........... 4,126 5,212 Series B preferred distributions ............. (3,235) (3,235) (9,703) (9,703) Depreciation ................................. 39,273 39,535 118,786 121,015 Depreciation from unconsolidated entities .... 2,755 2,493 7,777 7,629 ---------- ---------- ---------- ---------- FFO ............................................... $ 33,069 $ 76,848 $ 169,838 $ 226,228 ========== ========== ========== ========== Weighted average units outstanding (2) ............ 66,632 66,851 66,641 67,601 ========== ========== ========== ==========
21 The following table details the computation of EBITDA (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- EBITDA(1): Funds from Operations ............................... $ 33,069 $ 76,848 $ 169,838 $ 226,228 Interest expense ............................... 40,695 40,168 120,591 117,812 Interest expense of unconsolidated entities .... 2,523 2,162 7,265 6,949 Amortization expense ........................... 555 569 1,439 1,043 Series B preferred distributions ............... 3,235 3,235 9,703 9,703 ---------- ---------- ---------- ---------- EBITDA .............................................. $ 80,077 $ 122,982 $ 308,836 $ 361,735 ========== ========== ========== ==========
(1) FFO and EBITDA are adjusted for non-recurring items. (2) Weighted average units outstanding are computed including dilutive options, unvested stock grants, and assuming conversion of Series A Preferred Units to Units. 22 Hotel Operating Statistics The following table sets forth historical occupied rooms ("Occupancy"), average daily rate ("ADR") and RevPAR at September 30, 2001 and 2000, and the percentage changes therein between the periods presented for the Hotels in which the Company had an ownership interest at September 30, 2001:
OCCUPANCY (%) -------------------------------------------------------------------- THIRD QUARTER YEAR TO DATE --------------------------------- --------------------------------- % % 2001 2000 VARIANCE 2001 2000 VARIANCE ---- ---- -------- ---- ---- -------- Embassy Suites hotels 65.6 75.8 (13.5) 69.3 76.0 (8.8) Holiday-branded hotels 65.4 72.7 (10.1) 67.9 71.1 (4.6) Crowne Plaza hotels 57.7 72.8 (20.8) 62.7 72.6 (13.6) Doubletree-branded hotels 60.2 70.0 (14.0) 67.6 71.0 (4.7) Sheraton-branded hotels 59.5 71.3 (16.5) 65.7 73.0 (10.0) Other hotels 57.6 65.0 (11.3) 61.6 65.2 (5.6) Total hotels 63.0 72.7 (13.2) 66.9 72.3 (7.5)
ADR (DOLLARS) -------------------------------------------------------------------- THIRD QUARTER YEAR TO DATE --------------------------------- -------------------------------- % % 2001 2000 VARIANCE 2001 2000 VARIANCE ------ ------ -------- ------- ------- ---------- Embassy Suites hotels 122.69 126.84 (3.3) 130.64 127.61 2.4 Holiday-branded hotels 82.92 87.00 (4.7) 84.78 86.35 (1.8) Crowne Plaza hotels 98.11 105.07 (6.6) 103.84 104.89 (1.0) Doubletree-branded hotels 97.17 101.60 (4.4) 105.95 104.79 1.1 Sheraton-branded hotels 101.75 108.99 (6.6) 110.77 111.91 (1.0) Other hotels 73.99 78.41 (5.6) 79.40 81.84 (3.0) Total hotels 98.41 103.42 (4.8) 103.94 104.25 (0.3)
REVPAR (DOLLARS) -------------------------------------------------------------------- THIRD QUARTER YEAR TO DATE --------------------------------- -------------------------------- % % 2001 2000 VARIANCE 2001 2000 VARIANCE ------ ------ -------- ------ ------ -------- Embassy Suites hotels 80.44 96.15 (16.3) 90.53 96.93 (6.6) Holiday-branded hotels 54.22 63.29 (14.3) 57.54 61.41 (6.3) Crowne Plaza hotels 56.59 76.48 (26.0) 65.15 76.18 (14.5) Doubletree-branded hotels 58.48 71.10 (17.8) 71.67 74.35 (3.6) Sheraton-branded hotels 60.55 77.70 (22.1) 72.76 81.69 (10.9) Other hotels 42.61 50.93 (16.3) 48.89 53.37 (8.4) Total hotels 62.03 75.14 (17.4) 69.52 75.38 (7.8)
23 REVPAR PERFORMANCE FOR SELECTED STATES Texas, California, Florida and Georgia contained the largest concentration of the Company's Hotels. The RevPAR changes during the periods ended September 30, 2001 (versus comparable periods of 2000) from the Company's Hotels in these states are as follows:
REVPAR (DOLLARS) --------------------------------------------------------------------------------------- THIRD QUARTER YEAR-TO-DATE ----------------------------------------- ------------------------------------------- 2001 2000 % VARIANCE 2001 2000 % VARIANCE ------ ------- ---------- ------ ------- ---------- Texas 47.45 56.65 (16.2) 55.00 60.03 (8.4) California 92.48 122.76 (24.7) 98.99 113.44 (12.7) Florida 51.02 60.31 (15.4) 69.28 73.73 (6.0) Georgia 57.97 69.44 (16.5) 66.89 70.26 (4.8)
BRAND DISTRIBUTION
NUMBER OF NUMBER PERCENTAGE OF HOTELS OF ROOMS ROOM REVENUE --------- -------- ------------- Embassy Suites 59 14,843 39.8 Holiday-branded hotels 59 16,922 28.7 Crowne Plaza 18 5,963 11.5 Doubletree-branded hotels 14 2,779 5.9 Sheraton-branded 10 3,269 7.0 Other hotels 24 4,848 7.1 ---- ------- ------ Total 184 48,624 100.0 === ======= ======
SELECTED STATE DISTRIBUTION
NUMBER OF NUMBER PERCENTAGE OF HOTELS OF ROOMS ROOM REVENUE --------- -------- ------------- Texas 41 11,138 18.2 California 19 6,027 17.7 Florida 18 5,658 11.6 Georgia 14 3,868 7.7 --- -------- ----- Total for four states 92 26,691 55.2 === ======== =====
