-----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, GWowGxstCNyLxy1VfH1o5khbfgldgnjouZLtBs2ZuZU0mO4OxJU255325U9HQmFv W+pVgLESKaRJtEQR8C0zMA== 0000950134-03-011867.txt : 20030814 0000950134-03-011867.hdr.sgml : 20030814 20030814155913 ACCESSION NUMBER: 0000950134-03-011867 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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: 03847652 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 d08275e10vq.txt FORM 10-Q - -------------------------------------------------------------------------------- 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, 2003 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 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 --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- - -------------------------------------------------------------------------------- FELCOR LODGING LIMITED PARTNERSHIP INDEX
Page ---- PART I. -- FINANCIAL INFORMATION Item 1. Financial Statements....................................................... 3 Consolidated Balance Sheets - June 30, 2003 (unaudited) and December 31, 2002.............................................. 3 Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2003 and 2002 (unaudited)........................... 4 Consolidated Statements of Comprehensive Income (Loss) - For the Three and Six Months Ended June 30, 2003 and 2002 (unaudited) ........... 5 Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2003 and 2002 (unaudited)........................... 6 Notes to Consolidated Financial Statements.............................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General................................................... 25 Financial Comparison.................................................... 25 Results of Operations................................................... 26 Liquidity and Capital Resources......................................... 34 Inflation............................................................... 38 Seasonality............................................................. 38 Disclosure Regarding Forward Looking Statements......................... 39 Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 39 Item 4. Controls and Procedures...................................................... 39 PART II. - OTHER INFORMATION Item 5. Other Information.......................................................... 40 Item 6. Exhibits and Reports on Form 8-K........................................... 40 SIGNATURE........................................................................... 42
2 PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 2003 2002 ------------ ------------ (UNAUDITED) ASSETS Investment in hotels, net of accumulated depreciation of $870,363 at June 30, 2003 and $782,166 at December 31, 2002 ..................... $ 3,506,431 $ 3,473,452 Investment in unconsolidated entities ..................................... 120,753 141,943 Cash and cash equivalents ................................................. 182,669 66,542 Accounts receivable, net of allowance for doubtful accounts of $1,236 in 2003 and $1,413 in 2002 ............................................. 52,921 48,548 Deferred expenses, net of accumulated amortization of $13,517 at June 30, 2003 and $13,357 at December 31, 2002 ...................... 23,932 24,185 Other assets .............................................................. 32,717 25,693 ------------ ------------ Total assets ..................................................... $ 3,919,423 $ 3,780,363 ============ ============ LIABILITIES AND PARTNER' CAPITAL Debt, net of discount of $4,284 at June 30, 2003 and $3,231 at December 31, 2002 ............................................ $ 2,058,467 $ 1,877,134 Distributions payable ..................................................... 5,483 14,792 Accrued expenses and other liabilities .................................... 156,678 150,385 Minority interest in other partnerships ................................... 55,021 48,596 ------------ ------------ Total liabilities ................................................ 2,275,649 2,090,907 ------------ ------------ Commitments and contingencies Redeemable units at redemption value, 3,238 and 3,290 units issued and outstanding at June 30, 2003 and December 31, 2002, respectively ....... 25,416 37,634 ------------ ------------ Preferred units, $.01 par value, 20,000 units authorized: Series A Cumulative Convertible Preferred Units, 5,980 units issued and outstanding at June 30, 2003 and December 31, 2002 .............. 149,512 149,512 Series B Cumulative Redeemable Preferred Units, 68 units issued and outstanding at June 30, 2003 and December 31, 2002 .............. 169,395 169,395 Common units, 64,613 and 64,470 units issued, and outstanding, at June 30, 2003 and December 31, 2002, respectively ...................... 1,288,515 1,333,014 Accumulated other comprehensive income .................................... 10,936 (99) ------------ ------------ Total partners' capital .......................................... 1,618,358 1,651,822 ------------ ------------ Total liabilities, redeemable units and partners' capital ........ $ 3,919,423 $ 3,780,363 ============ ============
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, 2003 AND 2002 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER UNIT DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Revenues: Hotel operating revenue ...................................... $ 327,251 $ 349,563 $ 632,811 $ 672,256 Retail space rental and other revenue ........................ 236 428 637 1,098 ------------ ------------ ------------ ------------ Total revenues .................................................. 327,487 349,991 633,448 673,354 ------------ ------------ ------------ ------------ Expenses: Hotel departmental expenses .................................. 115,544 117,557 224,871 227,508 Other property operating costs ............................... 91,801 89,960 182,979 178,501 Management and franchise fees ................................ 16,646 18,017 32,893 33,605 Taxes, insurance and lease expense ........................... 33,554 33,697 65,979 68,172 Corporate expenses ........................................... 3,737 3,970 7,160 7,716 Depreciation ................................................. 36,658 38,204 72,656 76,822 ------------ ------------ ------------ ------------ Total operating expenses ........................................ 297,940 301,405 586,538 592,324 ------------ ------------ ------------ ------------ Operating income ................................................ 29,547 48,586 46,910 81,030 Interest expense, net ........................................... (41,251) (41,555) (81,504) (82,751) Charge-off of deferred financing costs .......................... (2,834) -- (2,834) -- Gain on early extinguishment of debt ............................ 307 -- 1,260 -- Impairment loss ................................................. (7,824) -- (7,824) -- ------------ ------------ ------------ ------------ Income (loss) before equity in income of unconsolidated entities, minority interest and gain on sales of assets .... (22,055) 7,031 (43,992) (1,721) Equity in income from unconsolidated entities ................ 726 1,365 578 2,586 Gain on sale of assets ....................................... 153 6,061 153 6,061 Minority interest ............................................ 292 (755) (138) (1,541) ------------ ------------ ------------ ------------ Income (loss) from continuing operations ........................ (20,884) 13,702 (43,399) 5,385 Discontinued operations ...................................... (812) 372 (945) 456 ------------ ------------ ------------ ------------ Net (income) loss ............................................... (21,696) 14,074 (44,344) 5,841 Preferred distributions ...................................... (6,728) (6,688) (13,454) (12,838) ------------ ------------ ------------ ------------ Net income (loss) applicable to unitholders ..................... $ (28,424) $ 7,386 $ (57,798) $ (6,997) ============ ============ ============ ============ Earnings (loss) per unit data: Basic: Net income (loss) from continuing operations ............... $ (0.45) $ 0.11 $ (0.92) $ (0.12) ============ ============ ============ ============ Net income (loss) .......................................... $ (0.46) $ 0.12 $ (0.93) $ (0.11) ============ ============ ============ ============ Weighted average units outstanding ......................... 61,845 61,732 61,833 61,726 Diluted: Net income (loss) from continuing operations ............... $ (0.45) $ 0.11 $ (0.92) $ (0.12) ============ ============ ============ ============ Net income (loss) .......................................... $ (0.46) $ 0.12 $ (0.93) $ (0.11) ============ ============ ============ ============ Weighted average units outstanding ......................... 61,845 62,097 61,833 61,726 Cash dividends declared on partnership units .................... $ -- $ 0.15 $ -- $ 0.30 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income (loss) ........................ $ (21,696) $ 14,074 $ (44,344) $ 5,841 Foreign currency translation adjustment .. 6,216 2,259 11,035 2,840 ------------ ------------ ------------ ------------ Comprehensive income (loss) ......... $ (15,480) $ 16,333 $ (33,309) $ 8,681 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------------ 2003 2002 -------- ---------- Cash flows from operating activities: Net income (loss)................................................................. $ (44,344) $ 5,841 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation............................................................ 73,191 76,822 Loss (gain) on sale of assets........................................... 330 (6,061) Amortization of deferred financing fees................................. 2,375 2,658 Accretion of debt, net of discount...................................... 207 205 Amortization of unearned compensation................................... 1,080 1,035 Equity in income from unconsolidated entities........................... (578) (2,586) Impairment loss......................................................... 7,824 - Charge-off of deferred finance costs net of gain on debt extinguishment. 1,574 - Minority interest....................................................... 138 1,541 Changes in assets and liabilities: Accounts receivable..................................................... (4,058) (7,753) Deferred expenses....................................................... (3,654) (1,014) Other assets............................................................ (4,316) (8,366) Accrued expenses and other liabilities.................................. 2,556 7,402 --------- ---------- Net cash flow provided by operating activities................ 32,325 69,724 --------- ---------- Cash flows (used in) provided by investing activities: Improvements and additions to hotels.............................................. (42,279) (17,924) Proceeds from sale of assets...................................................... 12,292 23,237 Cash from purchase of percentage interest in Interstate Joint Venture............. 2,705 - Cash distributions from unconsolidated entities................................... 2,913 5,225 --------- ---------- Net cash flow provided by (used in) investing activities...... (24,369) 10,538 ---------- ---------- Cash flows (used in) provided by financing activities: Proceeds from borrowings.......................................................... 321,119 - Repayment of borrowings........................................................... (190,367) (56,718) Net proceeds from sale of preferred stock......................................... - 23,981 Purchase of treasury stock........................................................ - (113) Distributions paid to other partnership minority interests........................ - (448) Distributions paid to preferred unitholders....................................... (13,455) (12,454) Distributions paid to common unitholders.......................................... (9,307) (12,457) ---------- ---------- Net cash flow provided by (used in) financing activities...... 107,990 (58,209) --------- ---------- Effect of exchange rate changes on cash............................................... 181 909 Net change in cash and cash equivalents............................................... 116,127 22,962 Cash and cash equivalents at beginning of periods..................................... 66,542 128,742 --------- --------- Cash and cash equivalents at end of periods........................................... $ 182,669 $ 151,704 ========= ========== Supplemental cash flow information -- Interest paid..................................................................... $ 80,937 $ 79,742 ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. 6 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION In 1994, FelCor Lodging Limited Partnership, or FelCor LP, was established with six hotels. We are now the nation's second largest owner of full service, all-suite hotels. Our sole general partner is FelCor Lodging Trust Incorporated, or FelCor, is the second largest lodging real estate investment trust, or REIT. At June 30, 2003, FelCor owned a greater that 95% equity interest in our operations. Our hotel portfolio at June 30, 2003, included 77 upscale, all-suite hotels, 85 hotels in the upscale or full service segments and the largest number of Embassy Suites Hotels(R) and independently-owned Doubletree Guest Suites(R) hotels in North America. At June 30, 2003, we had ownership interests in 181 hotels. We owned a 100% real estate interest in 143 hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels, a 51% interest in an entity owning eight hotels and 50% interests in unconsolidated entities that own 21 hotels. As a result of our ownership interests in the operating lessees of 175 of these hotels, we reflect their operating revenues and expenses in our consolidated statements of operations. The operating revenues and expenses of the remaining six hotels are unconsolidated. At June 30, 2003, we had an aggregate of 62,154,164 shares of FelCor common stock and units of FelCor LP limited partnership interest outstanding. The following table reflects the distribution, by brand, of the 175 hotels included in our consolidated hotel operations at June 30, 2003: BRAND Hilton Hotels Corporation, or Hilton, brands: Embassy Suites Hotels........................................... 59 Doubletree(R) and Doubletree Guest Suites....................... 13 Hampton Inn(R).................................................. 4 Hilton and Hilton Suites(R)..................................... 2 Homewood Suites(R).............................................. 1 InterContinental Hotels Group brands: Holiday Inn(R).................................................. 40 Crowne Plaza(R) and Crowne Plaza Suites(R)...................... 18 Holiday Inn Select(R)........................................... 10 Holiday Inn Express(R).......................................... 3 Staybridge Suites(R)............................................ 1 Starwood Hotels & Resorts Worldwide Inc., or Starwood, brands: Sheraton(R) and Sheraton Suites(R).............................. 10 Westin(R)....................................................... 1 Marriott International, Inc., or Marriott brands: Fairfield Inn(R) by Marriott(R)................................. 5 Courtyard(R) by Marriott........................................ 2 Other brands......................................................... 6 --- Total hotels......................................................... 175 ===
