-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AWNbPY9YmRX3nqIu2LdMHWQp+QPJxeUNE+NpBX0e8Hof2b1tnY6VgSNGyoXIGCju iduCLNilZp5bg5XzTJToQA== 0000950134-02-010038.txt : 20020814 0000950134-02-010038.hdr.sgml : 20020814 20020814151236 ACCESSION NUMBER: 0000950134-02-010038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR LODGING L P CENTRAL INDEX KEY: 0001048789 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752544994 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-39595-01 FILM NUMBER: 02735507 BUSINESS ADDRESS: STREET 1: 545 E. JOHN CARPENTER FREEWAY STREET 2: SUITE 1300 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 9724444900 FORMER COMPANY: FORMER CONFORMED NAME: FELCOR SUITES LP DATE OF NAME CHANGE: 19971030 10-Q 1 d99036e10vq.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 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 - June 30, 2002 (Unaudited) and December 31, 2001................................................................... 3 Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2002 and 2001 (unaudited)................................................ 4 Consolidated Statements of Comprehensive Income - For the Three and Six Months Ended June 30, 2002 and 2001 (unaudited) ............................................... 5 Consolidated Statements of Cash Flows -- For the Six Months Ended June 30, 2002 and 2001 (unaudited)................................................ 6 Notes to Consolidated Financial Statements................................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General...................................................................................... 22 Financial Comparison......................................................................... 22 Results of Operations........................................................................ 22 Liquidity and Capital Resources.............................................................. 32 Inflation.................................................................................... 35 Seasonality.................................................................................. 35 Disclosure Regarding Forward Looking Statements.............................................. 35 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 35 PART II. - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds....................................................... 36 Item 5. Other Information............................................................................... 36 Item 6. Exhibits and Reports on Form 8-K................................................................ 36 SIGNATURE.................................................................................................... 37
2 PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------ (UNAUDITED) ASSETS Investment in hotels, net of accumulated depreciation of $706,834 at June 30, 2002 and $630,962 at December 31, 2001 .......................... $3,592,897 $3,662,680 Investment in unconsolidated entities .......................................... 148,408 151,047 Hotels held for sale ........................................................... 33,722 38,937 Cash and cash equivalents ...................................................... 151,704 128,742 Accounts receivable ............................................................ 64,373 55,868 Deferred expenses, net of accumulated amortization of $13,330 at June 30, 2002 and $10,672 at December 31, 2001 ........................... 29,605 31,249 Other assets ................................................................... 27,650 20,406 ---------- ---------- Total assets .......................................................... $4,048,359 $4,088,929 ========== ========== LIABILITIES AND PARTNERS' CAPITAL Debt, net of discount of $7,194 at June 30, 2002 and $7,768 at December 31, 2001 ................................................. $1,882,675 $1,938,408 Distributions payable .......................................................... 14,766 8,172 Accrued expenses and other liabilities ......................................... 178,893 173,496 Minority interest in other partnerships ........................................ 50,652 49,559 ---------- ---------- Total liabilities ..................................................... 2,126,986 2,169,635 ---------- ---------- Commitments and contingencies Redeemable units at redemption value, 9,003 and 9,005 units issued and outstanding at June 30, 2002 and December 31, 2001, respectively............. 165,202 150,479 ---------- ---------- Preferred units, $.01 par value, 20,000 units authorized: Series A Cumulative Preferred Units, 5,980 and 5,981 units issued and outstanding at June 30, 2002 and December 31, 2001, respectively ......... 149,512 149,515 Series B Redeemable Preferred Units, 68 and 58 units issued and outstanding at June 30, 2002 and December 31, 2001, respectively ......... 169,395 143,750 Common units, 54,208 and 54,098 units issued and outstanding at June 30, 2002 and December 31, 2001, respectively ......................................... 1,434,800 1,475,926 Accumulated other comprehensive income.......................................... 2,464 (376) ---------- ---------- Total partners' capital ............................................... 1,756,171 1,768,815 ---------- ---------- Total liabilities, redeemable units and partners' capital ............. $4,048,359 $4,088,929 ========== ==========
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 SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER UNIT DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Revenues: Hotel operating revenue: Room ............................................. $ 277,361 $ 173,118 $ 534,591 $ 365,343 Food and beverage ................................ 56,389 25,486 107,080 53,150 Other operating departments ...................... 17,548 11,891 33,767 24,790 Percentage lease revenue ........................... 63,606 115,137 Retail space rental and other revenue .............. 428 548 1,098 1,882 --------- --------- --------- --------- Total revenues ..................................... 351,726 274,649 676,536 560,302 --------- --------- --------- --------- Expenses: Hotel operating expenses: Room ............................................. 68,114 39,784 131,347 83,404 Food and beverage ................................ 42,138 19,024 82,129 39,141 Other operating departments ...................... 7,916 5,195 15,232 10,922 Other property operating costs ..................... 90,548 52,508 179,708 111,009 Management and franchise fees ...................... 18,088 10,573 33,736 23,245 Taxes, insurance and lease expense ................. 33,790 38,096 68,360 76,460 Corporate expenses ................................. 3,970 3,231 7,716 6,372 Depreciation ....................................... 38,204 39,705 76,822 79,513 Lease termination costs ............................ 36,226 --------- --------- --------- --------- Total operating expenses ........................... 302,768 208,116 595,050 466,292 --------- --------- --------- --------- Operating income ...................................... 48,958 66,533 81,486 94,010 Interest expense, net: Recurring financing ................................ (41,555) (39,179) (82,751) (78,535) Merger related financing ........................... (1,086) (1,086) Swap termination expense .............................. (4,824) (4,824) Loss on early extinguishment of debt .................. (225) (225) --------- --------- --------- --------- Income (loss) before equity in income from unconsolidated entities, minority interests and gain on sale of assets ............................. 7,403 21,219 (1,265) 9,340 Equity in income from unconsolidated entities ...... 1,365 4,178 2,586 6,328 Minority interests ................................. (755) (526) (1,541) (2,282) Gain on sale of assets ............................. 6,061 482 6,061 2,955 --------- --------- --------- --------- Net income ............................................ 14,074 25,353 5,841 16,341 Preferred distributions ............................ (6,688) (6,150) (12,838) (12,300) --------- --------- --------- --------- Net income (loss) applicable to unitholders ........... $ 7,386 $ 19,203 $ (6,997) $ 4,041 ========= ========= ========= ========= Per unit data: Basic: Net income (loss) applicable to unitholders ........ $ 0.12 $ 0.31 $ (0.11) $ 0.07 ========= ========= ========= ========= Weighted average units outstanding ................. 61,732 61,644 61,726 61,628 Diluted: Net income (loss) applicable to unitholders ........ $ 0.12 $ 0.31 $ (0.11) $ 0.07 ========= ========= ========= ========= Weighted average units outstanding ................. 62,097 62,060 61,726 62,069
The accompanying notes are an integral part of these consolidated financial statements. 4 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ----------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net income ...................................................... $ 14,074 $ 25,353 $ 5,841 $ 16,341 Cumulative transition adjustment from interest rate swaps ....... 248 Unrealized holding losses from interest rate swaps .............. (879) (5,971) Realized loss on terminated interest rate swap agreements ....... 4,824 4,824 Foreign currency translation adjustment ......................... 2,259 2,840 -------- -------- -------- -------- Comprehensive income ....................................... $ 16,333 $ 29,298 $ 8,681 $ 15,442 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------- 2002 2001 --------- --------- Cash flows from operating activities: Net income .......................................................................... $ 5,841 $ 16,341 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation .............................................................. 76,822 79,513 Gain on sale of assets .................................................... (6,061) (2,955) Amortization of deferred financing fees ................................... 2,658 2,563 Accretion of debt, net of discount ........................................ 205 (150) Amortization of unearned compensation ..................................... 1,035 884 Equity in income from unconsolidated entities ............................. (2,586) (6,328) Loss on debt extinguishment ............................................... 225 Lease termination costs ................................................... 36,226 Minority interests ........................................................ 1,541 2,282 Changes in assets and liabilities: Accounts receivable ....................................................... (7,753) (10,077) Deferred expenses ......................................................... (1,014) (11,045) Other assets .............................................................. (8,366) (11,297) Accrued expenses and other liabilities .................................... 7,402 (2,552) --------- --------- Net cash flow provided by operating activities .................. 69,724 93,630 --------- --------- Cash flows (used in) provided by investing activities: Restricted cash ..................................................................... (323,555) Improvements and additions to hotels ................................................ (17,924) (29,431) Proceeds from sale of assets ........................................................ 23,237 59,016 Operating cash received in acquisition of lessee .................................... 25,583 Cash distributions from unconsolidated entities ..................................... 5,225 2,973 --------- --------- Net cash flow (used in) provided by investing activities ........ 10,538 (265,414) --------- --------- Cash flows (used in) provided by financing activities: Proceeds from borrowings ............................................................ 849,748 Repayment of borrowings ............................................................. (56,718) (553,746) Net proceeds from sale of preferred units ........................................... 