24 LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to meet its cash requirements, including distributions to unitholders and repayments of indebtedness, is from the results of operations of the Hotels. For the nine months ended September 30, 2001, net cash flow provided by operating activities, consisting primarily of hotel operations, was $137.0 million and FFO was $169.8 million. As a result of the effectiveness of the RMA, the Company obtained the right to lease the Hotels to TRSs of the Company. Accordingly, January and July 2001, the Company acquired its existing lessees or leases in consolidated taxable REIT subsidiaries and began reporting the revenues and expenses of Hotel operations, rather than reporting only the lease income from the percentage leases. Any profits or losses from the TRS entities holding the Hotel leases, after applicable corporate taxes, are reflected in the Company's results of operations. Prior to January 1, 2001, substantially all of the Company's Hotels were leased to third parties under leases providing for the payment of rent based, in part, upon revenues from the Hotels. Accordingly, the Company's risks were essentially limited to changes in Hotel revenues and to the lessees' ability to pay the rent due under the leases. On January 1, 2001, the Company acquired the leaseholds of 96 of its hotels and on July 1, 2001, the Company acquired the remaining 88 Hotel leases. As a result of these acquisitions, the Company also became subject to the risk of fluctuating hotel operating margins at its Hotels, including but not limited to wage and benefit costs, repair and maintenance expenses, utilities, liability insurance, and other operating expenses which can fluctuate disproportionately to revenues. These operating expenses are more difficult to predict and control than percentage lease revenue, resulting in an increased risk of volatility in the Company's results of operations. The recent economic slowdown and the terrorist attacks of September 11 resulted both in declines in RevPAR and an erosion in operating margins during the nine months ended September 30, 2001, compared to the same period of 2000. If the decline in hotel RevPAR and/or operating margins worsen or continue for a protracted time, it could have a material adverse effect on the Company's operations and earnings. The Company made the decision to acquire its leases, and the potential profits from the operation of its Hotels, based upon its belief that, in the long term, lodging demand will exceed new supply and that operating efficiencies will increase industry-wide for a variety of reasons, including the impact of new technologies allowing lower-cost delivery of services and providing new revenue sources that are not labor-intensive, such as in-room entertainment and direct in-room marketing to guests. On May 9, 2001, the Company entered into an Agreement and Plan of Merger with MeriStar and MeriStar LP. On September 21, 2001, the Company and MeriStar announced the termination of the merger. The decision to terminate the merger resulted from the September 11 terrorist attacks and the subsequent adverse impact on the financial markets. As the result of the merger termination, the Company recorded expenses aggregating $19.9 million associated with the merger and recognized $5.2 million of non-recurring merger financing costs. On January 11, 2001, the Company completed the private placement of $100 million in 9 1/2% senior unsecured notes that mature in September 2008. These notes were issued at a premium to yield an effective rate of 91/8%. The proceeds were used initially to pay down the Company's line of credit. On September 13, 2001, the Company announced the commencement of offers to exchange the $100 million of privately placement senior notes for notes with identical terms that are registered under the Securities Act of 1933. This exchange offer was completed in October 2001. In March 2001, the Company contributed eight of the Hotels held for sale to an entity in which the Company holds a 50% equity interest, and a subsidiary of IHC holds the other 50% equity interest. Another subsidiary of IHC manages each of these hotels. 25 On June 4, 2001, the Company completed the private placement of $600 million in 8 1/2% senior unsecured notes that mature in 2011. Approximately $315 million of the proceeds were placed in escrow, pending the closing or termination of the merger with MeriStar. As the result of the merger termination, in accordance with the requirements of the indenture governing these notes, in October 2001, the Company redeemed $300 million in principal amount of these notes. The redemption price was 101% of the principal amount redeemed plus accrued interest and was paid out of the $315 million in escrowed funds. On September 13, 2001, the Company announced the commencement of offers to exchange the privately placed notes for notes with identical terms that are registered under the Securities Act of 1933. This exchange offer was completed in October 2001. In June 2001, in connection with the issuance of fixed rate senior notes and the subsequent prepayment of floating rate debt, the Company terminated $200 million of interest rate swaps, resulting in a one-time $4.8 million swap termination cost recorded in the second quarter. In July 2001, the Company entered into an amended and restated revolving credit facility in the amount of $615 million and extended the maturity date to October 2004, before extension options. On November 8, 2001, the Company