The hotels shown in the above table are located in the United States (35 states) and Canada (six hotels), with concentrations in Texas (41 hotels), California (19 hotels), Florida (16 hotels) and Georgia (14 hotels). Approximately 51% of our hotel room revenues were generated from hotels in these four states during the quarter. 7 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION -- (CONTINUED) At June 30, 2003, of the 175 hotels, (i) subsidiaries of InterContinental Hotels Group, or IHG, managed 80, (ii) subsidiaries of Hilton managed 72, (iii) subsidiaries of Starwood managed 11, (iv) subsidiaries of Interstate Hotels Corporation, or IHC, managed 10, and (v) two independent management companies managed one each. 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 (loss) or partners' capital. The financial information for the three and six months ended June 30, 2003, and 2002, is unaudited. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying financial statements for the three and six months ended June 30, 2003, and 2002, include adjustments made to management's estimates (consisting of an impairment charge and normal recurring accruals) which we consider 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, 2002, included in our Annual Report on Form 10-K for the year ended December 31, 2002 ("Form 10-K"). Operating results for the three and six months ended June 30, 2003, are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2003. 2. INVESTMENT IN UNCONSOLIDATED ENTITIES We owned 50% interests in joint venture entities that owned 21 hotels at June 30, 2003, and 24 hotels at June 30, 2002. We also owned a 50% interest in entities that: own an undeveloped parcel of land; provide condominium management services; develop condominiums in Myrtle Beach, South Carolina; and lease five hotels. We account for our investments in these unconsolidated entities under the equity method. Effective June 1, 2003, we made a $0.2 million capital contribution to our joint venture with IHC, which increased our ownership in that venture to more than 50 percent. As a result, we began consolidating the eight hotels owned by this venture. The consolidation of these eight hotels increased our net investment in hotels by $73 million, increased our debt by $51 million and reduced our investment in unconsolidated entities by $19 million. Summarized combined financial information for 100% of our unconsolidated entities is as follows (in thousands):
JUNE 30, DECEMBER 31, 2003 2002 ------------ ------------ Balance sheet information: Investment in hotels, net of accumulated depreciation .. $ 318,215 $ 383,249 Total assets ........................................... $ 328,846 $ 408,979 Debt ................................................... $ 245,945 $ 278,978 Total liabilities ...................................... $ 246,133 $ 279,887 Equity ................................................. $ 94,873 $ 129,854
Debt of our unconsolidated entities at June 30, 2003, consisted of $215.1 million of non-recourse mortgage debt. It also included $15.5 million of mortgage debt guaranteed by us and $15.3 million of mortgage debt guaranteed by Hilton, one of our joint venture partners. The debt guaranteed by us consisted primarily of 50% of a loan related to the construction of a residential condominium project in Myrtle Beach, South Carolina. The loan commitment is for $97.6 million, of which approximately $30.6 million was outstanding as of June 30, 2003. Our guarantee reduces from 50% to 25% of the outstanding balance when the condominium project is completed and 8 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENT IN UNCONSOLIDATED ENTITIES - (CONTINUED) receives a certificate of occupancy, which we expect to occur in late 2004. Our guarantee is a payment guarantee and will require us to pay in the event that the joint venture fails to pay interest or principal due under the debt agreement. The loan matures in August 2005, and bears interest at LIBOR plus 200 basis points. As of June 30, 2003, we had not established any liability related to our guarantees of debt because it was not believed to be probable that we would be required to perform under the guarantees. Summarized combined statement of operations information for 100% of our unconsolidated entities is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Total revenues ..... $ 21,720 $ 22,798 $ 42,868 $ 41,663 Net income ......... $ 2,806 $ 3,767 $ 3,717 $ 5,485
3. DEBT Debt consisted of the following (in thousands):
BALANCE OUTSTANDING COLLATERAL AT INTEREST RATE --------------------------- JUNE 30, AT JUNE 30, JUNE 30, DECEMBER 31, 2003 2003 MATURITY DATE 2003 2002 ------------- ------------- ------------- ----------- ------------ FLOATING RATE: Publicly-traded term notes-swapped None 4.50(a) October 2004 $ 174,824 $ 174,760 Publicly-traded term notes-swapped None 5.37(a) October 2007 75,000 25,000 Mortgage debt 10 hotels 3.93 May 2006 149,729 -- Promissory note None 3.34 June 2016 650 650 ----- ----------- ----------- Total floating rate debt(b) 4.23% 400,203 200,410 ----- ----------- ----------- FIXED RATE: Publicly-traded term notes None 7.63 October 2007 49,567 99,518 Publicly-traded term notes None 10.00 September 2008 596,530 596,195 Publicly-traded term notes None 9.00 June 2011 298,032 297,907 Mortgage debt 15 hotels 7.24 November 2007 133,243 134,738 Mortgage debt 7 hotels 7.54 April 2009 93,382 94,288 Mortgage debt 6 hotels 7.55 June 2009 70,265 70,937 Mortgage debt 7 hotels 8.73 May 2010 139,280 140,315 Mortgage debt 8 hotels 8.70 May 2010 179,321 180,534 Mortgage debt 8 hotels 7.48 April 2011 50,696 - Mortgage debt 4 hotels 7.20 2005 - 2008 41,147 54,993 Other 1 hotel 9.08 August 2011 6,801 7,299 ----- ----------- ----------- Total fixed rate debt(a) 8.89 1,658,264 1,676,724 ----- ----------- ----------- Total debt(b) 7.98% $ 2,058,467 $ 1,877,134 ===== =========== ===========
(a) At June 30, 2003, our $175 million publicly-traded notes due October 2004 and $75 million of our publicly traded notes due October 2007, were matched with interest rate swap agreements that effectively converted the fixed interest rate on the notes to a floating interest rate tied to LIBOR. The differences to be paid or received by us under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense. The interest rate swaps decreased interest expense by $1.7 million and $3.3 million for the three months and six months ended June 30, 2003, respectively. (b) Calculated based on the weighted average outstanding debt at June 30, 2003. All of our floating rate debt at June 30, 2003, was based upon LIBOR (1.1% as of June 30, 2003). 9 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DEBT -- (CONTINUED) We reported interest expense, net of interest income, of $0.6 million, and capitalized interest of $0.1 million, for both the three months ended June 30, 2003 and 2002. We reported interest expense, net of interest income, of $0.9 million and $1.2 million, and capitalized interest of $0.5 million and $0.3 million, for the six months ended June 30, 2003 and 2002, respectively. In June 2003, we entered into a non-recourse secured loan facility for up to $200 million, with a delayed draw feature. This facility has an initial term of 18 months, that can be extended for an additional six months at our option, and carries a floating interest rate of LIBOR plus 225 to 275 basis points, depending on the loan-to-value ratio of the facility. The outstanding balances on the loan facility are expected to be converted into 10-year fixed rate commercial mortgage backed securities loans. At the date of this filing, no draws had been made and capacity available under this facility was $120 million, secured by seven hotels. The amount available under this facility may be increased to a maximum of $200 million as additional properties are mortgaged to secure borrowings thereunder. With the inclusion of additional hotels, which are subject to final underwriting and customary closing conditions, we expect to have the capacity available of approximately $170 million to $180 million under this facility by the end of the third quarter. During this quarter, we also reduced the commitments under our unsecured line of credit from $300 million to $50 million. The line of credit has an accordion feature that allows us to increase the commitments to $200 million, subject to lender consent and the satisfaction of certain conditions. As the result of this reduction in our line commitments, we charged-off unamortized costs of $2.8 million during the second quarter. We had no borrowings outstanding under our line of credit at June 30, 2003. On April 24, 2003, we completed a $150 million non-recourse mortgage loan, at a floating interest rate of LIBOR plus 250 basis points, secured by 10 full service hotels. The loan matures in May 2006, with two, one-year extension options. The proceeds were used to pay off all outstanding borrowings under our unsecured line of credit. In May 2003, we made a prepayment of $7.1 million of secured debt and recorded a gain from debt extinguishment of $0.3 million. In February 2003, we made a prepayment of $5.2 million of secured debt and recorded a gain from debt extinguishment of $1.0 million. Effective March 31, 2003, we completed the refinancing of $15.5 million of secured debt that was to mature in late 2003. Under the refinancing terms, this fixed rate debt was converted to a floating interest rate of LIBOR plus 285 basis points effective August 2003. The new maturity is August 2008. In the first quarter of 2003, we entered into two interest rate swaps. These fair value swaps are the same type as those that existed at December 31, 2002, in that they modify a portion of the interest characteristics of our outstanding fixed rate debt, without an exchange of the underlying principal amount, and effectively convert fixed rate debt to a variable rate. As designated fair value hedges, these swaps are marked to market through the income statement, but offset by the change in fair value of our swapped outstanding fixed rate debt. The notional amount of these new swaps is $50 million, on which we will receive a fixed rate of 7.625% and pay a rate of LIBOR plus an average spread of 4.325%. In addition to 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 and 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 (such as distributions on common and preferred stock, share repurchases and certain investments); 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; 10 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DEBT -- (CONTINUED) limitations on our ability to enter into transactions with affiliates; and limitations on our ability to enter into joint ventures. At June 30, 2003, we were in compliance with all covenants under our line of credit. At the date of this filing, we have no restrictions on our ability to use our line of credit. However, at certain leverage levels, usage under the line of line credit is restricted to fund operational cash flow shortfalls. At these higher leverage levels, excess cash flow from operations and net cash proceeds from sales, must first be used to reduce any outstanding balances under our line of credit. Failure to satisfy one or more of the financial or other covenants under our line of credit would result in our inability to borrow under the line of credit and a continuation of such default could result in an event of default, notwithstanding our ability to meet our debt service obligations. If revenue per available room declines continue or become more severe, we may be unable to satisfy all of the covenant requirements under our line of credit. Other events that would be events of default under our line of credit include a default in the payment of other recourse indebtedness in the amount of $10 million or more, bankruptcy or a change of control. Our other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than those in our line of credit. Most of our mortgage debt is non-recourse to us and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of our mortgage debt is prepayable, subject to various prepayment penalties, yield maintenance or defeasance obligations. Our publicly-traded senior unsecured notes require that we satisfy a total leverage, a secured leverage and an interest coverage test in order to: incur additional indebtedness, except under our line of credit or to refinance maturing debt with replacement debt, as defined in our senior unsecured note indentures; pay distributions in excess of the minimum distribution required to meet FelCor's REIT qualification test; repurchase FelCor stock; or merge. As of June 30, 2003, and the date of this filing, we have satisfied all such incurrence tests. If revenue per available room declines continue or become more severe, we may be unable to satisfy all of the incurrence tests under our senior unsecured notes. As a consequence of the prolonged economic slowdown, its impact on the travel and lodging industries and our higher secured debt levels, Moody's lowered its ratings on our $1.2 billion in senior unsecured debt to B1, in June 2003. This downgrade, coupled with a similar downgrade by Standard & Poor's earlier in the year, triggered a 50 basis point step-up in interest rates on $900 million of our senior unsecured debt, which will continue in effect unless and until either Moody's raises its ratings on our senior unsecured debt to Ba3 or Standard & Poor's raises its rating to BB-. 