23,981 Redemption of units ................................................................. (113) (3,354) Distributions paid to other partnership minority interests .......................... (448) (2,582) Distributions paid to preferred unitholders ......................................... (12,454) (12,300) Distributions paid to common unitholders ............................................ (12,457) (67,822) --------- --------- Net cash flow (used in) provided by financing activities ........ (58,209) 209,944 --------- --------- Effect of exchange rate changes on cash ....................................................... 909 Net change in cash and cash equivalents ....................................................... 22,962 38,160 Cash and cash equivalents at beginning of periods ............................................. 128,742 26,060 --------- --------- Cash and cash equivalents at end of periods ................................................... $ 151,704 $ 64,220 ========= ========= Supplemental cash flow information -- Interest paid ....................................................................... $ 79,742 $ 84,115 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 6 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION FelCor Lodging Limited Partnership and its subsidiaries (the "Company") had ownership interests in 182 hotels at June 30, 2002, with nearly 50,000 rooms and suites. The general partner of the Company is FelCor Lodging Trust Incorporated ("FelCor"), a Maryland corporation, one of the nation's largest hotel real estate investment trusts, or REITs. At June 30, 2002, FelCor owned a greater than 85% equity interest in the Company. At June 30, 2002, the Company owned a 100% interest in 149 hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels and a 50% interest in separate unconsolidated entities that own 24 hotels. Twelve of the Company's hotels were designated as held for sale at June 30, 2002. On January 1, 2001, the REIT Modernization Act ("RMA") went into effect. Among other things, the RMA permits a REIT to form taxable subsidiaries ("TRS") 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 TRSs 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. Effective July 1, 2001, the Company acquired the remaining 88 hotel leases held by Six Continents Hotels. By acquiring these leases through its TRSs, the Company acquired the economic benefits and risks of the operation of these hotels and began reporting hotel revenues and expenses rather than percentage lease revenues. The following table provides a schedule of the Company's hotels, by brand, at June 30, 2002:
BRAND - ----- Hilton Hotels Corporation ("Hilton") brands: Embassy Suites Hotels(R).................................................. 59 Doubletree(R) and Doubletree Guest Suites(R).............................. 12 Hampton Inn(R)............................................................ 7 Hilton Suites(R).......................................................... 1 Homewood Suites(R)........................................................ 1 Six Continents Hotels 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 Hotels & Resorts Worldwide Inc. ("Starwood") brands: Sheraton(R) and Sheraton Suites(R)........................................ 10 Westin(R)................................................................. 1 Other brands................................................................... 14 --- Total hotels................................................................... 182 ===
7 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION -- (CONTINUED) At June 30, 2002, the Company's hotels were located in the United States (35 states) and Canada, with concentrations in Texas (41 hotels), California (19 hotels), Florida (16 hotels) and Georgia (14 hotels). Approximately 54% of the Company's hotel room revenues for the six months ended June 30, 2002, were generated from hotels in these four states. At June 30, 2002, of the Company's 182 hotels, (i) subsidiaries of Six Continents Hotels managed 89, (ii) subsidiaries of Hilton managed 70, (iii) subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels Corporation ("IHC") managed eight and (v) three independent management companies managed four. Two additional hotels were acquired subsequent to June 30, 2002 (see footnote 14). 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 six months ended June 30, 2002 and 2001, 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, 2001, included in the Company's Annual Report on Form 10-K ("Form 10-K"). Operating results for the three and six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2002. 2. NEW ACCOUNTING PRONOUNCEMENTS On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 establishes additional criteria to determine when a long-lived asset is held for sale and establishes a new recoverability test for long-lived assets to be held for investment. It also broadens the definition of "discontinued operations" to include the sale of individual properties. The provisions of the new standard are generally to be applied prospectively and assets designated as held for sale prior to January 1, 2002, are not subject to this standard. During the six months ended June 30, 2002, the Company was not required to record any impairment under the new standard. In addition, the Company does not have any discontinued operations for the six months ended June 30, 2002, as no additional hotels were designated as held for sale during the period. During the six months ended June 30, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145, among other things, rescinds SFAS 4, which required that gains and losses from extinguishments of debt be classified as an extraordinary item, net of related income tax effects. SFAS 145 is to be applied beginning in fiscal years beginning after May 15, 2002, and encourages early application of SFAS 145 related to the rescission of SFAS 4. The Company had $225,000 in losses from extinguishment of debt in the six months ended June 30, 2001, which were reclassified to be included in income before equity in income of unconsolidated entities, minority interests and gain on sale of assets, in the accompanying financial statements to conform to SFAS 145. During the six months ended June 30, 2002, the Company adopted the provisions of Statement of Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The adoption of SFAS 142 did not have a material effect on the Company's financial statements. 8 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. NEW ACCOUNTING PRONOUNCEMENTS - (CONTINUED) In July 2002, the FASB issued SFAS 146, "Accounting for Exit or Disposal Activities." SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact this statement will have on its financial position or results of operations. 3. ACQUISITION OF HOTEL LEASES As a result of the passage of the RMA, effective January 1, 2001, the Company acquired 100% of DJONT, which owned leases on 85 of our hotels, and contributed it to a TRS. In consideration, the Company issued 416,667 of its units, valued at approximately $10 million, and assumed DJONT's accumulated stockholders' deficit of $25 million, which was expensed as lease termination cost in 2001. On January 1, 2001, the Company also acquired from Six Continents Hotels the leases covering 11 hotels, terminated one additional lease in connection with the sale of the related hotel and terminated the 12 related management agreements in exchange for 413,585 shares of FelCor common stock valued at approximately $10 million. Of this $10 million in consideration, $8 million was expensed in 2000, in connection with the designation of certain of these hotels as held for sale. The remaining $2 million was expensed as lease termination cost in 2001 as a result of the acquisition of the leases. Of the 11 hotels, two have been sold, eight have been contributed to a joint venture with IHC, and one will be retained. 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, and the related lease termination costs for the six months ended June 30, 2001, are as follows (in thousands): Cash and cash equivalents..................................... $ 25,300 Accounts receivable........................................... 30,214 Other assets.................................................. 17,394 --------- Total assets acquired......................................... 72,908 --------- Accounts payable.............................................. 18,656 Due to the Company............................................ 30,687 Accrued expenses and other liabilities........................ 40,072 --------- Total liabilities assumed..................................... 89,415 --------- Liabilities assumed in excess of assets acquired.............. 16,507 Value of FelCor common stock and units issued................. 19,719 --------- Lease termination costs.................................. $ 36,226 =========
4. INVESTMENT IN UNCONSOLIDATED ENTITIES The Company owned 50% interests in joint venture entities that owned 24 hotels at June 30, 2002 and 2001. The Company also owned a 50% interest in entities that owned an undeveloped parcel of land, provided condominium management services, developed and sold condominiums in Myrtle Beach, South Carolina, and leased eight hotels. The Company accounts for its investments in these unconsolidated entities under the equity method. 9 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. INVESTMENT IN UNCONSOLIDATED ENTITIES - (CONTINUED) Summarized unaudited combined financial information for 100% of these unconsolidated entities is as follows (in thousands):
JUNE 30, DECEMBER 31, 2002 2001 -------- ------------ (UNAUDITED) Balance sheet information: Investment in hotels ......... $357,646 $365,802 Debt (a) ..................... $263,865 $266,238 Equity ....................... $117,039 $116,032
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Statements of operations information: Total revenues ................................... $ 22,798 $ 26,656 $ 41,663 $ 44,483 Net income ....................................... $ 3,767 $ 8,693 $ 5,485 $ 14,065 Net income attributable to the Company ........... $ 1,883 $ 4,346 $ 2,742 $ 7,032 Preferred return ................................. 370 367 732 367 Depreciation of cost in excess of book value ..... (888) (535) (888) (1,071) -------- -------- -------- -------- Equity in income from unconsolidated entities .... $ 1,365 $ 4,178 $ 2,586 $ 6,328 ======== ======== ======== ========
(a) Debt at June 30, 2002, consists of $263.5 million of non-recourse mortgage debt and $372,000 of full-recourse debt guaranteed by the Company. 5. HOTELS HELD FOR SALE In 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, in June 2000 the Company recorded an expense of $63 million representing the difference between the net book value and the then estimated fair market value of these hotels. In 2001, the Company recognized an additional $7 million expense to reflect the deterioration of the market value of the then remaining 13 hotels held for sale. At June 30, 2002, the Company was actively marketing the then remaining 12 hotels held for sale. At June 30, 2001, the Company had 16 hotels designated as held for sale. The Company regularly reviews the carrying value of the remaining hotels held for sale to ensure that they are recorded at the lower of depreciated book value or expected net sales proceeds. No depreciation expense has been recorded on these hotels since June 30, 2000. For the three and six months ended June 30, 2002, the revenues, less associated expenses, for hotels held for sale were approximately $2.2 million and $3.3 million, respectively. For the three and six months ended June 30, 2001, the revenues less associated expenses, for hotels held for sale, were approximately $1.8 million and $6.9 million. The Company closed on the sale of its 183-room Doubletree Guest Suites hotel in Boca Raton, Florida, on April 26, 2002, and received net sales proceeds of $6.5 million. A net gain of approximately $773,000 was recorded on the sale. This property previously had been identified as a non-strategic asset at June 30, 2000, and classified as held for sale. 10 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. DEBT Debt at June 30, 2002, and December 31, 2001, consists of the following (in thousands):
