-----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, LpkjWAyYLOI+0xF/nJEZ5twTi90nioBi6YkGETUukohZje2NTN5zEKSn6c37HrBY e8cSiitMn+HSnLMSLybgpA== 0000950134-99-004417.txt : 19990518 0000950134-99-004417.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950134-99-004417 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FELCOR LODGING L P CENTRAL INDEX KEY: 0001048789 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752564994 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-39595-01 FILM NUMBER: 99627913 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 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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 Identification No.) organization) 545 E. JOHN CARPENTER FREEWAY, SUITE 1300, IRVING, TEXAS 75062 (Address of principal executive offices) (Zip Code) (972) 444-4900 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] - -------------------------------------------------------------------------------- 2 FELCOR LODGING LIMITED PARTNERSHIP INDEX
PAGE ---- PART I. -- FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS.............................................................................. 3 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS - MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998..................................................................... 3 CONSOLIDATED STATEMENTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)................................................. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS -- FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)................................................. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 14 GENERAL/FIRST QUARTER HIGHLIGHTS............................................................... 14 RESULTS OF OPERATIONS.......................................................................... 15 LIQUIDITY AND CAPITAL RESOURCES................................................................ 19 PART II. -- OTHER INFORMATION ITEM 5. OTHER INFORMATION................................................................................. 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................. 24 SIGNATURE....................................................................................................... 25
2 3 PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
MARCH 31, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Investment in hotels, net of accumulated depreciation of $214,333 in 1999 and $178,072 in 1998 ................................................ $ 4,010,960 $ 3,955,582 Investment in unconsolidated entities .......................................... 138,987 148,065 Cash and cash equivalents ...................................................... 26,644 34,692 Due from Lessees ............................................................... 31,513 18,968 Deferred expenses, net of accumulated amortization of $2,704 in 1999 and $2,096 in 1998 .................................................. 15,982 10,041 Other assets ................................................................... 7,685 8,035 ------------ ------------ Total assets ........................................................ $ 4,231,771 $ 4,175,383 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Debt, net of discount of $1,571 in 1999 and $1,628 in 1998 ..................... $ 1,671,191 $ 1,594,734 Distributions payable .......................................................... 42,547 67,262 Accrued expenses and other liabilities ......................................... 68,318 57,312 Minority interest in other partnerships ........................................ 51,911 51,105 ------------ ------------ Total liabilities ................................................... 1,833,967 1,770,413 ------------ ------------ Commitments and contingencies (Notes 3 and 5) Redeemable units at redemption value ........................................... 69,296 67,595 Preferred units: Series A Cumulative Preferred Units, 6,050 units issued and outstanding ... 151,250 151,250 Series B Redeemable Preferred Units, 58 units issued and outstanding ...... 143,750 143,750 Partners' Capital ......................................................... 2,033,508 2,042,375 ------------ ------------ Total liabilities and partners' capital ............................. $ 4,231,771 $ 4,175,383 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 4 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED, IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ------------ ------------ Revenues: Percentage lease revenue ................................................ $ 124,991 $ 56,060 Equity in income from unconsolidated entities ........................... 1,246 1,293 Other revenue ........................................................... 680 175 ------------ ------------ Total revenues ................................................. 126,917 57,528 ------------ ------------ Expenses: General and administrative .............................................. 2,244 1,199 Depreciation ............................................................ 36,425 15,887 Taxes, insurance, and other ............................................. 20,953 7,270 Interest expense ........................................................ 28,422 9,731 Minority interest in other partnerships ................................. 