4. DERIVATIVES On the date we enter into a derivative contract, we designate the derivative as a hedge to the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), or the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge). For a fair value hedge, the gain or loss is recognized in earnings in the period of change, together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. For a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. At June 30, 2003, all of our outstanding hedges were fair value hedges. 11 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. DERIVATIVES -- (CONTINUED) We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy, relating to our various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or specific firm commitments. We also formally assess (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows or fair values of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When we determine that a derivative is not (or has ceased to be) highly effective as a hedge, we will discontinue hedge accounting, prospectively. In the normal course of business, we are exposed to the effect of interest rate changes. We limit these risks by following established risk management policies and procedures including the use of derivatives. It is our objective to use interest rate hedges to manage our fixed and floating interest rate position and not to engage 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 will result in the least amount of reported earnings volatility under generally accepted accounting principles, while still meeting strategic economic objectives and maintaining adequate liquidity and flexibility. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. To manage the relative mix of our debt between fixed and variable rate instruments, at June 30, 2003, we had entered into nine interest rate swap agreements with five financial institutions with an aggregate notional value of $250 million. These interest rate swap agreements modify a portion of the interest characteristics of our outstanding fixed rate debt, without an exchange of the underlying principal amount, and effectively convert fixed rate debt to a variable rate. To determine the fair values of our derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. The interest rate swap agreements held at June 30, 2003, are designated as fair value hedges, are marked to market through the income statement, but are offset by the change in fair value of our swapped outstanding fixed rate debt. The estimated unrealized net gain on these interest rate swap agreements was approximately $10.2 million at June 30, 2003, and represents the amount we would receive if the agreements were terminated based on current market rates. The fixed rates we will receive and the variable rates we will pay under these swaps as of June 30, 2003, are summarized in the following table:
Weighted-average Spread Notional Amount Number of Paid in Excess of Fixed Rate Swap Maturity (in millions) Swaps LIBOR Received - ------------- --------------- --------- ----------------------- ---------- October 2004 $ 175 6 3.2043% 7.3750% October 2007 75 3 4.0725% 7.6250% ------- $ 250 =======
12 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. DERIVATIVES -- (CONTINUED) The differences between the amounts paid or received by us under the terms of the interest rate swap agreements are accrued as interest rates change and we recognize them as an adjustment to interest expense, which will have a corresponding effect on our future cash flows. Our interest rate swaps have semi-annual settlement dates in April and October. Agreements such as these 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 Standard & Poor's credit ratings for the financial institutions that are counterparties to our interest rate swap agreements range from A to AA-. In conjunction with the $150 million non-recourse mortgage loan, executed in April 2003, we purchased 6% interest rate caps with a notional amount of $150 million. We concurrently sold interest rate caps with identical terms. These interest rate cap agreements have not been designated as hedges. The changes in the fair value of both the purchased and sold interest rate caps is $0.2 million at June 30, 2003, resulting in no net earnings impact. 13 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. HOTEL OPERATING REVENUE, DEPARTMENTAL EXPENSES AND OTHER PROPERTY OPERATING COSTS Hotel operating revenue from continuing operations was comprised of the following (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Room revenue .......................... $ 257,397 $ 275,768 $ 499,124 $ 531,707 Food and beverage revenue ............. 52,758 56,278 100,561 106,844 Other operating departments ........... 17,096 17,517 33,126 33,705 ---------- ---------- ---------- ---------- Total hotel operating revenues .. $ 327,251 $ 349,563 $ 632,811 $ 672,256 ========== ========== ========== ==========
Hotel departmental expenses from continuing operations were comprised of the following (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Room ..................................... $ 66,554 $ 67,658 $ 129,596 $ 130,468 Food and beverage ........................ 41,041 42,018 79,847 81,875 Other operating departments .............. 7,949 7,881 15,428 15,165 ---------- ---------- ---------- ---------- Total hotel departmental expenses .. $ 115,544 $ 117,557 $ 224,871 $ 227,508 ========== ========== ========== ==========
Other property operating costs from continuing operations were comprised of the following (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Hotel general and administrative expense .... $ 29,959 $ 31,508 $ 60,064 $ 62,464 Marketing ................................... 27,918 26,865 55,474 53,232 Repair and maintenance ...................... 17,696 17,111 35,386 33,807 Utilities ................................... 16,228 14,476 32,055 28,998 ---------- ---------- ---------- ---------- Total other property operating costs .. $ 91,801 $ 89,960 $ 182,979 $ 178,501 ========== ========== ========== ==========
Included in hotel departmental expenses and other property operating costs were hotel compensation and benefit expenses of $104.3 million and $105.3 million for the three months ended June 30, 2003 and 2002, respectively and $207.1 million and $205.6 million for the six months ended June 30, 2003 and 2002, respectively. 6. TAXES, INSURANCE AND LEASE EXPENSE Taxes, insurance and lease expense is comprised of the following (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Operating lease expense (a) .......................... $ 15,898 $ 17,391 $ 29,381 $ 32,242 Real estate and other taxes .......................... 13,139 12,138 27,128 27,497 Property and general liability insurance ............. 4,517 4,168 9,470 8,433 ---------- ---------- ---------- ---------- Total taxes, insurance and lease expense .. $ 33,554 $ 33,697 $ 65,979 $ 68,172 ========== ========== ========== ==========
(a) Includes lease expense associated with 15 hotels owned by unconsolidated entities. Included in lease expense is $4.0 and $4.8 million in percentage rent for the three months ended June 30, 2003 and 2002, respectively, and $6.0 and $8.1 million in percentage rent for the six months ended June 30, 2003 and 2002, respectively. 14 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DISCONTINUED OPERATIONS On July 29, 2003, we sold our Doubletree Guest Suites in Nashville, Tennessee, for net proceeds of approximately $3.0 million. This hotel was held for sale as of June 30, 2003, with a net book value of approximately $3.0 million. The results of operations of this hotel for the three and six months ended June 30, 2003 and 2002 is included in discontinued operations in the accompanying statement of operations. In May 2003, we sold two non-strategic hotels, the 138-room Hampton Inn in Moline, Illinois, and the 132-room Hampton Inn in Davenport, Iowa, for aggregate net sales proceeds of $6.5 million. We realized a loss of $0.5 million on these sales. The realized loss on sale and the results of operations of these hotels for the three and six months ended June 30, 2003 and 2002, are included in discontinued operations in the accompanying statement of operations. 8. OTHER DISPOSITIONS During the second quarter, we recorded a $7.8 million impairment charge related to two low rise Harvey hotels in Dallas. We relinquished title to these hotels through a foreclosure auction on August 5, 2003. At June 30, 2003, these hotels were reflected on our balance sheet at $10 million, with related non-recourse debt of $13 million, offset by $3 million in escrows and reserves retained by the lender. During the past 12 months, these hotels incurred cash flow losses of approximately $1.7 million, in the aggregate. We may be subject to additional impairment charges in the event that operating results of individual hotels are materially different from our forecasts, the economy and lodging industry remains weak, or if we shorten our contemplated holding period for certain of our hotels. We lease a hotel under a lease that expires in 2004, subject to our right, exercisable during the fourth quarter of this year, to extend the term of the lease under certain conditions. The lessor under this lease asserted that we were in default thereunder on July 31, 2003. We are currently evaluating our ability to, and the desirability of, seeking to extend the term of this lease. Should we not extend the lease, we could incur an impairment charge with respect to this hotel which, at June 30, 2003, was carried at $11.1 million on our balance sheet. In May 2003, we sold a parking garage adjacent to our Crown Plaza - Union Square hotel in San Francisco, California, for net sales proceeds of $5.6 million and realized a gain of $0.2 million. During the three months ended June 30, 2002, we sold our 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, we 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. We also recognized a $0.2 million gain related to the condemnation of land adjacent to one of our hotels. 15 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. EARNINGS (LOSS) PER UNIT The following table sets forth the computation of basic and diluted earnings (loss) per unit (in thousands, except per unit data):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2003 JUNE 30, 2003 ------------------------ ------------------------ 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Numerator: Income (loss) from continuing operations .............. $ (20,884) $ 13,702 $ (43,399) $ 5,385 Less: Preferred distributions ...................... (6,728) (6,688) (13,454) (12,838) ---------- ---------- ---------- ---------- Income (loss) from continuing operations applicable to unitholders ...................................... (27,612) 7,014 (56,853) (7,453) Discontinued operations .................................. (812) 372 (945) 456 ---------- ---------- ---------- ---------- Net income (loss) applicable to unitholders .............. $ (28,424) $ 7,386 $ (57,798) $ (6,997) ========== ========== ========== ========== Denominator: Denominator for basic earnings per unit ............... 61,845 61,732 61,833 61,726 Effect of dilutive securities: FelCor stock options ................................ -- 40 -- -- Restricted shares ................................... -- 325 -- -- ---------- ---------- ---------- ---------- Denominator for diluted earnings per unit - adjusted weighted average units and assumed conversions ...... 61,845 62,097 61,833 61,726 ---------- ---------- ---------- ---------- Earnings (loss) per unit data: Basic: Income (loss) from continuing operations .............. $ (0.45) $ 0.11 $ (0.92) $ (0.12) Discontinued operations ............................... $ (0.01) $ 0.01 $ (0.01) $ 0.01 ---------- ---------- ---------- ---------- Net income (loss) ..................................... $ (0.46) $ 0.12 $ (0.93) $ (0.11) ========== ========== ========== ========== Diluted: Income (loss) from continuing operations .............. $ (0.45) $ 0.11 $ (0.92) $ (0.12) Discontinued operations ............................... $ (0.01) $ 0.01 $ (0.01) $ 0.01 ---------- ---------- ---------- ---------- Net income (loss) ..................................... $ (0.46) $ 0.12 $ (0.93) $ (0.11) ========== ========== ========== ==========
Securities that could potentially dilute basic earnings per unit in the future that were not included in the computation of diluted earnings per unit, because they would have been antidilutive for the periods presented, are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- FelCor stock options ....................... -- -- -- 38 Restricted shares granted but not vested ... 309 -- 309 325 Series A convertible preferred units ....... 4,636 4,636 4,636 4,636