amended its line of credit. Prior to the amendment, the Company met all its existing covenants under its unsecured line of credit. However, it was necessary to amend the line of credit in anticipation of the continued negative RevPAR environment. The amendment allows for the relaxation of certain financial covenants through September 30, 2002, including the unsecured interest coverage, fixed charge coverage, and total leverage tests. Pricing remains on the same floating rate basis with a tiered spread based on the Company's leverage ratio, but with added tiers to reflect the higher permitted leverage. At the maximum permitted leverage under the line, the Company would pay a spread of 325 basis points LIBOR (over 90-day was 2.01% as of the close of business, November 13, 2001). Commitments remain at $615 million, with $110 million outstanding under the facility, and approximately $85 million in cash and cash equivalents as of November 13, 2001. Management currently anticipates that the Company will meet its financial covenants under the RevPAR guidance provided by the Company at its third quarter earnings conference call on November 1, 2001. The guidance that was provided for RevPAR in the fourth quarter 2001 was a decline of 20% to 25%, while in 2002 RevPAR was expected to be within a range from flat to a decline of 5%. The Company anticipates a gradual sequential recovery in 2002, by quarter, with easier comparable periods in the second half of the year. The Company currently anticipates a first half RevPAR decline of approximately 10% with the first quarter being more challenging than the second quarter of 2002. On November 13, 2001, the Company's line of credit represents approximately 5% of its debt, with $110 million outstanding. The Company also maintains flexibility in working with its lenders, with its $85 million of cash and equivalents on hand, $2.5 billion of unencumbered assets, and a breakeven occupancy, after debt service and preferred equity distributions, of approximately 50%. The $505 million of capacity under the line of credit is expected to be available to take advantage of opportunities that may present themselves as the industry begins to recover in late 2002 and 2003. The Company does not expect that the amendment to its line of credit will have an adverse impact on its business plan, which emphasizes capital preservation and maintenance of appropriate leverage in this challenging operating environment. The Company may incur indebtedness to make property acquisitions, to purchase units, or to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to the extent that working capital and cash flow from the Company's investments are insufficient for such purposes. FelCor's board of directors has authorized FelCor to repurchase up to $300 million of its outstanding common shares. Stock repurchases may, at the discretion of FelCor's management, be made from time to time at prevailing prices in the open market or through privately negotiated transactions. Beginning in January 2001, through March 27, 2001, FelCor repurchased approximately 179,000 shares of its outstanding common stock on the open market for approximately $4.0 million. Subsequent to March 27, 2001, FelCor has not repurchased any additional shares of its common stock and it does not currently anticipate that it will repurchase additional stock in the near future. The Company intends to limit its future distributions to its partners to available cash flow, if any. Accordingly, distributions to its partners may be significantly reduced or possibly eliminated in future periods. At September 30, 2001, the Company had $69.6 million of cash and cash equivalents. Certain significant credit and debt statistics at September 30, 2001, are as follows: o Interest coverage ratio of 2.4x for the twelve month period ended September 30, 2001 o Borrowing capacity of $565.1 million under its line of credit o Consolidated debt equal to 39.4% of its investment in hotels, at cost o Fixed interest rate debt equal to 100% of total debt o Weighted average maturity of fixed interest rate debt of approximately 7 years o Mortgage debt to total assets of 17.1% o Debt of approximately $3.2 million maturing in 2001 o Debt of approximately $13.0 million maturing in 2002 o Debt of approximately $35.0 million maturing in 2003 The Company's 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, 2001, the Company was in compliance with all such covenants. 26 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 Company's mortgage debt is nonrecourse to the Company 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. The Company had one interest rate swap agreement with a notional amount of $50 million at September 30, 2001, which was designated as a cash flow hedge. The interest rate swap agreement modifies 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 converts variable rate debt to a fixed rate. The fixed rate to be paid, based on the swap agreement is 5.56%, and the variable rate to be received by the Company at September 30, 2001 is 3.58%. The swap agreement matures in July 2003. The Company spent approximately $50.3 million on upgrading and renovating its Hotels during the nine months ended September 30, 2001. Notwithstanding the current significant economic downturn, the Company believes that its Hotels will continue to benefit from the Company's extensive capital expenditure programs in previous years. Most future renovation and redevelopment expenditures are discretionary and the Company expects to fund these from cash flow. 