JUNE 30, 2002 JUNE DECEMBER 31, COLLATERAL(a) INTEREST RATE MATURITY DATE 2002 2001 ------------- ------------- ------------- ---------- ------------ (UNAUDITED) FLOATING RATE DEBT: Line of credit None October 2004 $ 49,674 Publicly-traded term notes-swapped(b) None 5.59% October 2004 $ 174,697 174,633 Promissory note None 3.72 June 2016 650 650 ---- ---------- ---------- Total floating rate debt 5.59 175,347 224,957 ---- ---------- ---------- FIXED RATE DEBT: Publicly-traded term notes None 7.63 October 2007 124,469 124,419 Publicly-traded term notes None 9.50 September 2008 595,860 595,525 Publicly-traded term notes None 8.50 June 2011 297,781 297,655 Mortgage debt 15 hotels 7.24 November 2007 136,151 137,541 Mortgage debt 7 hotels 7.54 April 2009 95,158 95,997 Mortgage debt 6 hotels 7.55 June 2009 71,585 72,209 Mortgage debt 7 hotels 8.73 May 2010 141,306 142,254 Mortgage debt 8 hotels 8.70 May 2010 181,689 182,802 Other 6 hotels 6.96 2002-2005 63,329 65,049 ---- ---------- ---------- Total fixed rate debt 8.59 1,707,328 1,713,451 ---- ---------- ---------- Total debt 8.31% $1,882,675 $1,938,408 ==== ========== ==========
(a) At June 30, 2002, the Company had unencumbered investments in hotels with a net book value totaling $2.4 billion. (b) At June 30, 2002, and December 31, 2001, the Company's $175 million in publicly-traded notes due October 2004 were matched with interest rate swap agreements, which effectively converted the fixed interest rate on the notes to a variable interest rate tied to LIBOR. The interest rate swap agreements also have a maturity of October 2004. 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. These interest rate swaps have decreased interest expense by $1.7 million during the six months ended June 30, 2002. All of the Company's floating rate debt at June 30, 2002, was based upon LIBOR. One month LIBOR at June 30, 2002, was 1.84%. Interest expense is reported for the six months ended June 30, 2002 and 2001 net of interest income of $1.2 million and $2.2 million, respectively, and capitalized interest of $108,000 and $229,000, respectively. On June 17, 2002, the Company entered into an amendment of its $615 million unsecured line of credit. The amendment revised certain covenant levels to provide greater financial and operating flexibility. The maturity date on the credit facility remains October 31, 2004, and we may extend the facility for up to two additional one-year terms, subject to certain conditions. The interest rate remains on the same floating rate basis with a tiered spread based on our debt leverage ratio. The lenders' commitments under the line of credit remain at $615 million. The Company had no outstanding balance on its line of credit at June 30, 2002. In addition to financial covenants, the Company's line of credit includes certain other affirmative and negative covenants, including limitations on total indebtedness, total secured indebtedness, and restricted payments (such as unit redemptions and cash distributions). At June 30, 2002, the Company was in compliance with all of these covenants. 11 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. DEBT - (CONTINUED) The Company's publicly traded senior term notes require it to satisfy an interest coverage test in order to incur additional indebtedness, except under its line of credit; to pay distributions in excess of the minimum amount required for FelCor to meet its REIT qualification test; or to repurchase stock. As of the date of this filing, the Company has satisfied this minimum interest coverage requirement. The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than those contained in its line of credit. Our failure to satisfy any accelerated indebtedness, if in the amount of $10 million or more, could result in the acceleration of most of our unsecured indebtedness. 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. 7. DERIVATIVES 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 speculation on interest rates. We manage interest rate risk based on the varying circumstances of anticipated borrowings, and existing floating and fixed rate debt. We will generally seek to pursue interest rate risk mitigation strategies that 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 manage the relative mix of its debt between fixed and variable rate instruments, at June 30, 2002, the Company had interest rate swap agreements with three financial institutions with a notional value of $175 million. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding fixed rate debt, without an exchange of the underlying principal amount, and effectively convert fixed rate debt to a variable rate. 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 are recognized as an adjustment to interest expense by the Company and will have a corresponding effect on its future cash flows. To determine the fair values of its derivative instruments, the Company engages a third party that uses a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date. As deemed necessary, the Company will use other methods and assumptions to validate the fair market values. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. The interest rate swap agreements held at June 30, 2002, are designated as fair value hedges, are marked to market through the income statement, but are offset by the change in fair value of the Company's swapped outstanding fixed rate debt. The estimated unrealized gain on these interest rate swap agreements was approximately $1.5 million at June 30, 2002, and represents the amount the Company would receive to terminate the agreements based on current market rates. 12 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. PREFERRED UNITS On April 4, 2002, FelCor issued 1,025,800 depositary shares, representing 10,258 shares of its 9% Series B Cumulative Redeemable Preferred Stock ("Series B preferred stock") at $24.37 per depositary share to yield 9.4%. The Series B preferred stock and the corresponding depositary shares may be called by FelCor at $25 per depositary share on or after May 7, 2003, have no stated maturity, sinking fund or mandatory redemption, and are not convertible into any other securities of FelCor. The preference on these units is the same as FelCor's Series B preferred stock. The proceeds from the Series B preferred stock were contributed to the Company in exchange for Series B preferred units. The net proceeds of $24.0 million were used for working capital, and allowed the Company to accelerate discretionary capital expenditures. 9. DEFERRED RENT The Company recognized rent deferred under Staff Accounting Bulletin No. 101 ("SAB 101") of $5.3 million for the quarter ended June 30, 2001, on the 88 hotels leased by Six Continents Hotels. This deferred rent was recognized upon the acquisition of the leases. 10. INCOME TAXES The Company generally leases its hotels to wholly-owned TRSs that are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes ("SFAS 109")." 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 differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. At June 30, 2002, the Company's TRSs had a deferred tax asset of approximately $18.8 million, prior to any valuation allowance, relating to accumulated losses of the TRSs. 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. 11. GAIN ON DISPOSITION OF ASSETS During the three months ended June 30, 2002, the Company sold its Doubletree Guest Suites hotel in Boca Raton, Florida, for net proceeds of $6.5 million and recorded a net gain of $0.8 million. Additionally, the Company sold retail space associated with the Allerton Hotel located in Chicago, Illinois, for net proceeds of $16.7 million and recorded a net gain of approximately $5.1 million. The Company also recognized a $0.2 million gain related to the condemnation of land adjacent to one of its hotels. For the six months ended June 30, 2001, the Company received $3.9 million for the condemnation of three parcels of land and recorded a gain of $3.0 million. 13 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. EARNINGS PER UNIT The following table sets forth the computation of basic and diluted earnings per unit for the three and six months ended June 30, 2002 and 2001 (unaudited, in thousands, except per unit data):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2002 2001 2002 2001 -------- -------- -------- -------- Numerator: Net income .............................................. $ 14,074 $ 25,353 $ 5,841 $ 16,341 Preferred distributions ............................... (6,688) (6,150) (12,838) (12,300) -------- -------- -------- -------- Net income (loss) applicable to unitholders ............. $ 7,386 $ 19,203 $ (6,997) $ 4,041 ======== ======== ======== ======== Denominator: Denominator for basic earnings per unit - weighted average units ............................... 61,732 61,644 61,726 61,628 Effect of dilutive securities: FelCor stock options .................................... 40 65 90 Restricted units ........................................ 325 351 351 -------- -------- -------- -------- Denominator for diluted earnings per unit - adjusted weighted average units and assumed conversions ....... 62,097 62,060 61,726 62,069 -------- -------- -------- -------- Earnings (loss) per unit data: Basic Net income (loss) ....................................... $ 0.12 $ 0.31 $ (0.11) $ 0.07 ======== ======== ======== ======== Diluted Net income (loss) ....................................... $ 0.12 $ 0.31 $ (0.11) $ 0.07 ======== ======== ======== ========
The Series A preferred units and other dilutive securities are not included in the calculation of diluted earnings per unit for the six months ended June 30, 2002, because they are anti-dilutive as the result of losses in the period. The Series A preferred units and the majority of FelCor stock options granted are anti-dilutive for the remaining periods presented and, as such, are not included in the calculation of diluted earnings per unit. 13. CONSOLIDATING FINANCIAL INFORMATION Certain of the Company's wholly-owned subsidiaries (FelCor/CSS Holdings, L.P.; FelCor/CSS Hotels, L.L.C.; FelCor/LAX Hotels L.L.C.; FelCor Eight Hotels, L.L.C.; FelCor/St. Paul Holdings, L.P.; FelCor/LAX Holdings, L.P.; FHAC Nevada Holdings, L.L.C.; FelCor TRS Holdings, L.P.; Kingston Plantation Development Corp.; FHAC Texas Holdings, L.P.; FelCor Omaha Hotel Company, L.L.C.; FelCor Country Villa Hotel, L.L.C.; FelCor Moline Hotel, L.L.C.; FelCor Canada Co. and FelCor Hotel Asset Company, L.L.C., collectively, "Subsidiary Guarantors"), together with FelCor and one of its wholly-owned subsidiaries (FelCor Nevada Holdings, L.L.C.), are guarantors of senior debt. The following tables present consolidating information for the Subsidiary Guarantors. 14 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONSOLIDATING BALANCE SHEET JUNE 30, 2002 (IN THOUSANDS) ASSETS
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------- ------------- ------------ Net investment in hotel properties ................. $ 494,401 $1,571,108 $1,527,388 $3,592,897 Equity investment in consolidated entities ......... 2,416,106 $ (2,416,106) Investment in unconsolidated entities .............. 132,947 15,461 148,408 Assets held for sale ............................... 3,835 29,887 33,722 Cash and cash equivalents .......................... 93,243 41,948 16,513 151,704 Accounts receivable ................................ 6,966 56,238 1,169 64,373 Deferred assets .................................... 24,782 1,023 3,800 29,605 Other assets ....................................... 6,559 17,299 3,792 27,650 ---------- ---------- ---------- ------------- ---------- Total assets ............................... $3,178,839 $1,732,964 $1,552,662 $ (2,416,106) $4,048,359 ========== ========== ========== ============= ========== LIABILITIES AND PARTNERS' CAPITAL Debt ............................................... $1,214,405 $ 103,334 $ 564,936 $1,882,675 Distributions payable .............................. 14,766 14,766 Accrued expenses and other liabilities ............. 28,198 130,341 20,354 178,893 Minority interest - other partnerships ............ 97 50,555 50,652 ---------- ---------- ---------- ------------- ---------- Total liabilities .......................... 1,257,466 233,675 635,845 2,126,986 Redeemable units, at redemption value .............. 165,202 165,202 ---------- ---------- ---------- ------------- ---------- Preferred units .................................... 318,907 318,907 Common units........................................ 1,437,264 1,496,825 916,817 $ (2,416,106) 1,434,800 Accumulated other comprehensive income ............. 2,464 2,464 ---------- ---------- ---------- ------------- ---------- Total partners' capital .................... 1,756,171 1,499,289 916,817 (2,416,106) 1,756,171 ---------- ---------- ---------- ------------- ---------- Total liabilities, redeemable units and partners' capital ....................... $3,178,839 $1,732,964 $1,552,662 $ (2,416,106) $4,048,359 ========== ========== ========== ============= ==========