Series A convertible preferred distributions that would be excluded from net loss applicable to unitholders, if these preferred units were dilutive, were $2.9 million for the three months and $5.8 million for the six months ended June 30, 2003 and 2002, respectively. 16 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCK BASED COMPENSATION PLANS FelCor applies APB Opinion 25 and related interpretations in accounting for its stock based compensation plans for stock based compensation issued prior to January 1, 2003. In 1995, SFAS 123, "Accounting for Stock-Based Compensation," was issued, which, if fully adopted by FelCor, would have changed the methods they apply in recognizing the cost of the plans. As permitted under the transition provisions of SFAS 148, "Accounting for Stock-Based Compensation - - Transition and Disclosure," they began recognizing compensation expense in accordance with SFAS 123 for all new awards issued after December 31, 2002. Had the compensation cost for all of their stock-based compensation plans been determined in accordance with SFAS 123, our net income or loss related per unit amount for the three and six months ended June 30, 2003 and 2002 would approximate the pro forma amounts below (in thousands, except per unit data):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net income (loss), as reported ....................... $ (26,931) $ 6,314 $ (54,748) $ (5,982) Add stock based compensation included in the net income (loss), as reported ................ 565 526 1,080 1,035 Less stock based compensation expense that would have been included in the determination of net income (loss) if the fair value method had been applied to all awards ........................ (589) (642) (1,177) (1,284) ---------- ---------- ---------- ---------- Net income (loss), pro forma ......................... $ (26,955) $ 6,198 $ (54,845) $ (6,231) ========== ========== ========== ========== Basic net income (loss) per unit: As reported ..................................... $ (0.46) $ 0.12 $ (0.93) $ (0.11) Pro forma ....................................... $ (0.46) $ 0.12 $ (0.94) $ (0.12) Diluted net income (loss) per unit: As reported ..................................... $ (0.46) $ 0.12 $ (0.93) $ (0.11) Pro forma ....................................... $ (0.46) $ 0.12 $ (0.94) $ (0.12)
The effects of applying SFAS 123 in this pro forma disclosure are not necessarily indicative of future results. 11 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. 17 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2003 (IN THOUSANDS) ASSETS
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------- ------------ ------------ Net investment in hotel properties .............. $ 414,158 $ 1,372,847 $ 1,719,426 $ -- $ 3,506,431 Equity investment in consolidated entities ...... 2,291,689 -- -- (2,291,689) -- Investment in unconsolidated entities ........... 97,257 23,496 -- -- 120,753 Cash and cash equivalents ....................... 123,095 41,346 18,228 -- 182,669 Accounts receivable ............................. 1,211 49,410 2,300 -- 52,921 Deferred assets ................................. 17,251 858 5,823 -- 23,932 Other assets .................................... 6,737 19,588 6,392 -- 32,717 ------------ ------------ ------------ ------------ ------------ Total assets ............................ $ 2,951,398 $ 1,507,545 $ 1,752,169 $ (2,291,689) $ 3,919,423 ============ ============ ============ ============ ============ LIABILITIES AND PARTNERS' CAPITAL Debt ............................................ $ 1,261,383 $ 100,183 $ 696,901 $ -- $ 2,058,467 Distributions payable ........................... 5,483 -- -- -- 5,483 Accrued expenses and other liabilities .......... 31,841 110,563 14,274 -- 156,678 Minority interest - other partnerships ......... 8,917 (2,637) 48,741 -- 55,021 ------------ ------------ ------------ ------------ ------------ Total liabilities ....................... 1,307,624 208,109 759,916 -- 2,275,649 ------------ ------------ ------------ ------------ ------------ Redeemable units, at redemption value ........... 25,416 -- -- -- 25,416 ------------ ------------ ------------ ------------ ------------ Preferred units ................................. 318,907 -- -- -- 318,907 Common units .................................... 1,299,451 1,288,500 992,253 (2,291,689) 1,288,515 Accumulated other comprehensive income .......... -- 10,936 -- -- 10,936 ------------ ------------ ------------ ------------ ------------ Total partners' capital ................. 1,618,358 1,299,436 992,253 (2,291,689) 1,618,358 ------------ ------------ ------------ ------------ ------------ Total liabilities, redeemable units and partners' capital ............... $ 2,951,398 $ 1,507,545 $ 1,752,169 $ (2,291,689) $ 3,919,423 ============ ============ ============ ============ ============
18 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONSOLIDATING BALANCE SHEET DECEMBER 31, 2002 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------- ------------ ------------ ASSETS Net investment in hotel properties ............... $ 464,473 $ 1,529,637 $ 1,479,342 $ -- $ 3,473,452 Equity investment in consolidated entities ....... 2,325,436 -- -- (2,325,436) -- Investment in unconsolidated entities ............ 120,406 21,537 -- -- 141,943 Cash and cash equivalents ........................ 24,725 24,479 17,338 -- 66,542 Accounts receivable .............................. 1,250 45,969 1,329 -- 48,548 Deferred assets .................................. 19,697 937 3,551 -- 24,185 Other assets ..................................... 2,369 19,538 3,786 -- 25,693 ------------ ------------ ------------ ------------ ------------ Total assets ............................. $ 2,958,356 $ 1,642,097 $ 1,505,346 $ (2,325,436) $ 3,780,363 ============ ============ ============ ============ ============ LIABILITIES AND PARTNERS' CAPITAL Debt ............................................. $ 1,215,925 $ 101,371 $ 559,838 $ -- $ 1,877,134 Distributions payable ............................ 14,792 -- -- -- 14,792 Accrued expenses and other liabilities ........... 38,086 96,566 15,733 -- 150,385 Minority interest - other partnerships .......... 97 -- 48,499 -- 48,596 ------------ ------------ ------------ ------------ Total liabilities ........................ 1,268,900 197,937 624,070 -- 2,090,907 ------------ ------------ ------------ ------------ ------------ Redeemable units, at redemption value ............ 37,634 -- -- -- 37,634 ------------ ------------ ------------ ------------ ------------ Preferred units .................................. 318,907 -- -- -- 318,907 Common units ..................................... 1,332,915 1,444,259 881,276 (2,325,436) 1,333,014 Accumulated other comprehensive loss ............. -- (99) -- -- (99) ------------ ------------ ------------ ------------ ------------ Total partners' capital .................. 1,651,822 1,444,160 881,276 (2,325,436) 1,651,822 ------------ ------------ ------------ ------------ ------------ Total liabilities, redeemable units and partners' capital ..................... $ 2,958,356 $ 1,642,097 $ 1,505,346 $ (2,325,436) $ 3,780,363 ============ ============ ============ ============ ============
19 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------- ------------ ------------ Revenues: Hotel operating revenue .................... $ -- $ 327,062 $ 189 $ -- $ 327,251 Percentage lease revenue ................... 13,719 43,798 44,485 (102,002) -- Other revenue .............................. 520 (284) -- -- 236 ------------ ------------ ------------ ------------ ------------ Total revenue ................... 14,239 370,576 44,674 (102,002) 327,487 ------------ ------------ ------------ ------------ ------------ Expenses: Hotel operating expense .................... -- 223,657 334 -- 223,991 Taxes, insurance and lease expense ......... 2,346 125,720 7,490 (102,002) 33,554 Corporate expenses ......................... 375 2,174 1,188 -- 3,737 Depreciation ............................... 5,402 16,036 15,220 -- 36,658 ------------ ------------ ------------ ------------ ------------ Total operating expenses ........ 8,123 367,587 24,232 (102,002) 297,940 ------------ ------------ ------------ ------------ ------------ Operating income ........................... 6,116 2,989 20,442 -- 29,547 Interest expense, net ...................... (25,408) (3,181) (12,662) -- (41,251) Charge-off of deferred financing cost ...... (2,830) (4) -- -- (2,834) Gain on early extinguishment of debt ....... (24) -- 331 -- 307 Impairment loss ............................ -- -- (7,824) -- (7,824) ------------ ------------ ------------ ------------ ------------ Income (loss) before equity in income from unconsolidated entities, minority interests and gain on sale of assets .... (22,146) (196) 287 -- (22,055) Equity in income from consolidated entities ................................ 259 -- -- (259) -- Equity in income from unconsolidated entities ................................ 1,017 (291) -- -- 726 Gain on sale of assets ..................... -- 153 -- -- 153 Minority interests in other partnerships ... (14) (89) 395 -- 292 ------------ ------------ ------------ ------------ ------------ Income (loss) from continuing operations ... (20,884) (423) 682 (259) (20,884) Discontinued operations from consolidated entities ................... (812) (812) -- 812 (812) ------------ ------------ ------------ ------------ ------------ Net income (loss) .......................... (21,696) (1,235) 682 553 (21,696) Preferred distributions .................... (6,728) -- -- -- (6,728) ------------ ------------ ------------ ------------ ------------ Net income (loss) applicable to unitholders ............................. $ (28,424) $ (1,235) $ 682 $ 553 $ (28,424) ============ ============ ============ ============ ============
20 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONDENSED 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 .................... $ -- $ 349,330 $ 233 $ -- $ 349,563 Percentage lease revenue ................... 18,326 48,750 41,104 (108,180) -- Other revenue .............................. 426 -- 2 -- 428 ------------ ------------ ------------ ------------ ------------ Total revenue ......................... 18,752 398,080 41,339 (108,180) 349,991 ------------ ------------ ------------ ------------ ------------ Expenses: Hotel operating expense .................... -- 225,078 456 -- 225,534 Taxes, insurance and other ................. 831 134,721 6,325 (108,180) 33,697 Corporate expenses ......................... 477 2,421 1,072 -- 3,970 Depreciation ............................... 6,593 16,707 14,904 -- 38,204 ------------ ------------ ------------ ------------ ------------ Total operating expenses ........ 7,901 378,927 22,757 (108,180) 301,405 ------------ ------------ ------------ ------------ ------------ Operating income (loss) .................... 10,851 19,153 18,582 -- 48,586 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) 16,637 6,895 -- 7,031 Equity in income from consolidated entities ................................ 28,573 -- -- (28,573) -- 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 ------------ ------------ ------------ ------------ ------------ Income from continuing operations .......... 13,702 22,233 6,340 (28,573) 13,702 Discontinued operations from consolidated entities ................... 372 372 -- (372) 372 ------------ ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============ ============
21 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------- ------------ ------------ Revenues: Hotel operating revenue .................... $ -- $ 631,292 $ 1,519 $ -- $ 632,811 Percentage lease revenue ................... 31,018 90,241 84,897 (206,156) -- Other revenue .............................. 332 286 19 -- 637 ------------ ------------ ------------ ------------ ------------ Total revenue ................... 31,350 721,819 86,435 (206,156) 633,448 ------------ ------------ ------------ ------------ ------------ Expenses: Hotel operating expense .................... 121 439,753 869 -- 440,743 Taxes, insurance and lease expense ......... 6,152 252,474 13,509 (206,156) 65,979 Corporate expenses ......................... 779 4,248 2,133 -- 7,160 Depreciation ............................... 11,269 32,248 29,139 -- 72,656 ------------ ------------ ------------ ------------ ------------ Total operating expenses ........ 18,321 728,723 45,650 (206,156) 586,538 ------------ ------------ ------------ ------------ ------------ Operating income ........................... 13,029 (6,904) 40,785 -- 46,910 Interest expense, net ...................... (51,257) (6,322) (23,925) -- (81,504) Charge-off of deferred financing cost ...... (2,830) (4) -- -- (2,834) Gain on early extinguishment of debt ....... 929 -- 331 -- 1,260 Impairment loss ............................ -- -- (7,824) -- (7,824) ------------ ------------ ------------ ------------ ------------ Income (loss) before equity in income from unconsolidated entities, minority interests and gain on sale of assets .... (40,129) (13,230) 9,367 -- (43,992) Equity in loss from consolidated entities .. (4,343) -- -- 4,343 -- Equity in income from unconsolidated entities ................................ 1,087 (509) -- -- 578 Gain on sale of asset ...................... -- 153 -- -- 153 Minority interests in other partnerships ... (14) (89) (35) -- (138) ------------ ------------ ------------ ------------ ------------ Income (loss) before discontinued operations .............................. (43,399) (13,675) 9,332 4,343 (43,399) Discontinued operations from consolidated entities ................... (945) (945) -- 945 (945) ------------ ------------ ------------ ------------ ------------ Net income (loss) .......................... (44,344) (14,620) 9,332 5,288 (44,344) Preferred distributions .................... (13,454) -- -- -- (13,454) ------------ ------------ ------------ ------------ ------------ Net income (loss) applicable to unitholders ............................. $ (57,798) $ (14,620) $ 9,332 $ 5,288 $ (57,798) ============ ============ ============ ============ ============