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 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, 2001, the table presents scheduled maturities and weighted average interest rates, by maturity dates. For its interest rate swap, the table presents the notional amount and weighted average interest rate, by contractual maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve as of September 30, 2001. The Fair Value of the Company's fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements which could have been borrowed at September 30, 2001 at then current market interest rates. The Fair Value of the Company's variable to fixed interest rate swap indicates the estimated amount that would have been paid by the Company had the swap been terminated at September 30, 2001. EXPECTED MATURITY DATE (IN THOUSANDS)
REMAINDER OF 2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE --------- ------- ------- -------- ------- ---------- ---------- ---------- LIABILITIES Debt: Fixed rate $ 3,200 $13,000 $34,904 $189,228 $43,129 $1,516,157 $1,799,618(1) $1,655,565 Average interest rate 8.16% 8.19% 8.09% 7.44% 8.67% 8.62% Floating rate $ 49,900 $ 650 $ 50,550 $ 50,550 Average interest rate 6.97% 8.26% Discount accretion $ (6,527) Total debt $1,843,641(1) INTEREST RATE DERIVATIVES Interest rate swap: Floating to fixed $50,000 $ 50,000 $ (2,171) Average pay rate 5.56% Average receive rate 3.58%
(1) Excludes $300 million in senior notes that was repaid out of escrowed funds in October 2001. 27 Swap contracts, such as described above, contain a credit risk, in that the counterparties may be unable to fulfill the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, who are limited to major banks and financial institutions, and does not anticipate nonperformance by the counterparties. INFLATION Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, require the Company to reduce room rates in the near term and may limit its ability to raise room rates in the future. 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 earnings, particularly during the fourth quarter. Historically, to the extent that cash flow from operations has been insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, the Company has utilized cash on hand or borrowings under its line of credit to make distributions to its equity holders. However, due to the sharp reduction in travel following the terrorist attacks of September 11 and the resultant drop in RevPAR and profits from the Company's hotel operations, the Company plans to limit distributions to its partners to available cash flow. Accordingly, distributions to its partners may be significantly reduced or possibly eliminated in future periods. 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 are 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, 2001. 28 PART II. -- OTHER INFORMATION ITEM 5. OTHER INFORMATION. For information relating to certain other transactions by the Company through September 30, 2001, see Notes 1 and 2 of Notes to Consolidated Financial Statements of FelCor Lodging Limited Partnership 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: The following exhibits are filed as part of this report:
Exhibit No. Description ----------- ----------- 10.17.1 First Amendment dated as of November 6, 2001, among the Registrant, FelCor Lodging Trust Incorporated and FelCor Canada Co., as Borrowers, the lenders party thereto, The Chase Manhattan Bank and The Chase Manhattan Bank of Canada, as Administrative Agents, and Bankers Trust Company, as Syndication Agent (filed as Exhibit 10.17.1 to the Form 10-Q of FelCor Lodging Trust Incorporated for the quarter ended June 30, 2001, and incorporated herein by reference).
(b) Reports on Form 8-K: A current report on Form 8-K was filed by the Company on September 24, 2001. This filing, under Item 5, reported (a) the termination of the merger between FelCor Lodging Trust Incorporated, FelCor Lodging Limited Partnership, FelCor Mergesub, L.L.C., MeriStar Hospitality and MeriStar Hospitality Operating Partnership, L.P.; (b) the redemption of $300 million of the Company's $600 million in 8 1/2% senior notes, at a redemption price equal to 101% of the principal amount plus accrued interest, in accordance with the requirements of the indenture governing such notes, as a result of the termination of the MeriStar merger; and (c) a supplement to the Cautionary Statements published in its annual report on Form 10-K for the year ended December 31, 2000. A current report on Form 8-K was filed by the Company on October 5, 2001. This filing, under Item 5, attached as an exhibit a press release dated October 4, 2001, reporting improving occupancy trends since the lows experienced following the September 11, 2001, terrorist attacks, and key information about the Company's operating performance. 29 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 14, 2001 FELCOR LODGING LIMITED PARTNERSHIP A Delaware Limited Partnership By: FelCor Lodging Trust Incorporated Its General Partner By: Richard J. O'Brien ---------------------------------------- Richard J. O'Brien Executive Vice President and Chief Financial Officer 30