15 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001 (IN THOUSANDS) ASSETS
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------- ------------ ------------ Net investment in hotel properties .................... $ 506,205 $ 1,604,132 $ 1,552,343 $ 3,662,680 Equity investment in consolidated entities ............ 2,442,491 $(2,442,491) Investment in unconsolidated entities ................. 134,804 16,243 151,047 Assets held for sale .................................. 3,818 35,119 38,937 Cash and cash equivalents ............................. 68,463 47,318 12,961 128,742 Accounts receivable ................................... 6,035 48,794 1,039 55,868 Deferred assets ....................................... 26,098 1,101 4,050 31,249 Other assets .......................................... 1,832 15,285 3,289 20,406 ----------- ----------- ----------- ----------- ----------- Total assets .................................. $ 3,189,746 $ 1,767,992 $ 1,573,682 $(2,442,491) $ 4,088,929 =========== =========== =========== =========== =========== LIABILITIES AND PARTNERS' CAPITAL Debt .................................................. $ 1,224,441 $ 144,106 $ 569,861 $ 1,938,408 Distributions payable ................................. 8,172 8,172 Accrued expenses and other liabilities ................ 37,742 111,146 24,608 173,496 Minority interest in other partnerships ............... 97 49,462 49,559 ----------- ----------- ----------- ----------- ----------- Total liabilities ............................. 1,270,452 255,252 643,931 2,169,635 ----------- ----------- ----------- ----------- ----------- Redeemable units, at redemption value ................. 150,479 150,479 ----------- ----------- ----------- ----------- ----------- Preferred units ....................................... 293,265 293,265 Common units .......................................... 1,475,550 1,513,116 929,751 $(2,442,491) 1,475,926 Accumulated other comprehensive income ................ (376) (376) ----------- ----------- ----------- ----------- ----------- Total partners' capital ....................... 1,768,815 1,512,740 929,751 (2,442,491) 1,768,815 ----------- ----------- ----------- ----------- ----------- Total liabilities, redeemable units and partners' capital .......................... $ 3,189,746 $ 1,767,992 $ 1,573,682 $(2,442,491) $ 4,088,929 =========== =========== =========== =========== ===========
16 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------- ------------ ------------ Revenues: Hotel operating revenue ..................... $ 351,065 $ 233 $ 351,298 Percentage lease revenue .................... $ 18,326 49,262 41,104 $ (108,692) Other revenue ............................... 426 2 428 --------- --------- --------- ----------- --------- Total revenue .................... 18,752 400,327 41,339 (108,692) 351,726 --------- --------- --------- ----------- --------- Expenses: Hotel operating expense ..................... 226,348 456 226,804 Taxes, insurance and other .................. 831 135,326 6,325 (108,692) 33,790 Corporate expenses .......................... 477 2,421 1,072 3,970 Depreciation ................................ 6,593 16,707 14,904 38,204 --------- --------- --------- ----------- --------- Total operating expenses ......... 7,901 380,802 22,757 (108,692) 302,768 --------- --------- --------- ----------- --------- Operating income (loss) ..................... 10,851 19,525 18,582 48,958 Interest expense, net ....................... (27,352) (2,516) (11,687) (41,555) --------- --------- --------- ----------- --------- Income (loss) before equity in income from unconsolidated entities, minority interests, and gain on sale of assets .... (16,501) 17,009 6,895 7,403 Equity in income from consolidated entities ................................. 28,945 (28,945) Equity in income from unconsolidated entities ................................. 1,630 (265) 1,365 Minority interests in other partnerships .... (755) (755) Gain on sale of assets ...................... 5,861 200 6,061 --------- --------- --------- ----------- --------- Net income .................................. 14,074 22,605 6,340 (28,945) 14,074 Preferred distributions ..................... (6,688) (6,688) --------- --------- --------- ----------- --------- Net income applicable to unitholders ........ $ 7,386 $ 22,605 $ 6,340 $ (28,945) $ 7,386 ========= ========= ========= =========== =========
17 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------- ------------ ------------ Revenues: Hotel operating revenue ..................... $ 208,646 $ 1,849 $ 210,495 Percentage lease revenue .................... $ 20,742 62,595 46,275 $ (66,006) 63,606 Other revenue ............................... 548 548 --------- --------- --------- --------- --------- Total revenue .................... 21,290 271,241 48,124 (66,006) 274,649 --------- --------- --------- --------- --------- Expenses: Hotel operating expenses .................... 126,020 1,064 127,084 Taxes, insurance and other .................. 2,062 94,765 7,275 (66,006) 38,096 Corporate expenses .......................... 418 1,752 1,061 3,231 Depreciation ................................ 6,816 17,605 15,284 39,705 --------- --------- --------- --------- --------- Total operating expenses .................... 9,296 240,142 24,684 (66,006) 208,116 --------- --------- --------- --------- --------- Operating income (loss) ..................... 11,994 31,099 23,440 66,533 Interest expense, net ....................... (24,883) (2,766) (12,616) (40,265) Loss on early extinguishment of debt ........ (225) (225) Swap termination expense .................... (4,824) (4,824) --------- --------- --------- --------- --------- Income (loss) before equity in income from unconsolidated entities, minority interests, and gain on sale of assets .... (17,713) 28,333 10,599 21,219 Equity in income from consolidated entities ................................. 38,830 (38,830) Equity in income from unconsolidated entities ................................. 4,236 (58) 4,178 Minority interests in other partnerships .... (526) (526) Gain on sale of assets ...................... 482 482 --------- --------- --------- --------- --------- Net income .................................. 25,353 28,275 10,555 (38,830) 25,353 Preferred distributions ..................... (6,150) (6,150) --------- --------- --------- --------- --------- Net income applicable to unitholders ........ $ 19,203 $ 28,275 $ 10,555 $ (38,830) $ 19,203 ========= ========= ========= ========= =========
18 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------- ------------ ------------ Revenues: Hotel operating revenue ....................... $ 673,770 $ 1,668 $ 675,438 Percentage lease revenue ...................... $ 36,098 96,700 83,840 $ (216,638) Other revenue ................................. 1,053 45 1,098 --------- --------- --------- ----------- --------- Total revenue ...................... 37,151 770,470 85,553 (216,638) 676,536 --------- --------- --------- ----------- --------- Expenses: Hotel operating expense ....................... 441,115 1,037 442,152 Taxes, insurance and other .................... 3,779 268,586 12,633 (216,538) 68,360 Corporate expenses ............................ 929 4,629 2,158 7,716 Depreciation .................................. 13,288 33,559 29,975 76,822 --------- --------- --------- ----------- --------- Total operating expenses ........... 17,996 747,889 45,803 (216,638) 595,050 --------- --------- --------- ----------- --------- Operating income (loss) ....................... 19,155 22,581 39,750 81,486 Interest expense, net ......................... (54,286) (5,148) (23,317) (82,751) --------- --------- --------- ----------- --------- Income (loss) before equity in income from unconsolidated entities, minority interests, and gain on sale of assets ...... (35,131) 17,433 16,433 (1,265) Equity in income from consolidated entities ................................... 37,915 (37,915) Equity in income from unconsolidated entities ................................... 3,057 (471) 2,586 Minority interests in other partnerships ...... (1,541) (1,541) Gain on sale of assets ........................ 5,861 200 6,061 --------- --------- --------- ----------- --------- Net income .................................... 5,841 22,823 15,092 (37,915) 5,841 Preferred distributions ....................... (12,838) (12,838) --------- --------- --------- ----------- --------- Net income (loss) applicable to unitholders ... $ (6,997) $ 22,823 $ 15,092 $ (37,915) $ (6,997) ========= ========= ========= =========== =========
19 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ------------- ------------- ------------ Revenues: Hotel operating revenue ..................... $ 441,434 $ 1,849 $ 443,283 Percentage lease revenue .................... $ 42,818 121,932 94,809 $ (144,422) 115,137 Other revenue ............................... 1,458 351 73 1,882 --------- --------- --------- ----------- --------- Total revenue .................... 44,276 563,717 96,731 (144,422) 560,302 --------- --------- --------- ----------- --------- Expenses: Hotel operating expenses .................... 266,657 1,064 267,721 Taxes, insurance and other .................. 5,215 203,040 12,627 (144,422) 76,460 Corporate expenses .......................... 907 3,328 2,137 6,372 Depreciation ................................ 13,596 35,719 30,198 79,513 Lease termination costs ..................... 34,456 1,770 36,226 --------- --------- --------- ----------- --------- Total operating expenses ......... 54,174 510,514 46,026 (144,422) 466,292 --------- --------- --------- ----------- --------- Operating income (loss) ..................... (9,898) 53,203 50,705 94,010 Interest expense, net ....................... (48,343) (5,693) (25,585) (79,621) Loss on early extinguishment of debt ........ (225) (225) Swap termination expense .................... (4,824) (4,824) --------- --------- --------- ----------- --------- Income (loss) before equity in income from unconsolidated entities, minority interests, and gain on sale of assets .... (63,065) 47,510 24,895 9,340 Equity in income from consolidated entities ................................. 72,638 (72,638) Equity in income from unconsolidated entities ................................. 6,358 (30) 6,328 Minority interests in other partnerships .... (235) (2,047) (2,282) Gain on sale of assets ...................... 645 2,310 2,955 --------- --------- --------- ----------- --------- Net income .................................. 16,341 47,480 25,158 (72,638) 16,341 Preferred distributions ..................... (12,300) (12,300) --------- --------- --------- ----------- --------- Net income applicable to unitholders ........ $ 4,041 $ 47,480 $ 25,158 $ (72,638) $ 4,041 ========= ========= ========= =========== =========