22 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CONSOLIDATING FINANCIAL INFORMATION - (CONTINUED) CONDENSED 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 ...................... $ -- $ 670,588 $ 1,668 $ -- $ 672,256 Percentage lease revenue ..................... 36,098 95,727 83,840 (215,665) -- Other revenue ................................ 1,053 -- 45 -- 1,098 ------------ ------------ ------------ ------------ ------------ Total revenue ..................... 37,151 766,315 85,553 (215,665) 673,354 ------------ ------------ ------------ ------------ ------------ Expenses: Hotel operating expense ...................... -- 438,577 1,037 -- 439,614 Taxes, insurance and other ................... 3,779 267,425 12,633 (215,665) 68,172 Corporate expenses ........................... 929 4,629 2,158 -- 7,716 Depreciation ................................. 13,288 33,559 29,975 -- 76,822 ------------ ------------ ------------ ------------ ------------ Total operating expenses .......... 17,996 744,190 45,803 (215,665) 592,324 ------------ ------------ ------------ ------------ ------------ Operating income (loss) ...................... 19,155 22,125 39,750 -- 81,030 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) 16,977 16,433 -- (1,721) Equity in income from consolidated entities .................................. 37,459 -- -- (37,459) -- 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 ------------ ------------ ------------ ------------ ------------ Income before discontinued operations ........ 5,385 22,367 15,092 (37,459) 5,385 Discontinued operations from consolidated entities ..................... 456 456 -- (456) 456 ------------ ------------ ------------ ------------ ------------ 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) ============ ============ ============ ============ ============
23 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CONSOLIDATING FINANCIAL INFORMATION -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS)
SUBSIDIARY NON-GUARANTOR TOTAL FELCOR L.P. GUARANTORS SUBSIDIARIES CONSOLIDATED ------------ ------------ ------------- ------------ Cash flows from (used in) operating activities .... $ (19,491) $ 12,326 $ 39,490 $ 32,325 Cash flows used in investing activities ........... (6,747) (2,440) (15,182) (24,369) Cash flows from (used in) financing activities .... 124,608 6,800 (23,418) 107,990 Effect of exchange rates changes on cash .......... -- 181 -- 181 ------------ ------------ ------------ ------------ Change in cash and cash equivalents ............... 98,370 16,867 890 116,127 Cash and cash equivalents at beginning of period .. 24,725 24,479 17,338 66,542 ------------ ------------ ------------ ------------ Cash and equivalents at end of period ............. $ 123,095 $ 41,346 $ 18,228 $ 182,669 ============ ============ ============ ============
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 (used in) 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 ============ ============ ============ ============
12. CONTINGENCIES On July 31, 2003, we were notified that the lessor of one of our hotels was asserting a default by us of our obligations of maintenance, repair and replacement under the lease, and asserting that the cost of correcting alleged deficiencies was approximately $13.9 million. We have not yet had the opportunity to evaluate whether or not this claim has any merit. 24 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For background information relating to us and the definition 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. We have identified three strategic objectives for 2003: improve the competitive positioning of our hotel portfolio; maintain our financial flexibility; and reposition our portfolio. We have made the following progress in meeting these objectives through the date of this filing: o Improve the competitive positioning of our hotel portfolio o The Hilton Myrtle Beach Resort was converted from the Wyndham(R) brand following the completion of a $15 million renovation. o We converted an extended-stay hotel in Dallas, which was operating without a brand affiliation, to a Staybridge Suites(R) in the first quarter of 2003. o We continue to provide the necessary capital spending to add long-term value to our hotels. We spent approximately 7% of our revenues, or $42.0 million, on capital expenditures in the first six months of 2003, and we expect to spend a total of $65 to $70 million, or 5% of revenues, for the full year. o Maintenance of our financial flexibility and liquidity o We closed on a $150 million non-recourse mortgage loan in April and used the proceeds to payoff all outstanding balances under our line of credit. o We entered into a secured debt facility of up to $200 million that, when fully collateralized, will provide us with additional capacity to repay the $175 million in senior notes maturing in October 2004. o We had cash and cash equivalents at June 30, 2003, of $182.7 million, of which $162.1 million was unrestricted. o Repositioning our portfolio o We have closed on the sale of three non-strategic hotels and a parking garage in 2003, with net sales proceeds of approximately $15.3 million. o We currently have received offers that are under negotiation, or signed contracts, on 15 properties with estimated proceeds of approximately $110 million. FINANCIAL COMPARISON (IN MILLIONS, EXCEPT REVENUE PER AVAILABLE ROOM ("REVPAR"), OPERATING MARGIN AND PERCENTAGE CHANGE)
JUNE 30, JUNE 30, --------------------------------- --------------------------------- 2003 2002 % CHANGE 2003 2002 % CHANGE -------- -------- -------- -------- -------- -------- RevPAR ......................................... $ 60.33 $ 65.33 (7.6) $ 59.19 $ 63.24 (6.4) Operating Margin(1) ............................ 31.6% 35.5% (11.0) 30.4% 34.6% (12.1) Funds From Operations ("FFO")(2) ............... $ 19.7 $ 42.8 (54.0) $ 29.2 $ 69.2 (57.8) FFO per unit(2)................................. $ 0.32 $ 0.69 (53.6) $ 0.47 $ 1.11 (57.7) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")(2) ............ $ 73.3 $ 94.6 (22.5) $ 132.2 $ 171.8 (23.1) Net income (loss) .............................. $ (21.7) $ 14.1 (253.9) $ (44.3) $ 5.8 (863.8)
- ---------- (1) Operating margin is calculated as the percentage of hotel operating revenue in excess of hotel departmental expenses, other property operating costs, and management and franchise fees to hotel operating revenue. (2) For a discussion of the computation of FFO and EBITDA, and a reconciliation thereof to net income (loss), see "Results of Operations - Funds From Operations and EBITDA" below. 25 RESULTS OF OPERATIONS Comparison of the Three Months Ended June 30, 2003 and 2002 We recognized a net loss of $21.7 million for the three months ended June 30, 2003, compared to net income of $14.1 million for the same period in 2002. The principal reasons for the net loss in 2003, compared to the net income in 2002, were a decrease in total revenue of $22.5 million and an impairment charge of $7.8 million. The primary component of the decrease in total revenue was a decrease in room revenue of $18.3 million. One of the hotel industry's principal measurements of room revenue is RevPAR. Our consolidated hotel portfolio RevPAR for the three months ended June 30, 2003, was $60.33, or 7.6% below that of the same period in 2002. The decrease in RevPAR resulted from a 4.8% decrease in average daily rate , or ADR, and a 3.0% decrease in occupied rooms as a percentage of available rooms, or Occupancy. The decrease in RevPAR reflected the decline in both business and leisure travel for the three months ended June 30, 2003, compared to the same period in the prior year. Travel was negatively affected during the three months ended June 30, 2003, by the conflict in Iraq, heightened terror alerts, and the lingering effects of SARS. In addition, food and beverage revenue decreased $3.5 million, principally resulting from the decreased Occupancy at our hotels during this period. Total operating expenses decreased by $3.5 million, to $297.9 million, for the three months ended June 30, 2003, compared to the same period in 2002. This decrease primarily consisted of decreases in hotel operating expenses (defined as hotel departmental expenses, other property operating costs and management and franchise fees) and depreciation. Hotel operating expenses decreased by $1.5 million, for the three months ended June 30, 2003, compared to the same period in 2002. However, hotel operating margins, as a percentage of hotel operating revenues, decreased by 390 basis points, compared to the same period last year. The deterioration in margins is principally related to a 4.8% decline in ADR, and increases, as a percentage of hotel revenue, in energy costs (80 basis points), repairs and maintenance (50 basis points) and marketing (80 basis points). Included in the departmental costs were increases in employee wages and benefit costs, on lower headcount compared to prior year, which resulted in an increase in these costs as a percentage of total revenue of 180 basis points. Depreciation expense decreased by $1.5 million in the current quarter, compared to the same quarter of 2002, primarily from an increase in fully depreciated furniture, fixtures and equipment. Taxes, insurance and lease expense decreased $0.1 million, compared to the same period of 2002, principally from a decrease in operating lease expense of $1.5 million. This decrease was largely offset by increases in real estate and other taxes of $1.0 million and property and general liability insurance expense of $0.4 million. The decrease in operating lease expense resulted from the decrease in hotel revenue for those hotels with participating leases. Real estate and other taxes increased primarily because of decreased expense in 2002 from resolution of prior years disputed property taxes. Interest expense, net of interest income, decreased $0.3 million for the three months ended June 30, 2003, from the same period in 2002. This net decrease primarily relates to a $2.9 million decrease from a lower average interest cost of 58 basis points, partially offset by a $2.5 million increase from a higher average debt balance of $114.1 million. The higher average debt balance relates to our decision in the first quarter of 2003, to carry excess cash. The three months ended June 30, 2003, included $2.8 million of charge-offs of deferred financing costs from the reduction in our outstanding line of credit commitments from $300 million to $50 million, and a $0.3 million gain on early extinguishment of debt. 26 During the second quarter, we recorded a $7.8 million impairment charge related to two low rise Harvey hotels in Dallas. We relinquished title to these hotels through a foreclosure auction on August 5, 2003. At June 30, 2003, these hotels were reflected on our balance sheet at $10 million, with related non-recourse debt of $13 million, offset by $3 million in escrows and reserves retained by the lender. During the past 12 months, these hotels incurred cash flow losses of approximately $1.7 million, in the aggregate. We may be subject to additional impairment charges in the event that operating results of individual hotels are materially different from our forecasts, the economy and lodging industry remains weak, or if we shorten our contemplated holding period for certain of our hotels. We lease a hotel under a lease that expires in 2004, subject to our right, exercisable during the fourth quarter of this year, to extend the term of the lease under certain conditions. The lessor under this lease asserted that we were in default thereunder on July 31, 2003. We are currently evaluating our ability to, and the desirability of, seeking to extend the term of this lease. Should we not extend the lease, we could incur an impairment charge with respect to this hotel which, at June 30, 2003, was carried at $11.1 million on our balance sheet. Equity in the income of unconsolidated entities decreased $0.6 million for the three months ended June 30, 2003, compared to the same period in 2002. The change principally relates to the 4.2% decrease in RevPAR for our unconsolidated hotels. During the three months ended June 30, 2003, we realized a $0.2 million gain from the sale of a parking garage adjacent to one of our hotels. During the three months ended June 30, 2002, we also realized a gain of $5.1 million on the sale of retail space and of $0.8 million on the sale of a hotel. Minority interest decreased our net loss by $0.3 million for the three months ended June 30, 2003 and decreased our net income by $0.8 million for the three months ended June 30, 2002. Minority interest represents the proportionate share of the income or loss of other consolidated subsidiaries allocated to minority interest holders. Discontinued operations reflected an $0.8 million loss in 2003, compared to income of $0.4 million in 2002. Included in discontinued operations for 2003, was a realized loss of $0.5 million on the sale of two hotels in the second quarter and $0.3 million of operating losses from the sold hotels and one additional hotel that was held for sale. Discontinued operations in 2002 represented the operating income of these three hotels. Comparison of the Six Months Ended June 30, 2003 and 2002 We recorded a net loss of $44.3 million for the six months ended June 30, 2003, compared to net income of $5.8 million for the same period in 2002. The principal components of the difference between the net loss in 2003, compared to the net income in 2002, were a decrease in total revenue of $39.9 million and an impairment charge of $7.8 million related to two hotels. The primary component of the decrease in total revenue was a decrease in room revenue of $32.3 million. One of the hotel industry's principal measurements of room revenue is RevPAR. Our hotel portfolio RevPAR for the six months ended June 30, 2003, was $59.19, or 6.4% below that of the same period in 2002. The decrease in RevPAR was comprised of a 4.4% decrease in ADR, and a 2.0% decrease in Occupancy. The decrease in RevPAR reflected the decline in both business and leisure travel for the six months ended June 30, 2003, compared to the same period in the prior year. Travel was negatively affected during the six months ended June 30, 2003, by the conflict in Iraq, heightened terror alerts issued, and the SARS outbreak. In addition, food and beverage revenue decreased $6.3 million, primarily due to the decreased Occupancy. Total operating expenses decreased by $5.8 million, to $586.5 million, for the six months ended June 30, 2003, compared to the same period in 2002. This decrease primarily consisted of decreases in taxes, insurance and lease expense and depreciation, partially offset by increases in hotel operating expenses (defined as hotel departmental expenses, other property operating costs, and management and franchise fees). 