20 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES CONSOLIDATED ----------- ---------- ------------- ------------ Cash flows from operating activities ................. $ (27,667) $ 51,071 $ 46,320 $ 69,724 Cash flows from investing activities ................. 1,359 6,322 2,857 10,538 Cash flows from (used in) financing activities ....... 51,088 (63,672) (45,625) (58,209) --------- --------- --------- --------- Effect of exchange rates changes on cash ............. 909 909 Change in cash and cash equivalents .................. 24,780 (5,370) 3,552 22,962 Cash and cash equivalents at beginning of period ..... 68,463 47,318 12,961 128,742 --------- --------- --------- --------- Cash and equivalents at end of period ................ $ 93,243 $ 41,948 $ 16,513 $ 151,704 ========= ========= ========= =========
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES CONSOLIDATED ----------- ---------- ------------- ------------ Cash flows from operating activities ................. $ (47,075) $ 84,999 $ 55,706 $ 93,630 Cash flows from (used in) investing activities ....... (276,345) 19,180 (8,249) (265,414) Cash flows from (used in) financing activities ....... 338,893 (79,405) (49,544) 209,944 --------- --------- --------- --------- Change in cash and cash equivalents .................. 15,473 24,774 (2,087) 38,160 Cash and cash equivalents at beginning of period ..... 5,113 3,032 17,915 26,060 --------- --------- --------- --------- Cash and equivalents at end of period ................ $ 20,586 $ 27,806 $ 15,828 $ 64,220 ========= ========= ========= =========
14. SUBSEQUENT EVENTS On July 12, 2002, the Company acquired the 208-suite SouthPark Suite Hotel in Charlotte, North Carolina for $14.5 million. This hotel will be converted to a Doubletree Guest Suites during the fall of 2002. The Company entered into a 15-year management agreement with Hilton for the hotel concurrent with the acquisition closing. The Company utilized excess cash on hand to acquire this hotel. On July 19, 2002, the Company acquired the 385-room Wyndham(R) resort and the Arcadia Shores Golf Club in Myrtle Beach, South Carolina. This hotel will be converted to a Hilton hotel in 2003. This hotel, adjacent land and a leasehold interest in the golf course were purchased for $35.3 million. The Company entered into a 15-year management agreement with Hilton for the hotel concurrent with the acquisition closing. The Company utilized excess cash on hand to acquire this hotel. The Company closed on the sale of its Holiday Inn Express hotel in Colby, Kansas, on August 8, 2002, and received net proceeds of $1.7 million. This property previously had been identified as a non-strategic asset and classified as held for sale. 21 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. The Company's results for the three and six months ended June 30, 2002, reflect Revenue Per Available Room ("RevPAR") below the same period in the prior year, but a consistent, gradual increase in hotel occupancy during 2002. RevPAR for the portfolio was below that of the prior year by 11.1% for the three months ended June 30, 2002, and 14.6% for the six months ended June 30, 2002. FINANCIAL COMPARISON
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------- --------------------------------- 2002 2001 % CHANGE 2002 2001 % CHANGE ------- ------- -------- ------- ------- -------- (IN MILLIONS, (IN MILLIONS, EXCEPT REVPAR) EXCEPT REVPAR) RevPAR ........................................... $ 64.57 $ 72.65 (11.1)% $ 62.67 $ 73.39 (14.6)% Funds From Operations ("FFO")(1) ................. $ 45.7 $ 65.3 (30.0)% $ 75.1 $ 136.8 (45.2)% Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")(1) .............. $ 94.6 $ 111.4 (15.1)% $ 171.8 $ 228.8 (24.9)% Net income ....................................... $ 14.1 $ 25.4 (44.5)% $ 5.8 $ 16.3 (64.4)%
- ---------- (1) For a discussion of the computation of FFO and EBITDA, see "Results of Operations -- Fund from Operations and EBITDA" RESULTS OF OPERATIONS Comparison of the Three Months Ended June 30, 2002 and 2001 On July 1, 2001, the Company acquired operating leases covering 88 of its hotels and contributed them to its TRSs. As the leases were acquired, the Company began receiving and recording hotel revenues and expenses, rather than percentage lease revenue for these hotels. Consequently, a comparison of historical results for the three months ended June 30, 2002, to the three months ended June 30, 2001, are not directly comparable. Total revenue increased $77.1 million for the three months ended June 30, 2002, over the same period in 2001. The increase is principally associated with reporting hotel operating revenues for 88 of the hotels during 2002, contrasted with percentage lease revenue reported by the Company for these hotels during the same period in 2001. These 88 hotels contributed approximately $163.1 million in hotel operating revenue during the three months ended June 30, 2002, compared to $63.6 million in percentage rent revenue for the same hotels, during the same period in 2001. For the remaining 85 consolidated hotels owned by the Company, total revenues decreased approximately $20.2 million in the quarter. The principal component of this decrease is a decrease in room revenue for these hotels of $17 million. The RevPAR for these 85 hotels was 9.9% below that of the same period in 2001. The decrease in RevPAR for these hotels was comprised of a 2.3% decrease in hotel occupancy and a 7.8% decrease in average daily rate ("ADR"). The remaining change in revenue of $2.2 million primarily relates to decreases in revenue from the disposition of assets held for sale. Total operating expenses increased $94.7 million for the three months ended June 30, 2002, over the same three month period in 2001. This increase primarily resulted from the inclusion of hotel operating expenses, management fees and other property related costs for the 88 hotels that were not included in the same period of 2001, prior to the Company's acquisition of the leases. 22 Taxes, insurance and lease expense decreased $4.3 million, compared to the second quarter of 2001, principally as the result of decreases in lease expense of $3.9 million and in property taxes of $2.7 million, partially offset by increased insurance costs of $ 1.6 million. The decrease in lease expense is related to participating leases that are principally based on revenues. Property taxes decreased primarily as a result of resolutions in the current quarter of prior year tax disputes. Interest expense, net of interest income, on recurring financing increased $2.4 million for the three months ended June 30, 2002, over the same period in 2001. The increase during the second quarter is primarily related to excess cash carried during 2002 and the related increase in average debt outstanding of $85.2 million compared to the same period of 2001. Equity in the income of unconsolidated entities decreased by $2.8 million, compared to the same quarterly period in 2001. The decrease in 2002 principally resulted from a 13.6% drop in RevPAR for the unconsolidated hotels. Minority interest increased $0.2 million for the three months ended June 30, 2002, over the same period in 2001. Minority interest represents the proportionate share of the income or loss of consolidated subsidiaries not owned by the Company. This change principally reflects the increase in net loss of the other consolidated subsidiaries. The activity of these other consolidated subsidiaries consists primarily of activity associated with hotel properties. Included in net income for the three months ended June 30, 2002, is a gain of $5.1 million on the sale of retail space and $0.8 million on the sale of a hotel. Included in net income for the three months ended June 30, 2001, is a gain of $0.5 million related to condemnation proceeds received. The Company's net income decreased by $11.3 million for the three months ended June 30, 2002, compared to the same period in 2001. The major item affecting the change in net income was the 11.1% decline in the Company's hotel RevPAR in the second quarter of 2002, compared to the same period in the prior year. Other items affecting the change in net income were approximately $6 million of non-recurring expenses during the second quarter of 2001 related to merger financing and termination of interest rate swaps and $5.9 million in 2002 of gains on sale, related to the sale of retail space at the Allerton hotel in Chicago, Illinois, and the sale of a non-strategic hotel in Boca Raton, Florida. Comparison of the Six Months Ended June 30, 2002 and 2001 On July 1, 2001, the Company acquired operating leases covering 88 of its hotels and contributed them to its TRSs. As the leases were acquired, the Company began receiving and recording hotel revenues and expenses, rather than percentage lease revenue for these hotels. Consequently, the historical results for the six months ended June 30, 2002, and the six months ended June 30, 2001, are not directly comparable. Total revenue for the six months ended June 30, 2002, increased $116.2 million over the same period in 2001. The increase is principally associated with reporting hotel operating revenues for 88 of the hotels during 2002, contrasted with percentage lease revenue reported by the Company for these hotels during the same period in 2001. These 88 hotels contributed approximately $305.3 million in hotel operating revenue in the first six months of 2002, compared to $115.1 million in percentage rent revenue for the same hotels, during the same period in 2001. For the remaining 85 consolidated hotels owned by the Company, total revenues decreased approximately $61 million for the six months ended June 30, 2002. The principal component of this decrease is a decrease in room revenue for these hotels of $49 million. The RevPAR for these 85 hotels was 13.9% below that of the same period in 2001. The decrease in RevPAR for these hotels was comprised of a 5.9% decrease in hotel occupancy and a 8.5% decrease in ADR. The remaining change in revenue of $13 million primarily relates to decreases in revenue from the disposition of assets held for sale. 23 Total operating expenses increased $128.8 million for the six months ended June 30, 2002, over the same three month period in 2001. This increase primarily resulted from the inclusion of hotel operating expenses, management fees and other property related costs for the 88 hotels that were not included in the same period of 2001, prior to the Company's acquisition of the leases. Also included in total operating expenses for the first six months of 2001 were lease termination costs of $36.2 million. Interest expense, net of interest income, increased $3.1 million for the six months ended June 30, 2002, over the same period in 2001. The increase for the period is primarily related to the Company's excess cash carried during 2002 and an increase in average debt of $83.4 million over the same period of 2001. Equity in the income of unconsolidated entities decreased by $3.7 million, compared to the same six month period in 2001. The decrease in 2002 principally resulted from a 15.1% drop in RevPAR from the unconsolidated hotels. Taxes, insurance and lease expense decreased $8.1 million, principally as the result of decreases in lease expense of $9.2 million and in property taxes of $3.3 million, partially offset by increased insurance costs of $3.3 million. The decrease in lease expense is related to participating leases that are principally based on revenues. Property taxes decreased principally from resolutions in the current quarter of prior year tax disputes. Minority interest decreased $0.7 million for the six months ended June 30, 2002, over the same period in 2001. Minority interest represents the proportionate share of the income or loss of consolidated subsidiaries not owned by the Company. This change principally reflects the decrease in net loss of the other consolidated subsidiaries. The activity of these other consolidated subsidiaries consists primarily of activity associated with hotel properties. Included in net income for the six months ended June 30, 2002, is a gain of $5.1 million on the sale of retail space and $0.8 million on the sale of a hotel. Included in net income for the six months ended June 30, 2001, is a gain of $3.0 million related to condemnation proceeds received. The Company's net income was reduced $10.5 million for the six months ended June 30, 2002, compared to the same period in 2001. The major item affecting this change in income was the 14.6% decline in the Company's hotel RevPAR in the six months ended June 30, 2002 compared to the same period in the prior year. Comparison of the Six Months Ended June 30, 2002 with Pro Forma 2001 On July 1, 2001, we acquired the operating leases covering 88 of our hotels and contributed them to our TRSs. As the leases were acquired, we began receiving and recording hotel revenues and expenses, rather than percentage lease revenue. Consequently, a comparison of historical results for the six months ended June 30, 2002, to the six months ended June 30, 2001, may not be as meaningful as a discussion of pro forma results. Accordingly, we have included a discussion of the comparison of the pro forma results of operations. The pro forma results of operations for the six months ended June 30, 2001 assumes that our acquisition of 88 hotel leases held by Six Continents Hotels had occurred on January 1, 2001. 