27 Hotel operating expenses increased by $1.1 million, for the six months ended June 30, 2003, compared to the same period in 2002. Hotel operating margins as a percentage of hotel operating revenue decreased by 420 basis points compared to the same period last year. The deterioration in margins is principally related to a 4.4% decline in ADR and increases, as a percentage of hotel revenue, in energy costs (80 basis points), repairs and maintenance (60 basis points) and marketing (90 basis points). Included in the departmental costs were increases in employee wages and benefit costs, on lower headcount compared to prior year, which resulted in an increase in these costs as a percentage of total revenue of 220 basis points. Depreciation expense decreased by $4.2 million, primarily due to an increase in fully depreciated furniture, fixtures and equipment. Taxes, insurance and lease expense decreased $2.2 million, compared to the same period of 2002, principally as the result of decreases in operating lease expense of $2.9 million. This decrease was partially offset by increases in property and general liability insurance expense of $1.0 million. The decrease in operating lease expense is from the decrease in hotel revenue for those hotels with participating leases. Interest expense, net of interest income, decreased $1.2 million for the six months ended June 30, 2003, from the same period in 2002. This net decrease primarily relates to a $9.8 million decrease from a lower average interest cost of 86 basis points, partially offset by a $8.3 million increase resulting from higher average debt balances of $175.7 million. The higher average debt balance relates to our decision, in the first quarter of 2003, to carry excess cash. The six months ended June 30, 2003, included $2.8 million of charge-offs of line of credit costs related to the reduction in our outstanding line of credit commitments from $300 million to $50 million, and $1.3 million of gain on early extinguishment of debt. During the second quarter, we recorded a $7.8 million impairment charge related to two low rise Harvey hotels in Dallas. We relinquished title to these hotels through a foreclosure auction on August 5, 2003. At June 30, 2003, these hotels were reflected on our balance sheet at $10 million, with related non-recourse debt of $13 million, offset by $3 million in escrows and reserves retained by the lender. During the past 12 months, these hotels incurred cash flow losses of approximately $1.7 million, in the aggregate. We may be subject to additional impairment charges in the event that operating results of individual hotels are materially different from our forecasts, the economy and lodging industry remains weak, or if we shorten our contemplated holding period for certain of our hotels. We lease a hotel under a lease that expires in 2004, subject to our right, exercisable during the fourth quarter of this year, to extend the term of the lease under certain conditions. The lessor under this lease asserted that we were in default thereunder on July 31, 2003. We are currently evaluating our ability to, and the desirability of, seeking to extend the term of this lease. Should we not extend the lease, we could incur an impairment charge with respect to this hotel which, at June 30, 2003, was carried at $11.1 million on our balance sheet. Equity in income of unconsolidated entities decreased $2.0 million for the six months ended June 30, 2003, compared to the same period in 2002. The change relates principally to a 4.9% decrease in RevPAR at our unconsolidated hotels. During the six months ended June 30, 2003, we realized a $0.2 million gain from the sale of a parking garage adjacent to one of our hotels. During the six months ended June 30, 2002, we realized a gain of $5.1 million on the sale of retail space and $0.8 million on the sale of a hotel. Minority interest decreased $1.4 million for the six months ended June 30, 2003, compared to the same period in 2002. Minority interest represents the proportionate share of the income or loss of other consolidated subsidiaries allocated to minority interests. 28 Discontinued operations reflected a $0.9 million loss in 2003 compared to income of $0.5 million in 2002. Included in discontinued operations for 2003, was a realized loss of $0.5 million on the sale of two hotels in the six months ended June 30, 2003, and $0.4 million of operating losses from the sold hotels and one additional hotel that was held for sale. Discontinued operations in 2002 represented the operating income of these three hotels. Funds From Operations and EBITDA Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminish predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider supplemental measurements of performance to be helpful in evaluating a real estate company's operations. We consider Funds From Operations, or FFO, and Earnings Before Interest, Taxes, Depreciation, and Amortization, or 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 generally accepted accounting principles), excluding gains or losses from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. We believe that FFO and EBITDA are helpful to investors as a measure of the performance of an equity REIT. We compute FFO in accordance with standards established by NAREIT. This may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. 29 The following tables detail our computation of FFO and EBITDA (in thousands): RECONCILIATION OF NET INCOME (LOSS) TO FFO (in thousands, except per unit data)
THREE MONTHS ENDED JUNE 30, ------------------------------------------------------------------------------- 2003 2002 ------------------------------------- -------------------------------------- PER UNIT PER UNIT DOLLARS UNITS AMOUNT DOLLARS UNITS AMOUNT ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) ........................... $ (21,696) 61,845 $ (0.35) $ 14,074 61,732 $ 0.23 Depreciation from continuing operations .. 36,658 -- 0.59 38,204 -- 0.62 Depreciation from unconsolidated entities and discontinued operations .. 3,268 -- 0.05 3,078 -- 0.05 Loss (gain) on sale of assets ............ 330 -- 0.01 (5,861) -- (0.10) Impairment loss .......................... 7,824 -- 0.13 -- -- -- Preferred distributions .................. (6,728) -- (0.11) (6,688) (0.11) Conversion of options and unvested restricted units ...................... -- 309 -- -- 365 -- ---------- ---------- ---------- ---------- ---------- ---------- FFO(a) ...................................... $ 19,656 62,154 $ 0.32 $ 42,807 62,097 $ 0.69 ========== ========== ========== ========== ========== ==========
SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------------------- 2003 2002 ------------------------------------- -------------------------------------- PER UNIT PER UNIT DOLLARS UNITS AMOUNT DOLLARS UNITS AMOUNT ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) ............................. $ (44,344) 61,833 $ (0.72) $ 5,841 61,726 $ 0.09 Depreciation from continuing operations .... 72,656 -- 1.17 76,822 -- 1.24 Depreciation from unconsolidated entities and discontinued operations .............. 6,236 -- 0.10 5,256 -- 0.08 Loss (gain) on sale of assets .............. 330 -- 0.01 (5,861) -- (0.09) Impairment loss ............................ 7,824 -- 0.13 -- -- -- Preferred distributions .................... (13,454) -- (0.22) (12,838) -- (0.21) Conversion of options and unvested restricted units ........................ -- 309 -- -- 362 -- ---------- ---------- ---------- ---------- ---------- ---------- FFO(a) ........................................ $ 29,248 62,142 $ 0.47 $ 69,220 62,088 $ 1.11 ========== ========== ========== ========== ========== ==========
(a) Included in FFO is the charge-off of debt related costs of $2.5 million for the three months ended June 30, 2003, and $1.6 million for the six months ended June 30, 2003, net of gains on extinguishment of debt. RECONCILIATION OF FFO TO EBITDA (in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2003 2002 2003 2002 ---------- ---------- ---------- ---------- FFO ............................................ $ 19,656 $ 42,807 $ 29,248 $ 69,220 Interest expense ............................... 41,821 42,184 82,449 83,959 Interest expense from unconsolidated entities .. 2,036 2,373 4,375 4,732 Charge-off of line of credit costs ............. 2,834 -- 2,834 -- Gain on early extinguishment of debt ........... (307) -- (1,260) -- Amortization expense ........................... 564 526 1,080 1,035 Preferred distributions ........................ 6,728 6,688 13,454 12,838 ---------- ---------- ---------- ---------- EBITDA ......................................... $ 73,332 $ 94,578 $ 132,180 $ 171,784 ========== ========== ========== ==========
30 Hotel Portfolio Composition The following tables set forth, as of June 30, 2003, our consolidated hotel portfolio distribution by brand, by our top metropolitan markets, 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, 2002.
Brand Hotels Rooms % of Total Rooms % of 2002 EBITDA - ----- ------ ------- ---------------- ---------------- Embassy Suites Hotels(R) 59 14,842 31% 46% Holiday Inn(R)-branded 53 16,017 34 24 Crowne Plaza(R) 18 5,963 13 9 Sheraton(R)-branded 10 3,269 7 7 Doubletree(R)-branded 13 2,675 6 6 Other 22 4,844 9 7 Top Markets Atlanta 12 3,514 7% 8% Dallas 18 5,477 12 8 San Francisco Bay Area 9 3,255 7 5 Orlando 6 2,220 5 4 Houston 9 2,262 5 4 New Orleans 2 746 2 3 Philadelphia 3 1,174 2 3 Phoenix 5 1,245 3 3 Minneapolis 4 955 2 3 Chicago 4 1,239 3 3 Top Four States California 19 6,023 13% 14% Texas 41 11,136 23 17 Florida 16 5,346 11 10 Georgia 14 3,868 8 9 Location Suburban 81 20,035 42% 40% Urban 35 11,252 24 26 Airport 32 9,573 20 22 Highway 15 3,072 6 3 Resort 12 3,678 8 9 Segment Upscale all-suite 77 18,357 39% 53% Full service 55 17,086 36 26 Upscale 30 10,087 21 19 Limited service 13 2,080 4 2 Non-Strategic Hotels 31 6,198 13% 6%
31 Hotel Operating Statistics The following tables set forth historical occupancy, ADR and RevPAR at June 30, 2003 and 2002, and the percentage changes therein between the periods presented, for our 175 consolidated hotels: OPERATING STATISTICS BY BRAND
OCCUPANCY (%) ------------------------------------------------------------------------ THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------- -------------------------------- 2003 2002 % VARIANCE 2003 2002 % VARIANCE ---- ---- ---------- ---- ---- ---------- Embassy Suites Hotels 69.4 70.1 (0.9) 68.1 68.3 (0.3) Holiday Inn-branded hotels 63.9 66.0 (3.2) 61.1 62.6 (2.5) Crowne Plaza hotels 58.4 63.2 (7.6) 56.9 60.0 (5.2) Doubletree-branded hotels 69.5 70.2 (0.9) 67.2 65.3 2.9 Sheraton-branded hotels 60.3 61.5 (2.0) 59.6 59.0 1.0 Other hotels 53.5 57.0 (6.1) 52.4 56.8 (7.8) Total hotels 64.0 65.9 (3.0) 62.1 63.4 (2.0)
ADR ($) ------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------------- -------------------------------- 2003 2002 % VARIANCE 2003 2002 % VARIANCE ------ ------ ---------- ------ ------ ---------- Embassy Suites Hotels 114.89 119.52 (3.9) 116.98 122.12 (4.2) Holiday Inn-branded hotels 77.68 82.41 (5.7) 77.48 81.45 (4.9) Crowne Plaza hotels 90.79 97.92 (7.3) 90.09 96.09 (6.2) Doubletree-branded hotels 100.11 102.00 (1.9) 100.40 103.49 (3.0) Sheraton-branded hotels 94.26 103.61 (9.0) 96.30 104.22 (7.6) Other hotels 79.08 82.30 (3.9) 80.68 83.62 (3.5) Total hotels 94.34 99.08 (4.8) 95.33 99.77 (4.4)
REVPAR ($) ---------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------------- -------------------------------- 2003 2002 % VARIANCE 2003 2002 % VARIANCE ---- ----- ---------- ----- ---- ---------- Embassy Suites Hotels 79.78 83.73 (4.7) 79.64 83.40 (4.5) Holiday Inn-branded hotels 49.66 54.40 (8.7) 47.32 51.03 (7.3) Crowne Plaza hotels 52.98 61.87 (14.4) 51.26 57.66 (11.1) Doubletree-branded hotels 69.61 71.58 (2.8) 67.45 67.58 (0.2) Sheraton-branded hotels 56.82 63.75 (10.9) 57.40 61.49 (6.7) Other hotels 42.28 46.94 (9.9) 42.24 47.51 (11.1) Total hotels 60.33 65.33 (7.6) 59.19 63.24 (6.4)
32 OPERATING STATISTICS FOR OUR TOP 10 MARKETS
OCCUPANCY (%) ----------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------------- -------------------------------- 2003 2002 % VARIANCE 2003 2002 % VARIANCE ---- ---- ---------- ---- ---- ---------- Atlanta 63.7 67.4 (5.5) 65.0 68.2 (4.6) Dallas 46.1 50.9 (9.3) 45.8 51.2 (10.5) San Francisco Bay Area 64.8 68.1 (4.8) 62.3 63.2 (1.4) Orlando 74.4 71.1 4.6 70.1 70.3 (0.4) Houston 64.2 66.1 (2.9) 64.1 67.7 (5.3) New Orleans 73.0 73.7 (0.9) 67.6 73.6 (8.1) Philadelphia 67.0 71.8 (6.6) 59.8 62.8 (4.8) Phoenix 67.6 62.5 8.2 74.1 66.0 12.2 Minneapolis 64.1 67.6 (5.1) 61.9 63.4 (2.4) Chicago 72.4 69.7 3.9 65.4 61.5 6.4
ADR ($) -------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------- --------------------------------- 2003 2002 % VARIANCE 2003 2002 % VARIANCE ------ ------ ---------- ------ ------- ---------- Atlanta 84.00 90.02 (6.7) 86.73 92.42 (6.2) Dallas 81.65 86.93 (6.1) 83.69 89.33 (6.3) San Francisco Bay Area 108.26 122.28 (11.5) 108.33 120.88 (10.4) Orlando 73.96 79.08 (6.5) 78.40 84.25 (6.9) Houston 72.40 75.43 (4.0) 72.97 75.35 (3.2) New Orleans 130.99 132.51 (1.1) 142.51 148.68 (4.2) Philadelphia 109.51 127.84 (14.3) 105.12 120.47 (12.7) Phoenix 88.47 99.22 (10.8) 104.78 115.09 (9.0) Minneapolis 123.53 125.70 (1.7) 121.77 123.86 (1.7) Chicago 113.98 125.85 (9.4) 108.36 120.06 (9.7)