24 FELCOR LODGING LIMITED PARTNERSHIP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, --------------------------- HISTORICAL PRO FORMA 2002 2001 ---------- --------- Total revenues ........................................................... $ 676,536 $ 802,304 Operating expenses: Lease termination costs ............................................... 36,226 Other operating expenses .............................................. 595,050 667,576 --------- --------- Operating income ......................................................... 81,486 98,502 Interest expense, net: Recurring financing ................................................... (82,751) (78,535) Merger related financing .............................................. (1,086) Swap termination expense ................................................. (4,824) Loss on early extinguishment of debt ..................................... (225) --------- --------- Income (loss) before equity in income from unconsolidated entities, minority interests and gain on sale of assets ...................... (1,265) 13,832 Equity in income from unconsolidated entities ......................... 2,586 6,328 Minority interest ..................................................... (1,541) (2,282) Gain on sale of assets ................................................ 6,061 2,955 --------- --------- Net income ............................................................... 5,841 20,833 Preferred distributions ............................................... (12,838) (12,300) --------- --------- Net income (loss) applicable to unitholders .............................. $ (6,997) $ 8,533 ========= ========= Basic and diluted per unit data: Net income (loss) applicable to unitholders ........................... $ (0.11) $ 0.14 ========= ========= Weighted average units outstanding ....................................... 61,726 62,069
25 FELCOR LODGING LIMITED PARTNERSHIP PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED, IN THOUSANDS)
FELCOR HISTORICAL PRO FORMA 2001 ADJUSTMENTS 2001 ---------- ----------- --------- Total revenues ................................................. $ 560,302 $ 242,002(a) $ 802,304 Operating expenses: Lease termination costs ..................................... 36,226 36,226 Other operating expenses .................................... 430,066 237,510(b) 667,576 --------- ---------- --------- Operating income ............................................... 94,010 4,492 98,502 Interest expense, net: Recurring financing ......................................... (78,535) (78,535) Merger related financing .................................... (1,086) (1,086) Swap termination expense ....................................... (4,824) (4,824) Loss on early extinguishment of debt ........................... (225) (225) --------- ---------- --------- Income before equity in income from unconsolidated entities, minority interests and gain on sale of assets ............. 9,340 4,492 13,832 Equity in income from unconsolidated entities ............... 6,328 6,328 Minority interests .......................................... (2,282) (2,282) Gain on sale of assets ...................................... 2,955 2,955 --------- ---------- --------- Net income ..................................................... 16,341 4,492 20,833 Preferred distributions ..................................... (12,300) (12,300) --------- ---------- --------- Net income applicable to unitholders ........................... $ 4,041 $ 4,492 $ 8,533 ========= ========== =========
The unaudited Pro Forma Consolidated Statement of Operations is presented for illustrative purposes only and is not necessarily indicative of what the actual results of operations would have been had the transactions described above occurred on the indicated date, nor do they purport to represent our results of operations for future periods. The pro forma numbers presented represent our historical revenues and expenses, modified as described in the pro forma adjustments below. Pro forma adjustments: (a) Total revenue adjustments consist of the increase in our historical revenue from the elimination of historical percentage lease revenue and the addition of historical hotel operating revenues. (b) Operating expense adjustments consist of: (i) the increase in our historical operating expense from the addition of historical hotel operating expenses and the elimination of percentage lease expense for the 88 hotel leases acquired from Six Continents Hotels on July 1, 2001, (ii) the recording of management fees at their new contractual rates, and (iii) the elimination of historical franchise fees, which are included in the new management fees for these hotels. Revenues decreased $125.8 million in 2002 compared to pro forma 2001, primarily as a result of the continuing economic downturn and the disruptions in business and leisure travel patterns following the terrorist attacks on September 11, 2001. As a result of these events, both business and leisure travel declined significantly for the six months ended June 30, 2002, compared to the same pro forma period in 2001. During the six months ended June 30, 2002, our hotels' RevPAR decreased 14.6%, compared to the same period in the prior year, which was comprised of a decrease in hotel occupancy of 5.8 percentage points to 63.1% and a decline in ADR of 6.8% to $99.28. 26 Other operating expenses decreased $72.5 million in 2002 compared to pro forma 2001. However, other operating expense as a percentage of total revenue, increased from 83% to 88%. The principal reason for the increased in other operating expenses as a percentage of total revenue, was a 140 basis point drop in hotel operating margins. This margin compression primarily relates to the reduction in revenue and the inability to reduce labor costs, repair and maintenance costs and marketing costs proportionately. We are actively working with our managers to implement cost cutting programs at the hotels to maximize hotel operating profits. These measures include reducing labor costs, streamlining staffing, and consolidating operations by closing unused floors in hotels when possible. Interest expense from recurring financing, net of interest income, increased $3.1 million. The increase for the period is primarily related to the Company's excess cash carried during 2002 and an increase in average debt of $83.4 million over the same period of 2001. Equity in income from unconsolidated entities decreased $3.7 million, principally as the result of the decrease in RevPAR previously discussed. Minority interest decreased $0.7 million for the six months ended June 30, 2002, over the same pro forma period in 2001. Minority interest represents the proportionate share of the income or loss of consolidated subsidiaries not owned by the Company. This change principally reflects the decrease in net loss of the other consolidated subsidiaries. The activity of these other consolidated subsidiaries consists primarily of activity associated with hotel properties. Included in net income for the six months ended June 30, 2002, was a gain of $5.1 million on the sale of retail space and $0.8 million on the sale of a hotel. Included in pro forma net income for the six months ended June 30, 2001, was a gain of $3.0 million related to condemnation proceeds received. Funds From Operations and EBITDA We consider 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 our 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 extraordinary items and gains or losses from sales of properties, plus real estate related depreciation and amortization, after comparable adjustments for the applicable portion of these items related to unconsolidated entities and joint ventures. We believe 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 REIT to incur and service debt, to make capital expenditures, to pay dividends and to fund other cash needs. We compute FFO in accordance with standards established by NAREIT, except that we add back lease termination costs, merger financing costs, swap termination costs, loss from early extinguishment of debt and deferred rent 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 we do or that do not adjust FFO for lease termination costs, merger financing costs, swap termination costs, loss from early extinguishment of debt and deferred rent. 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 our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor does it necessarily reflect the funds available to fund our cash needs, including our ability to make cash distributions. FFO and EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. 27 The following table details our computation of Funds From Operations (unaudited, in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2002 2001 2002 2001 --------- --------- --------- --------- FUNDS FROM OPERATIONS (FFO): Net income ........................................ $ 14,074 $ 25,353 $ 5,841 $ 16,341 Deferred rent ................................ (5,254) Gain on sale of assets ....................... (5,861) (5,861) Lease termination costs ...................... 36,226 Merger related interest, net ................. 1,086 1,086 Loss on early extinguishment of debt ......... 225 225 Swap termination expense ..................... 4,824 4,824 Series B preferred distributions ............. (3,773) (3,234) (7,007) (6,468) Depreciation ................................. 38,204 39,705 76,822 79,513 Depreciation from unconsolidated entities .... 3,078 2,641 5,256 5,022 --------- --------- --------- --------- FFO ............................................... $ 45,722 $ 65,346 $ 75,051 $ 136,769 ========= ========= ========= ========= Weighted average units outstanding (a) ............ 66,733 66,750 66,724 66,759 ========= ========= ========= =========
- ---------- (a) Weighted average units outstanding are computed including dilutive options, unvested FelCor stock grants, and assuming conversion of Series A preferred units. The following table details our computation of EBITDA (unaudited, in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2002 2001 2002 2001 -------- -------- -------- -------- EBITDA: Funds from Operations ...................................... $ 45,722 $ 65,346 $ 75,051 $136,769 Interest expense ...................................... 42,184 39,803 83,959 79,896 Interest expense of unconsolidated subsidiaries ....... 2,373 2,631 4,732 4,742 Amortization expense .................................. 526 408 1,035 884 Series B preferred distributions ...................... 3,773 3,234 7,007 6,468 -------- -------- -------- -------- EBITDA ..................................................... $ 94,578 $111,422 $171,784 $228,759 ======== ======== ======== ========
28 Hotel Portfolio Composition The following tables set forth as of June 30, 2002, our hotel portfolio distribution by brand, by our top ten Metropolitan Statistical Areas ("MSAs"), by selected states, by type of location, and by market segment. For comparative purposes, also set forth below is the percentage of EBITDA contributed by each grouping for the year ended December 31, 2001.