REVPAR ($) ------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------- -------------------------------- 2003 2002 % VARIANCE 2003 2002 % VARIANCE ------- ------- ---------- ------- ------- ---------- Atlanta 53.52 60.67 (11.8) 56.40 63.00 (10.5) Dallas 37.68 44.20 (14.8) 38.37 45.76 (16.2) San Francisco Bay Area 70.17 83.25 (15.7) 67.53 76.38 (11.6) Orlando 55.01 56.25 (2.2) 54.94 59.26 (7.3) Houston 46.49 49.86 (6.8) 46.78 51.00 (8.3) New Orleans 95.61 97.61 (2.1) 96.36 109.39 (11.9) Philadelphia 73.36 91.73 (20.0) 62.91 75.71 (16.9) Phoenix 59.82 61.98 (3.5) 77.61 75.98 2.2 Minneapolis 79.21 84.92 (6.7) 75.34 78.50 (4.0) Chicago 82.57 87.76 (5.9) 70.89 73.83 (4.0)
33 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, 2003, net cash flow provided by operating activities, consisting primarily of hotel operations, was $32.3 million. We currently expect that our cash flow provided by operating activities for 2003 (after preferred distributions) will be approximately $55 million to $61 million using current RevPAR forecasts. We expect our 2003 capital expenditures to be approximately $65 to $70 million, of which $42 million has been spent during the six months ended June 30, 2003. We expect to close on non-strategic asset sales of $50 million to $75 million by the end of the year. We currently have received offers that are under negotiation, or signed contracts, on 15 properties with estimated proceeds of approximately $110 million. We have no remaining debt maturities during the remainder of 2003, other than $9 million in normal recurring principal payments. Cash necessary to fund cash flow shortfalls and distributions, if any, will be funded from our cash balances, which were $182.7 million at June 30, 2003, proceeds from the sale of hotels or additional borrowings. We expect FelCor's Board of Directors to defer future common distributions until our hotels experience a 2% to 4% increase in RevPAR over 2002, and to determine the amount of preferred distributions, if any, for each quarterly period, based upon the operating results of that quarter, economic conditions, other operating trends and minimum REIT distribution requirements. We do not currently anticipate paying any distributions on our common units during 2003. Recent events, including the threat of additional terrorist attacks, U.S. military involvement in the Middle East and the bankruptcy of several major corporations, have had an adverse impact on the capital markets. These events, new terrorist attacks or additional bankruptcies could further adversely affect the availability and cost of capital for our business. In addition, should the anticipated recovery of the overall economy, and of the lodging industry, continue to be delayed significantly, that too could adversely affect our operating cash flow and the availability and cost of capital for our business. As a consequence of the prolonged economic slowdown, its impact on the travel and lodging industries and our higher secured debt levels, Moody's lowered its ratings on our $1.2 billion in senior unsecured debt one level, to B1 in June 2003. This downgrade, along with a similar downgrade by Standard & Poor's earlier this year, triggered a 50 basis point step-up in interest rates on $900 million of our $1.2 billion in senior unsecured debt, which will continue in effect unless and until either Moody's raises its rating on our senior unsecured debt to Ba3 or Standard & Poor's increases its rating to BB-. The step-up in interest rates will increase our interest expense by $4.5 million on an annual basis. We are also subject to the risks of fluctuating hotel operating margins at our hotels, including but not limited to increases in wage and benefit costs, repair and maintenance expenses, utilities, insurance, and other operating expenses that can fluctuate disproportionately to revenues. These operating expenses are difficult to predict and control, resulting in an increased risk of volatility in our results of operations. The economic slowdown and the sharp drop in Occupancy and ADR that began in 2001, have resulted both in declines in RevPAR and an erosion in operating margins. 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, earnings and cash flow. Effective June 1, 2003, we made a $0.2 million capital contribution to our joint venture with Interstate Hotels, which increased our ownership in that venture to more than 50 percent. As a result, we began consolidating the eight hotels, owned by this venture. The consolidation of these eight hotels increased our investment in hotels by $73 million, our debt by $51 million and reduced our investment in unconsolidated entities by $19 million. In June 2003, we entered into a non-recourse secured debt facility with JPMorgan Chase Bank for up to $200 million. This secured facility has an initial term of 18 months, that can be extended for an additional six months at FelCor's option, and carries a floating interest rate of LIBOR plus 225 to 275 basis points. The outstanding balances on the loan facility are expected to be converted into 10-year fixed rate commercial mortgage backed securities loans through JPMorgan Chase Bank. At the date of this filing, no draws had been made and capacity available under this facility was $120 million, secured by seven hotels. The amount available under this facility may be increased to a maximum of $200 million as 34 additional properties are mortgaged to secure borrowings thereunder. With the inclusion of additional hotels, which are subject to final underwriting and customary closing conditions, we expect to have capacity available of approximately $170 million to $180 million under this facility by the end of the third quarter. On April 24, 2003, we entered into a $150 million non-recourse mortgage loan, at a floating interest rate of LIBOR plus 250 basis points secured by 10 full service hotels. The loan matures in May 2006, with two, one-year extension options. The proceeds were used to pay off all outstanding borrowings under our unsecured line of credit. We have no remaining debt maturing during 2003, other than $9 million in normal recurring principal payments. Our next significant debt maturity is our $175 million of senior notes maturing in October 2004. We expect to satisfy this obligation primarily from our excess cash and additional secured debt capacity. However, we also anticipate that we will have positive cash flow from operations and net sales proceeds from the sale of non-strategic hotels that may be available as secondary sources of funds for repayment of this debt in the next 12 to 16 months. In the first six months of 2003, we prepaid $12.3 million of secured debt and recorded gains from debt extinguishment of $1.3 million. In June 2003, we reduced our unsecured line of credit commitments from $300 million to $50 million, and obtained more relaxed covenant levels. In addition to financial covenants, our unsecured 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 and 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 (such as distributions on units and preferred units, FelCor share repurchases and certain investments); limitations on our ability to merge or consolidate with other persons, to issue stock of our subsidiaries and to 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, 2003, and at the date of this filing, we were in compliance with all of these covenants. At the date of this filing, we have no restrictions on our ability to use our line of credit. However, at certain leverage levels, usage under the line of line credit is restricted to fund operational cash flow shortfalls. At these higher leverage levels, excess cash flow from operations and net cash proceeds from sales, must first be used to reduce any outstanding balances under our line of credit. Unless our business and cash flow stabilizes, we may not be able to satisfy the current financial covenant requirements. In such an event, we may need to obtain further amendments from our lenders under the line of credit to continue to be able to borrow under it. We are not certain whether, to what extent, or upon what terms the lenders may be willing to further relax the covenants. Further amendments to our line of credit may result in additional restrictions on us that, together with any limitation on our ability to borrow under the line, may adversely affect our ability to run our business and manage our financial affairs. Our other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than those in our line of credit. Most of our mortgage debt is non-recourse to us and contains provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of our mortgage debt is prepayable, subject to various prepayment penalties, yield maintenance or defeasance obligations. Our publicly-traded senior unsecured notes require that we satisfy a total leverage, a secured leverage and an interest coverage test in order to: incur additional indebtedness, except under our line of credit or to refinance maturing debt with replacement debt, as defined under our indentures; pay distributions in excess of the minimum distributions required to meet FelCor's REIT qualification test; repurchase units; or merge. As of the date of this filing, we have satisfied all such incurrence tests. We currently expect that we will have the flexibility to meet these tests unless RevPAR declines continue or become more severe. We anticipate meeting our debt service obligations through a combination of cash on hand, cash flow from operations, additional secured debt and the sale of non-strategic hotel assets. 35 Our failure to timely satisfy any judgment or recourse indebtedness, if in the amount of $10 million or more, could result in the acceleration of most of our other unsecured recourse indebtedness. We may not be able to refinance or repay our debt in full under those circumstances. Selected Ratios
JUNE 30, DECEMBER 31, 2003 2002 ------------ ------------ Consolidated debt (net of cash) to trailing twelve month EBITDA 7.1x 5.9x Total debt (net of cash) to trailing twelve month EBITDA 7.5x 6.4x Total debt (net of cash) to investment in hotels, at cost(a) 42.1% 41.8% EBITDA to consolidated interest paid(b) 1.6x 1.9x EBITDA to total interest expense(c) 1.5x 1.7x Fixed charge coverage ratio(d) 1.3x 1.5x
(a) Investment in hotels at cost is defined as our pro rata share of consolidated investment in hotels, before accumulated depreciation, plus our pro rata share of unconsolidated investment in hotels, before accumulated depreciation. (b) EBITDA to consolidated interest paid represents trailing twelve month consolidated EBITDA divided by trailing twelve month interest expense before capitalized interest and amortization of debt costs. (c) EBITDA to total interest expense represents trailing twelve month consolidated EBITDA divided by trailing twelve month interest expense, including the Company's pro rata share of unconsolidated interest expense. (d) Fixed charges include preferred distributions, consolidated interest expense and interest expense from unconsolidated entities. Current Forecast For the third quarter of 2003, we currently anticipate our portfolio RevPAR to be 1% to 3% below the comparable period of the prior year and operating margins to decrease 200 to 250 basis points from 2002 levels. Our net loss for the third quarter of 2003, before asset sales, is expected to be within the range of $29 million to $26 million. FFO for the third quarter is expected to be within the range of $11 million to $14 million, or $0.18 to $0.23 per share and unit, and EBITDA is expected to be within the range of $63 million to $66 million for the same period. We estimate our full year 2003 hotel portfolio RevPAR to be 3% to 4% below 2002, and that operating margins for 2003 will decrease by 250 to 275 basis points from 2002 levels. Our net loss for the full year 2003, before asset sales, is expected to be within the range of $120 million to $114 million. Our FFO for the full year 2003 is currently anticipated to be within the range of $45 million to $51 million, or $0.72 to $0.82 per share and unit, and EBITDA is expected to be within the range of $252 million to $258 million for the same period. In the event that RevPAR declines, compared to the prior year, are greater than anticipated in the preparation of this forecast, or operating margins are lower than anticipated, we may not meet our forecast for the remainder of the year. We expect to be able to meet our preferred distribution obligations even if RevPAR declines for the year are 6% to 8% below prior year. Our RevPAR results for July 2003 were approximately 0.7% below the same period in 2002 and our RevPAR for the first seven days of August was approximately 1.5% below the same period in 2002. 36 Our estimates of FFO and EBITDA for the third quarter and full year of 2003 were derived from our estimate of net loss applicable to unitholders for these periods. The following table provides a reconciliation of our estimates of FFO and EBITDA to our estimates of net loss applicable to unitholders for both the third quarter and full year 2003. RECONCILIATION OF ESTIMATED NET INCOME (LOSS) TO FFO AND EBITDA (in millions, except per unit data)
THIRD QUARTER 2003 GUIDANCE ---------------------------------------------------- LOW GUIDANCE HIGH GUIDANCE ------------------------ ------------------------ PER UNIT PER UNIT DOLLARS AMOUNT(a) DOLLARS AMOUNT(a) ---------- ---------- ---------- ---------- NET LOSS APPLICABLE TO UNITHOLDERS ... $ (29) $ (0.47) $ (26) $ (0.42) Depreciation ...................... 40 -- 40 -- ---------- ---------- FFO .................................. 11 $ 0.18 14 $ 0.23 Interest expense .................. 44 -- 44 -- Amortization expense .............. 1 -- 1 -- Preferred distributions ........... 7 -- 7 -- ---------- ---------- EBITDA ............................... $ 63 -- $ 66 -- ========== ==========