Brand Hotels Rooms % of Total Rooms % of 2001 EBITDA - ----- ------ ------ ---------------- ---------------- Embassy Suites(R) 59 14,842 31% 44% Holiday Inn(R)-branded 59 16,914 35 26 Crowne Plaza(R) 18 5,963 12 10 Sheraton(R)-branded 10 3,269 7 8 Doubletree(R)-branded 12 2,467 5 5 Other 24 4,848 10 7
Top 10 MSAs Hotels Rooms % of Total Rooms % of 2001 EBITDA - ----------- ------ ------ ---------------- ---------------- Dallas 18 5,479 11% 7% Atlanta 12 3,514 7 8 San Francisco 6 2,440 5 6 Houston 9 2,262 5 4 Orlando 6 2,220 5 4 New Orleans 3 917 2 4 Phoenix 5 1,245 3 3 Philadelphia 3 1,174 3 3 San Jose 2 572 1 3 Chicago 4 1,239 3 3
Top Four States Hotels Rooms % of Total Rooms % of 2001 EBITDA - --------------- ------ ------ ---------------- ---------------- Texas 41 11,138 23% 17% California 19 6,026 12 18 Florida 17 5,529 11 12 Georgia 14 3,868 8 9
Location Hotels Rooms % of Total Rooms % of 2001 EBITDA - -------- ------ ------ ---------------- ---------------- Suburban 80 20,394 42% 41% Urban 43 13,138 27 30 Airport 32 9,488 20 21 Highway 20 3,537 7 3 Resort 7 1,746 4 5
Segment Hotels Rooms % of Total Rooms % of 2001 EBITDA - ------- ------ ------ ---------------- ---------------- Upscale all-suite 76 18,149 38% 51% Upscale 27 9,286 19 18 Full-service 61 18,236 38 29 Limited-service 18 2,633 5 2
29 Hotel Operating Statistics The following tables set forth historical occupied rooms ("Occupancy"), ADR and RevPAR at June 30, 2002, and 2001, and the percentage changes therein between the periods presented for the hotels in which the Company had an ownership interest at June 30, 2002: OPERATING STATISTICS BY BRAND (FOR THE THREE AND SIX MONTHS ENDED JUNE 30)
OCCUPANCY (%) ------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------- -------------------------------- % % 2002 2001 VARIANCE 2002 2001 VARIANCE ---- ---- -------- ---- ---- -------- Embassy Suites hotels 70.1 70.9 (1.2) 68.3 71.2 (4.1) Holiday Inn-branded hotels 65.7 71.2 (7.8) 62.2 69.1 (10.0) Crowne Plaza hotels 63.2 65.9 (4.2) 60.0 65.3 (8.1) Doubletree-branded hotels 70.6 72.3 (2.4) 65.8 72.2 (8.8) Sheraton-branded hotels 61.5 69.2 (11.1) 59.0 68.8 (14.3) Other hotels 55.6 61.7 (10.0) 55.6 63.6 (12.6) Total hotels 65.7 69.4 (5.4) 63.1 68.9 (8.3)
ADR ($) -------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ --------------------------------- % % 2002 2001 VARIANCE 2002 2001 VARIANCE ------ ------ -------- ------ ------ -------- Embassy Suites hotels 119.52 130.83 (8.6) 122.12 134.36 (9.1) Holiday Inn-branded hotels 82.22 86.00 (4.4) 81.56 85.69 (4.8) Crowne Plaza hotels 97.92 106.98 (8.5) 96.09 106.41 (9.7) Doubletree-branded hotels 102.63 107.00 (4.1) 104.31 111.10 (6.1) Sheraton-branded hotels 103.61 111.32 (6.9) 104.22 114.74 (9.2) Other hotels 76.82 77.83 (1.3) 80.28 81.88 (2.0) Total hotels 98.33 104.64 (6.0) 99.28 106.57 (6.8)
REVPAR ($) ------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ----------------------------- -------------------------------- % % 2002 2001 VARIANCE 2002 2001 VARIANCE ----- ----- -------- ----- ----- -------- Embassy Suites hotels 83.73 92.77 (9.7) 83.40 95.66 (12.8) Holiday Inn-branded hotels 54.00 61.24 (11.8) 50.77 59.23 (14.3) Crowne Plaza hotels 61.87 70.54 (12.3) 57.66 69.50 (17.0) Doubletree-branded hotels 72.41 77.34 (6.4) 68.63 80.20 (14.4) Sheraton-branded hotels 63.75 77.02 (17.2) 61.49 78.97 (22.1) Other hotels 42.68 48.04 (11.2) 44.64 52.08 (14.3) Total hotels 64.57 72.65 (11.1) 62.67 73.39 (14.6)
30 OPERATING STATISTICS FOR OUR TOP 10 MSAS (FOR THE THREE AND SIX MONTHS ENDED JUNE 30)
OCCUPANCY (%) ----------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ --------------------------------- % % 2002 2001 VARIANCE 2002 2001 VARIANCE ---- ---- -------- ---- ---- -------- Dallas 50.9 58.2 (12.6) 51.2 62.7 (18.3) Atlanta 67.4 71.9 (6.3) 68.2 73.3 (7.0) San Francisco 70.5 77.1 (8.6) 64.2 74.9 (14.3) Houston 66.1 77.5 (14.7) 67.6 76.8 (11.9) Orlando 71.1 76.7 (7.2) 70.3 76.1 (7.6) New Orleans 73.4 76.1 (3.5) 73.5 77.3 (4.9) Phoenix 62.5 63.4 (1.5) 66.0 70.1 (5.8) Philadelphia 71.8 71.5 0.4 62.8 64.3 (2.3) San Jose 64.8 69.8 (7.2) 63.7 74.2 (14.1) Chicago 69.7 71.1 (1.9) 61.5 67.6 (9.1)
ADR ($) ------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------- ---------------------------------- % % 2002 2001 VARIANCE 2002 2001 VARIANCE ------ ------ -------- ------ ------ -------- Dallas 86.93 88.08 (1.3) 89.31 91.86 (2.8) Atlanta 90.02 97.83 (8.0) 84.25 100.21 (15.9) San Francisco 123.09 154.78 (20.5) 120.46 153.65 (21.6) Houston 75.43 79.05 (4.6) 75.40 78.70 (4.2) Orlando 79.08 86.76 (8.9) 84.25 93.17 (9.6) New Orleans 132.22 142.25 (7.1) 148.52 153.45 (3.2) Phoenix 99.22 103.46 (4.1) 115.09 127.11 (9.5) Philadelphia 127.84 126.61 1.0 120.47 119.86 0.5 San Jose 125.78 158.61 (20.7) 128.68 166.03 (22.5) Chicago 125.85 141.17 (10.9) 120.06 136.08 (11.8)
REVPAR ($) ----------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ --------------------------------- % % 2002 2001 VARIANCE 2002 2001 VARIANCE ----- ------ -------- ------ ------ -------- Dallas 44.20 51.25 (13.7) 45.76 57.57 (20.5) Atlanta 60.67 70.37 (13.8) 63.00 73.43 (14.2) San Francisco 86.76 119.41 (27.3) 77.30 115.12 (32.9) Houston 49.86 61.24 (18.6) 51.00 60.45 (15.6) Orlando 56.25 66.53 (15.5) 59.26 70.91 (16.4) New Orleans 97.05 108.20 (10.3) 109.21 118.61 (7.9) Phoenix 61.98 65.62 (5.5) 75.98 89.06 (14.7) Philadelphia 91.73 90.51 1.4 75.71 77.08 (1.8) San Jose 81.56 110.78 (26.4) 81.99 123.16 (33.4) Chicago 87.76 100.39 (12.6) 73.83 92.02 (19.8)
31 LIQUIDITY AND CAPITAL RESOURCES Our principal source of cash to meet our cash requirements, including distributions to unitholders and repayments of indebtedness, is from the results of operations of our hotels. For the six months ended June 30, 2002, net cash flow provided by operating activities, consisting primarily of hotel operations, was $69.7 million and FFO was $75.1 million. We currently expect that our operating cash flow will be sufficient to fund our continuing operations, including our required capital expenditures, debt service obligations and FelCor's distributions to shareholders required to maintain its REIT status. However, due to the sharp reduction in travel following the terrorist attacks of September 11, 2001, and the resultant drop in RevPAR and profits from our hotel operations, we plan to continue to limit distributions to holders of our units as may be necessary. Accordingly, distributions to holders of our units and dividends to holders of FelCor's common stock may be significantly reduced or possibly eliminated in future periods. Prior to January 1, 2001, substantially all of our hotels were leased to third parties under leases providing for the payment of rent based, in part, upon revenues from the hotels. Accordingly, our 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, we acquired the leaseholds of 96 of our hotels and on July 1, 2001, we acquired our remaining 88 hotel leases. As a result of these acquisitions, we also became subject to the risks of fluctuating hotel operating margins at our 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 our results of operations. The continued economic slowdown and the drop in occupancy and ADR following the terrorist attacks of September 11, 2001, resulted both in declines in RevPAR and an erosion in operating margins during the year ended December 31, 2001, compared to 2000, that have continued through the second quarter of 2002 compared to the same period in 2001. If the declines in hotel RevPAR and/or operating margins worsen or continue for a protracted time, they could have a material adverse effect on our operations and earnings. As a result of the current RevPAR environment, we amended our unsecured line of credit on June 17, 2002. The amendment allows for the relaxation of certain financial covenants through the maturity date, with a step-up in certain financial covenants. The interest rate remains on the same floating rate basis with a tiered spread based on our debt leverage ratio, but with added tiers to reflect the higher permitted leverage. The lenders' commitments under the line of credit were $615 million at June 30, 2002. No amount was outstanding under the facility at June 30, 2002. In addition to the financial covenants, our line of credit includes certain other affirmative and negative covenants, including: restrictions on our ability to create or acquire wholly-owned subsidiaries; restrictions on the operation/ownership of our hotels; limitations on our ability to lease property or guarantee leases of other persons; limitations on our ability to make restricted payments; limitations on our ability to merge or consolidate with other persons, issue stock of our subsidiaries and sell all or substantially all of our assets; restrictions on our ability to construct new hotels or acquire hotels under construction; limitations on our ability to change the nature of our business; limitations on our ability to modify certain instruments; limitations on our ability to create liens; limitations on our ability to enter into transactions with affiliates; and limitations on our ability to enter into joint ventures. At June 30 2002, we were in compliance with all of the line of credit covenants. Our publicly traded senior term notes require us to satisfy an interest coverage test in order to incur additional indebtedness, except under our line of credit; to pay distributions in excess of the minimum amount required for FelCor to meet its REIT qualification test; or to repurchase stock. As of the date of this filing, we have satisfied this minimum interest coverage requirement. 