FULL YEAR 2003 GUIDANCE ---------------------------------------------------- LOW GUIDANCE HIGH GUIDANCE ------------------------ ------------------------ PER UNIT PER UNIT DOLLARS AMOUNT(a) DOLLARS AMOUNT(a) ---------- ---------- ---------- ---------- NET LOSS APPLICABLE TO UNITHOLDERS ....... $ (120) $ (1.96) $ (114) $ (1.86) Depreciation .......................... 157 -- 157 -- Loss on depreciable assets(b) ......... 8 -- 8 -- ---------- ---------- FFO(c) ................................... 45 $ 0.72 51 $ 0.82 Interest expense ...................... 176 -- 176 -- Amortization expense .................. 2 -- 2 -- Charge-off of debt related costs(c) ... 2 -- 2 -- Preferred distributions ............... 27 -- 27 -- ---------- ---------- EBITDA ................................... $ 252 -- $ 258 -- ========== ==========
(a) Weighted average units are 61.8 million, adding unvested restricted units of 0.3 million, provides the weighted average units of 62.2 million used to compute FFO per unit. (b) Represents the impairment loss of $7.8 million and realized losses on the sale of assets of $0.3 million, which was recorded in the second quarter. (c) Included in full year FFO are $0.03 per unit in charge-offs of deferred financing loan costs, net of a $1.3 million gain on early extinguishment of debt, which was recorded in the six month period ended June 30, 2003. 37 Quantitative and Qualitative Disclosures About Market Risk At June 30, 2003, approximately 80% 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, 2003, the following 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, 2003. 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, 2003, at then current market interest rates. EXPECTED DEBT MATURITY DATES (DOLLARS IN THOUSANDS)
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE ------- --------- -------- --------- --------- ----------- ----------- ----------- Fixed rate: Debt $ 7,555 $ 189,465 $ 35,951 $ 14,993 $ 259,123 $ 1,405,283 $ 1,912,370 $ 1,906,999 Interest rate swaps (a) -- (175,000) -- -- (75,000) -- (250,000) -- Average interest rate 7.73% 7.91% 7.53% 8.02% 7.41% 9.15% 8.89% -- Floating rate: Debt 1,649 3,411 3,568 141,103 -- 650 150,381 150,381 Interest rate swaps (a) -- 175,000 -- -- 75,000 -- 250,000 (10,169) Average interest rate 3.62% 4.31% 3.62% 3.62% 5.19% 10.20% 4.23% -- Total debt $ 9,204 $ 192,876 $ 39,519 $ 156,096 $ 259,123 $ 1,405,933 $ 2,062,751 -- Average interest rate 6.80% 4.58% 7.56% 8.21% 6.77% 9.14% 7.98% -- Net discount -- -- -- -- -- -- (4,284) -- Total debt -- -- -- -- -- -- $ 2,058,467 --
(a) At June 30, 2003, the Company's $175 million and $75 million in publicly-traded notes due October 2004 and October 2007, respectively, were matched with interest rate swap agreements that effectively converted the fixed interest rate on the notes to a variable interest rate tied to LIBOR. The interest rate swap agreements have the same maturity as the notes. 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 Standard & Poor's credit ratings for the financial institutions that are counterparties to our 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 meet our cash requirements. 38 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. Forward looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. The risks, uncertainties and assumptions that may affect our actual results, some of which are discussed more fully in our previous filings under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (collectively, "Cautionary Disclosures") include: general economic conditions, including the timing and magnitude of any recovery from the current soft economy; future acts of terrorism; the impact on the travel industry of increased security precautions; the availability of capital; the impact of U.S. military involvement in the Middle East and elsewhere; the ability to effect sales of non-strategic hotels at anticipated prices and numerous other factors that may affect results, performance and achievements. The forward looking statements included herein, and all subsequent written and oral forward looking statements attributable to us or persons acting on our behalf, are expressly qualified in their entirety by the Cautionary Disclosures. We undertake no obligation to update any forward-looking statements to reflect future events or circumstances. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information and disclosures regarding market risks applicable to us 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 - Quantitative and Qualitative Disclosures About Market Risks" contained elsewhere in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of FelCor's principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, FelCor's principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. (b) Changes in internal controls. Not applicable. 39 PART II. -- OTHER INFORMATION ITEM 5. OTHER INFORMATION. For information relating to certain other transactions by the Company through June 30, 2003, 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: The following exhibits are filed as part of this Quarterly Report on Form 10-Q: EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.30- Loan Facility Agreement, dated June 18, 2003, by and among FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM BWI Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C. and FelCor/JPM Wilmington Hotel, L.L.C., as borrowers, FCH/DT BWI Hotel, L.L.C., as a guarantor, and JPMorgan Chase Bank, as lender, and acknowledged by FelCor Lodging Limited Partnership, relating to the non-recourse secured debt facility with lender for up to $200 million aggregate principal amount (the "Loan Facility") (filed as Exhibit 10.31 to FelCor Lodging Trust Incorporated's ("FelCor") June 2003 Form 10-Q and incorporated herein by reference). 10.30.1 - Form of Mortgage, Deed of Trust, Deed to Secure Debt and Security Agreement and Fixture Filing, each dated June 18, 2003, from each of FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Nashville Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C. and FelCor Hotel Asset Company, L.L.C. (as owner of the Orlando-Airport hotel), and FelCor/JPM Wilmington Hotel, L.L.C., as mortgagor, grantor and/or trustor, as applicable, and FCH/DT BWI Holdings, L.P. and FCH/DT BWI Hotel, L.L.C., as owner and ground lessee, respectively, of the Maryland hotel, in favor of JPMorgan Chase Bank, as mortgagee, grantee or beneficiary, as applicable, each covering a separate hotel and securing the Loan Facility (filed as Exhibit 10.31.1 to FelCor's June 2003 Form 10-Q and incorporated herein by reference). 10.30.2 - Promissory Note, dated June 18, 2003, made by FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM BWI Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Nashville Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C. and FelCor/JPM Wilmington Hotel, L.L.C., payable to the order of JPMorgan Chase Bank in the original principal amount of up to $200 million (filed as Exhibit 10.31.2 to FelCor's June 2003 Form 10-Q and incorporated herein by reference). 10.30.3 - First Amendment to Note, Loan Agreement, Environmental Indemnity Agreement and Other Loan Documents, dated July 31, 2003, by and among FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Nashville Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM Wilmington Hotel, L.L.C., FelCor Hotel Asset Company, L.L.C., BHR Operations, L.L.C., DJONT Leasing, L.L.C., DJONT Operations, L.L.C., FCH/DT Leasing, L.L.C., FCH/DT Leasing II, L.L.C., FelCor/TRS Holdings, L.P., FelCor/JPM LBV Hotel, L.L.C., DJONT/JPM Austin Leasing, L.P., DJONT/JPM Mandalay Leasing, L.L.C., DJONT/JPM Phoenix 40 Leasing, L.L.C., DJONT/JPM BWI Leasing, L.L.C., DJONT/JPM Orlando Leasing, L.L.C., DJONT/JPM Wilmington Leasing, L.L.C., DJONT/JPM Atlanta ES Leasing, L.L.C., DJONT/JPM LBV Leasing, L.L.C., and FelCor Lodging Limited Partnership, as loan parties, and JPMorgan Chase Bank, as lender (filed as Exhibit 10.31.3 to FelCor's June 2003 Form 10-Q and incorporated herein by reference). 31.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer. 31.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer. 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer. 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer. (b) Reports on Form 8-K: None were issued during the three months ended June 30, 2003. 41 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 2003 FELCOR LODGING LIMITED PARTNERSHIP A Delaware Limited Partnership By FelCor Lodging Trust Incorporated Its General Partner By: /s/ Richard J. O'Brien ----------------------------------- Richard J. O'Brien Executive Vice President and Chief Financial Officer By: /s/ Lester C. Johnson ----------------------------------- Lester C. Johnson Senior Vice President and Principal Accounting Officer 42 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.30- Loan Facility Agreement, dated June 18, 2003, by and among FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM BWI Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C. and FelCor/JPM Wilmington Hotel, L.L.C., as borrowers, FCH/DT BWI Hotel, L.L.C., as a guarantor, and JPMorgan Chase Bank, as lender, and acknowledged by FelCor Lodging Limited Partnership, relating to the non-recourse secured debt facility with lender for up to $200 million aggregate principal amount (the "Loan Facility") (filed as Exhibit 10.31 to FelCor Lodging Trust Incorporated's ("FelCor") June 2003 Form 10-Q and incorporated herein by reference). 10.30.1- Form of Mortgage, Deed of Trust, Deed to Secure Debt and Security Agreement and Fixture Filing, each dated June 18, 2003, from each of FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Nashville Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C. and FelCor Hotel Asset Company, L.L.C. (as owner of the Orlando-Airport hotel), and FelCor/JPM Wilmington Hotel, L.L.C., as mortgagor, grantor and/or trustor, as applicable, and FCH/DT BWI Holdings, L.P. and FCH/DT BWI Hotel, L.L.C., as owner and ground lessee, respectively, of the Maryland hotel, in favor of JPMorgan Chase Bank, as mortgagee, grantee or beneficiary, as applicable, each covering a separate hotel and securing the Loan Facility (filed as Exhibit 10.31.1 to FelCor's June 2003 Form 10-Q and incorporated herein by reference). 10.30.2- Promissory Note, dated June 18, 2003, made by FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM BWI Hotel, L.L.C., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Nashville Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C. and FelCor/JPM Wilmington Hotel, L.L.C., payable to the order of JPMorgan Chase Bank in the original principal amount of up to $200 million (filed as Exhibit 10.31.2 to FelCor's June 2003 Form 10-Q and incorporated herein by reference). 10.30.3- First Amendment to Note, Loan Agreement, Environmental Indemnity Agreement and Other Loan Documents, dated July 31, 2003, by and among FelCor/JPM Atlanta CP Hotel, L.L.C., FelCor/JPM Atlanta ES Hotel, L.L.C., FelCor/JPM Austin Holdings, L.P., FelCor/JPM Mandalay Hotel, L.L.C., FelCor/JPM Nashville Hotel, L.L.C., FelCor/JPM Orlando Hotel, L.L.C., FelCor/JPM Phoenix Hotel, L.L.C., FelCor/JPM Wilmington Hotel, L.L.C., FelCor Hotel Asset Company, L.L.C., BHR Operations, L.L.C., DJONT Leasing, L.L.C., DJONT Operations, L.L.C., FCH/DT Leasing, L.L.C., FCH/DT Leasing II, L.L.C., FelCor/TRS Holdings, L.P., FelCor/JPM LBV Hotel, L.L.C., DJONT/JPM Austin Leasing, L.P., DJONT/JPM Mandalay Leasing, L.L.C., DJONT/JPM Phoenix Leasing, L.L.C., DJONT/JPM BWI Leasing, L.L.C., DJONT/JPM Orlando Leasing, L.L.C., DJONT/JPM Wilmington Leasing, L.L.C., DJONT/JPM Atlanta ES Leasing, L.L.C., DJONT/JPM LBV Leasing, L.L.C., and FelCor Lodging Limited Partnership, as loan parties, and JPMorgan Chase Bank, as lender (filed as Exhibit 10.31.3 to FelCor's June 2003 Form 10-Q and incorporated herein by reference). 31.1- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer. 31.2- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer. 32.1- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer. 32.2- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer. EX-31.1 3 d08275exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATIONS I, Thomas J. Corcoran, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of FelCor Lodging Limited Partnership; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Thomas J. Corcoran, Jr. ---------------------------------- Thomas J. Corcoran, Jr. Chief Executive Officer of FelCor Lodging Trust Incorporated, as general partner of FelCor Lodging Limited Partnership EX-31.2 4 d08275exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATIONS I, Richard J. O'Brien, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FelCor Lodging Limited Partnership; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Richard J. O'Brien ---------------------------------- Richard J. O'Brien Chief Financial Officer of FelCor Lodging Trust Incorporated, as general partner of FelCor Lodging Limited Partnership EX-32.1 5 d08275exv32w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FelCor Lodging Limited Partnership (the "Registrant") on Form 10-Q for the quarter and six months ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report), the undersigned hereby certifies, in the capacity as indicated below and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant. August 14, 2003 /s/ Thomas J. Corcoran, Jr. ---------------------------------- Thomas J. Corcoran, Jr. Chief Executive Officer of FelCor Lodging Trust Incorporated, as general partner of FelCor Lodging Limited Partnership EX-32.2 6 d08275exv32w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of FelCor Lodging Limited Partnership (the "Registrant") on Form 10-Q for the quarter and six months ended June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report), the undersigned hereby certifies, in the capacity as indicated below and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant. August 14, 2003 /s/ Richard J. O'Brien ---------------------------------- Richard J. O'Brien Chief Financial Officer of FelCor Lodging Trust Incorporated, as general partner of FelCor Lodging Limited Partnership -----END PRIVACY-ENHANCED MESSAGE-----