32 Unless our business continues to gradually improve, we may be unable to satisfy all of the covenant requirements. In such an event, we may need to obtain further amendments from our lenders under the line of credit in order to borrow under the facility. We are not certain whether, to what extent, or upon what terms the lenders may be willing to further amend the covenants. Further amendments to our line of credit, if any, may result in additional restrictions on us and may adversely affect our ability to run our business and financial affairs. Failure to satisfy one or more of the financial or other covenants under our line of credit would constitute an event of default, notwithstanding our ability to meet our debt service obligations. Other events of default under our line of credit include, without limitation, a default in the payment of other indebtedness of $10 million or more, bankruptcy and a change of control. Our other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than those in the line of credit. Most of our mortgage debt is nonrecourse to us and contains provisions allowing for the substitution of collateral upon the satisfaction of certain conditions. Most of the mortgage debt is prepayable; subject, however, to various prepayment penalties, yield maintenance, or defeasance obligations. For the third quarter of 2002, we currently anticipates our portfolio RevPAR will be 1% to 5% above the comparable period of the prior year. FFO is expected to be within the range of $33 million to $40 million, and EBITDA is expected to be within the range of $81 million to $88 million for the same period. We estimate our full year 2002 hotel portfolio RevPAR will be between 3.5% and 5.5% below 2001. Our FFO for the full year 2002 is currently anticipated to be within the range of $133 million to $150 million and EBITDA to be within the range of $81 to $88 million. We currently anticipate 2002 capital expenditures will be from $55 to $65 million. For the six months ended June 30, 2002, capital expenditures totaled $20 million. In the event that RevPAR declines, compared to the prior year, are greater than anticipated in the preparation of this guidance, or operating margins are lower than anticipated, we may not meet our forecast for the remainder of the year. RevPAR results for July 2002 were 7% below the same period in 2001. Our decision to pay a quarterly distribution will be determined each quarter based upon the operating results of that quarter, economic conditions, and other factors. For both the three months ended March 31, 2002, and the three months ended June 30, 2002, we paid a distributions of $0.15 per unit, $0.4875 per share on our $1.95 Series A Cumulative Convertible Preferred Units and $0.5625 per depositary share evidencing our 9% Series B Cumulative Redeemable Preferred Units. On June 30, 2002, we did not have any amount outstanding on our line of credit. We also maintain flexibility in working with our lenders, as a result of our $152 million of cash and cash equivalents on hand, $2.4 billion of unencumbered assets, and a breakeven portfolio hotel occupancy, after debt service and preferred equity distributions, of approximately 50%. The $615 million of capacity under our line of credit is expected to remain available to take advantage of opportunities that may present themselves as the industry begins to recover in late 2002 and 2003. We may incur indebtedness to make property acquisitions or to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to the extent that working capital and cash flow from our investments are insufficient for such purposes. 33 At June 30, 2002, we had $152 million of cash and cash equivalents. Certain significant credit and debt statistics at June 30, 2002, are as follows: o Interest coverage ratio of 1.9x for the six month period ended June 30, 2002 o Borrowing capacity of $615 million under our line of credit o Consolidated debt equal to 38.3% of our investment in hotels, at cost o Fixed interest rate debt equal to 91% of our total debt o Weighted average maturity of debt of approximately 6.5 years and a weighted average interest cost of 8.3% o Mortgage debt to total assets of 17% o Scheduled debt repayments of $6 million during the remainder of 2002 o Scheduled debt repayments of $35 million in 2003 o Scheduled debt repayments of $189 million in 2004 We spent approximately $19.8 million on upgrading and renovating our consolidated hotels and approximately $5.6 million on upgrading and renovating the hotels owned by our unconsolidated entities during the six months ended June 30, 2002. Notwithstanding the current significant economic downturn, we believe that our hotels will continue to benefit from our extensive capital expenditure programs in previous years. We currently anticipate 2002 capital expenditures of between $55 and $65 million, depending upon the pace of the anticipated economic recovery. Quantitative and Qualitative Disclosures About Market Risk At June 30, 2002 approximately 91% of our consolidated debt had fixed interest rates. Currently, market rates of interest are below the rates we are obligated to pay on our fixed-rate debt. The following table provides information about our financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations at June 30, 2002, the table presents scheduled maturities and weighted average interest rates, by maturity dates. For interest rate swaps, 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 June 30, 2002. The fair value of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at June 30, 2002, at then current market interest rates. EXPECTED MATURITY DATE (DOLLARS IN THOUSANDS)
2002 2003 2004 2005 2006 THEREAFTER TOTAL FAIR VALUE ------ ------- -------- ------- ------- ---------- ---------- ---------- LIABILITIES Debt: Fixed rate ..................... $6,289 $34,904 $189,228 $42,636 $14,216 $1,601,946 $1,889,219 $1,713,780 Average interest rate ....... 7.88% 7.43% 7.42% 7.48% 8.04% 8.66% 8.48% Floating rate .................. $ 650 $ 650 650 Average interest rate (a) ... 7.74% 7.74% Discount accretion ................ $ (7,194) Total debt ........................ 6,289 34,904 189,228 42,636 14,216 1,602,596 $1,882,675 Average interest rate ........ 7.88% 7.43% 7.42% 7.48% 8.04% 8.66% 8.48% Interest rate swaps: Fixed to floating .............. 175,000 $ 175,000 $ 1,472 Average pay rate ............. 5.04% 5.59% Average receive rate ......... 7.38% 7.38%
(a) The average floating rate of interest represents the projected forward rate at June 30, 2002. 34 Swap agreements, such as described above, contain a credit risk, in that the counterparties may be unable to fulfill the terms of the agreement. We minimize that risk by evaluating the creditworthiness of our counterparties, who are limited to major banks and financial institutions, and we do not anticipate nonperformance by the counterparties. The credit ratings for the financial institutions that are counterparties to the interest rate swap agreements range from A- to AA. 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 us to reduce room rates in the near term and may limit our ability to raise room rates in the future. SEASONALITY The lodging business is seasonal in nature. Generally, hotel revenues are greater in the second and third calendar quarters than in the first and fourth calendar quarters, although this may not be true for hotels in major tourist destinations. Revenues for hotels in tourist areas generally are substantially greater during tourist season than other times of the year. Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues. Quarterly earnings also may be adversely affected by events beyond our control, such as extreme weather conditions, economic factors and other considerations affecting travel. Historically, to the extent that cash flow from operations has been insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we have utilized cash on hand or borrowings under our line of credit to make distributions to our equity holders. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Portions of this Quarterly Report on Form 10-Q include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's current expectations are disclosed herein and in the Company's other filings under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, (collectively, "Cautionary Disclosures"). The forward looking statements included herein, and all subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf, are expressly qualified in their entirety by the Cautionary Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information and disclosures regarding market risks applicable to the Company is incorporated herein by reference to the discussion under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" contained elsewhere in this Quarterly Report on Form 10-Q for the six months ended June 30, 2002. 35 PART II. -- OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On April 4, 2002, the Company issued 10,258 units of its 9% Series B Cumulative Redeemable Preferred Units to FelCor in exchange for the net proceeds from the issuance of a like number of FelCor's 9% Series B Cumulative Redeemable Preferred Stock. The units issued were not registered under the 1933 Act in reliance upon certain exemptions from the registration requirements thereof, including the exemption provided by Section 4(2) of that act. ITEM 5. OTHER INFORMATION. For information relating to certain other transactions by the Company through June 30, 2002, see Note 1 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: None (b) Reports on Form 8-K: A current report on Form 8-K dated June 17, 2002, was filed by the Company on July 1, 2002. This filing, under Item 5, disclosed the execution of the Company's Second Amendment to the Seventh Amended and Restated Credit Agreement on June 17, 2002. The amendment was filed as an exhibit to the 8-K. 36 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August [ ], 2002 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 By: Lester C. Johnson ------------------------------------ Lester C. Johnson Senior Vice President and Chief Accounting Officer 37 -----END PRIVACY-ENHANCED MESSAGE-----