806 190 ------------ ------------ Total expenses ................................................. 88,850 34,277 ------------ ------------ Income before extraordinary charge ........................................ 38,067 23,251 Extraordinary charge from write off of deferred financing fees ............ 556 ------------ ------------ Net income ................................................................ 38,067 22,695 Preferred distributions ................................................... 6,184 2,949 ------------ ------------ Income applicable to unitholders .......................................... $ 31,883 $ 19,746 ============ ============ Per unit data: Basic: Net income applicable to unitholders before extraordinary charge ........ $ 0.45 $ 0.51 Extraordinary charge .................................................... (0.01) ------------ ------------ Net income applicable to unitholders .................................... $ 0.45 $ 0.50 ============ ============ Weighted average units outstanding ...................................... 70,964 39,519 Diluted: Income applicable to unitholders before extraordinary charge ............ $ 0.45 $ 0.51 Extraordinary charge .................................................... (0.01) ------------ ------------ Net income applicable to unitholders .................................... $ 0.45 $ 0.50 ============ ============ Weighted average units outstanding ...................................... 71,298 39,885
The accompanying notes are an integral part of these consolidated financial statements. 4 5 FELCOR LODGING LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities: Net income ................................................................. $ 38,067 $ 22,695 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ..................................................... 36,425 15,887 Amortization of deferred financing fees .......................... 608 628 Accretion of debt ................................................ (262) Amortization of unearned officers' and directors' compensation ... 173 191 Equity in income from unconsolidated entities .................... (1,246) (1,293) Extraordinary charge for write off of deferred financing fees .... 556 Minority interest in other partnerships .......................... 806 190 Changes in assets and liabilities: Due from Lessees ................................................. (12,545) (14,907) Deferred financing fees .......................................... (6,549) (84) Other assets ..................................................... 306 (2,898) Accrued expenses and other liabilities ........................... 5,677 12,212 ------------ ------------ Net cash flow provided by operating activities ......... 61,460 33,177 ------------ ------------ Cash flows used investing activities: Acquisition of hotel assets ................................................ (10,802) (26,516) Acquisition of unconsolidated entities ..................................... (10) Sale of hotels ............................................................. 9,916 Improvements and additions to hotels ....................................... (81,781) (5,227) Cash distributions from unconsolidated entities ............................ 10,180 14,510 ------------ ------------ Net cash flow used in investing activities ............. (72,487) (17,243) ------------ ------------ Cash flows from financing activities: Proceeds from borrowings ................................................... 153,000 30,000 Repayment of borrowings .................................................... (79,041) (13,078) Distributions paid to preferred unitholders ................................ (7,436) (2,949) Distributions paid to unitholders .......................................... (63,544) (21,717) ------------ ------------ Net cash flow provided by (used in) financing activities 2,979 (7,744) ------------ ------------ Net change in cash and cash equivalents .............................................. (8,048) 8,190 Cash and cash equivalents at beginning of periods .................................... 34,692 17,543 ------------ ------------ Cash and cash equivalents at end of periods .......................................... $ 26,644 $ 25,733 ============ ============ Supplemental cash flow information -- Interest paid .............................................................. $ 22,347 $ 9,320 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 6 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND FIRST QUARTER HIGHLIGHTS FelCor Lodging Limited Partnership and its subsidiaries (the "Company") at March 31, 1999, owned interests in 189 hotels with nearly 50,000 rooms and suites (collectively the "Hotels"). The sole general partner of the Company is FelCor Lodging Trust Incorporated ("FelCor"), one of the nation's largest hotel real estate investment trusts ("REIT"). At March 31, 1999, FelCor owned a greater than 95% equity interest in the Company. The Company owns 100% interests in 165 of the Hotels, a 90% or greater interest in entities owning seven hotels, a 60% interest in an entity owning two hotels and 50% interests in separate entities that own 15 hotels. The Company is the owner of the largest number of Embassy Suites(R), Crowne Plaza(R), Holiday Inn(R), and independently owned Doubletree(R) branded hotels in the world. The following table presents the Hotels by brand operated by each of the Company's Lessees at March 31, 1999:
BRAND DJONT BRISTOL TOTAL ----- ----- ------- ----- Embassy Suites 59 59 Holiday Inn 47 47 Doubletree and Doubletree Guest Suites(R) 16 16 Crowne Plaza and Crowne Plaza Suites(R) 14 14 Holiday Inn Select(R) 11 11 Sheraton(R)and Sheraton Suites(R) 9 9 Hampton Inn(R) 9 9 Holiday Inn Express(R) 6 6 Fairfield Inn(R) 5 5 Harvey Hotel(R) 4 4 Independents 3 3 Courtyard by Marriott(R) 2 2 Four Points by Sheraton(R) 1 1 Hilton Suites(R) 1 1 Homewood Suites(R) 1 1 Westin(R) 1 1 ---- ------ ----- Total Hotels 86 103 189 ==== ====== =====
The Hotels are located in the United States (34 states) and Canada, with 79 hotels in California, Florida and Texas. The following table provides information regarding the net acquisition of hotels through March 31, 1999:
NET HOTELS ACQUIRED/ (DISPOSED) ---------- 1994 7 1995 13 1996 23 1997 30 1998 120 FIRST QUARTER 1999 (4) ----- 189 =====
6 7 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND FIRST QUARTER HIGHLIGHTS -- (CONTINUED) At March 31, 1999 the Company leased 86 of the Hotels to DJONT Operations, L.L.C., a Delaware limited liability company, or a consolidated subsidiary thereof (collectively "DJONT"), 102 of the Hotels to Bristol Hotels & Resorts or a consolidated subsidiary thereof ("Bristol" and, together with DJONT, the "Lessees"). One hotel, managed by Bristol, was not leased. Thomas J. Corcoran, Jr., the President, Chief Executive Officer, and a Director of FelCor, and Hervey A. Feldman, Chairman Emeritus of FelCor, beneficially own a 50% voting common equity interest in DJONT. The remaining 50% nonvoting common equity interest is beneficially owned by the children of Charles N. Mathewson, a director of FelCor and major initial investor in the Company. DJONT has entered into management agreements pursuant to which 73 of the Hotels leased by it are managed by subsidiaries of Promus Hotel Corporation ("Promus"), ten are managed by subsidiaries of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), and three are managed by two independent management companies. Bristol leases and manages 102 Hotels and manages one hotel which operated without a lease. Bristol is one of the largest independent hotel operating companies in North America and operates the largest number of Bass Hotels & Resorts-branded hotels in the world. A brief discussion of the first quarter 1999 highlights follows: o Completed renovations at six hotels at a total project cost of $23.8 million. o Twenty-four additional hotels undergoing renovation. o Capital expenditures to the Hotel portfolio per the Company's renovation and redevelopment program totaled $73 million in addition to $9 million of routine capital replacements and improvements. o Four of the hotels acquired in the merger with Bristol Hotel Company in 1998 (the "Bristol Merger") were sold during the quarter - two in Colorado Springs, Colorado, and one each in Columbia, South Carolina and Flagstaff, Arizona - for an aggregate sales price of $10.5 million ($9.9 million net proceeds). One additional hotel was sold in April 1999 for $2.1 million and the Company has a pending sales contract on one hotel for $3.3 million which is expected to close within the next couple of months. One additional hotel acquired in the Bristol Merger is being actively offered for sale. No significant gain or loss occurred or is expected to occur with respect to the sale of these hotels. Certain reclassifications have been made to prior period financial information to conform to the current periods presentation with no effect to previously reported net income or shareholder's equity. These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the financial statements and notes thereto of the Company and DJONT included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "10-K"). The notes to the financial statements included herein highlight significant changes to the notes included in the 10-K and present interim disclosures required by the SEC. The financial statements for the three months ended March 31, 1999 and 1998 are unaudited; however, in the opinion of management, all adjustments (which include only normal recurring accruals) have been made which are considered necessary to present fairly the operating results and financial position of the Company for the unaudited periods. 7 8 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENT IN UNCONSOLIDATED ENTITIES At March 31, 1999, the Company owned 50% interests in separate entities owning 15 hotels, a parcel of undeveloped land, and a condominium management company. The Company also owned a 97% nonvoting interest in an entity that is developing condominiums for sale and owns a recently completed hotel annex. The Company is accounting for its investments in these unconsolidated entities under the equity method. Summarized combined financial information for 100% of these unconsolidated entities is as follows (in thousands):
MARCH 31, DECEMBER 31, 1999 1998 ---------- ------------ Balance sheet information: Investment in hotels, net of accumulated depreciation......................... $ 267,734 $ 269,881 Non-recourse mortgage debt.................................................... $ 191,664 $ 176,755 Equity........................................................................ $ 95,980 $ 105,347
THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ------------ ------------ Statements of operations information: Percentage lease revenue .......................................................... $ 12,571 $ 12,347 Other income ...................................................................... 1,589 160 ------------ ------------ Total revenue ............................................................ 14,160 12,507 ------------ ------------ Expenses: Depreciation ................................................................. 4,879 4,263 Taxes, insurance, and other .................................................. 2,342 1,567 Interest expense ............................................................. 3,219 3,259 ------------ ------------ Total expenses ........................................................... 10,440 9,089 ------------ ------------ Net income ........................................................................ $ 3,720 $ 3,418 ============ ============ Net income attributable to the Company ............................................ $ 1,781 $ 1,709 Amortization of cost in excess of book value ...................................... (535) (416) ------------ ------------ Equity in income from unconsolidated entities ..................................... $ 1,246 $ 1,293 ============ ============
3. DEBT On March 4, 1999 the Company completed a $63 million first mortgage term loan ("Mortgage Loan"). The Mortgage Loan is collateralized by three hotels, bears interest at 200 basis points over LIBOR (30 day LIBOR at March 31, 1999, was 4.94%), matures in February 2003 and amortizes over 25 years. The proceeds from this loan were used to pay off a $44 million mortgage loan due December 2002 and to acquire ownership of land previously held under ground lease. 8 9 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. DEBT -- (CONTINUED) Debt at March 31, 1999 and December 31, 1998 consists of the following (in thousands): (see "Subsequent Events" Note 8)
OUTSTANDING BALANCE ------------------- INTEREST RATE MATURITY DATE MARCH 31, 1999 DECEMBER 31, 1998 ------------- ------------- -------------- ----------------- FLOATING RATE DEBT: Line of Credit LIBOR + 150bp June 2001 $ 480,000 $ 411,000 Term Loan LIBOR + 150bp December 1999 250,000 250,000 Mortgage debt LIBOR + 200bp February 2003 63,000 Other Up to LIBOR + 150bp Various 25,650 34,750 ------------ ------------ Total floating rate debt 818,650 695,750 ------------ ------------ FIXED RATE DEBT: Line of credit - swapped 7.24% June 2001 325,000 325,000 Publicly-traded term notes 7.38% October 2004 174,279 174,249 Publicly-traded term notes 7.63% October 2007 124,150 124,122 Mortgage debt 7.24% November 2007 144,212 145,062 Mortgage debt 6.97% December 2002 43,836 Other 6.96% - 7.23% 2000 - 2005 84,900 86,715 ------------ ------------ Total fixed rate debt 852,541 898,984 ------------ ------------ Total debt $ 1,671,191 $ 1,594,734 ============ ============
A portion of the Company's Line of Credit is matched with interest rate swap agreements which effectively convert the variable rate on the Line of Credit to a fixed rate. The Line of Credit and the Term Loan contain various affirmative and negative covenants including limitations on total indebtedness, total secured indebtedness, and cash distributions, as well as the obligation to maintain certain minimum tangible net worth and certain minimum interest and debt service coverage ratios. At March 31, 1999, the Company was in compliance with all such covenants. The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the Line of Credit and Term Loan. Most of the collateralized borrowings are nonrecourse to the Company (with certain exceptions) and contain provisions allowing for the substitution of collateral upon satisfaction of certain conditions. Most of the collateralized borrowings are prepayable; however they are subject to various prepayment penalties, yield maintenance, or defeasance obligations. 9 10 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. TAXES, INSURANCE, AND OTHER Taxes, insurance, and other is comprised of the following for the three months ended March 31, 1999 and 1998 (in thousands):
THREE MONTHS ENDED MARCH 31, ------------------------------ 1999 1998 ----------- ----------- Real estate and personal property taxes............................................ $ 14,636 $ 6,566 Property insurance................................................................. 853 252 Land lease expense................................................................. 4,006 227 State franchise taxes.............................................................. 1,074 225 Other.............................................................................. 384 ----------- ----------- Total taxes, insurance, and other......................................... $ 20,953 $ 7,270 =========== ===========
5. COMMITMENTS AND RELATED PARTY TRANSACTIONS The Company is to receive rental income from the Lessees under the Percentage Leases which expire in 2002 (six hotels), 2003 (four hotels), 2004 (12 hotels), 2005 (19 hotels), 2006 (26 hotels), 2007 (37 hotels), 2008 (54 hotels), and thereafter (16 hotels). The rental income under the Percentage Leases between 14 of the unconsolidated entities, of which the Company owns 50%, is payable by the Lessee to the respective entities and is not included in the following schedule of future lease commitments to the Company. Minimum future rental income (i.e., base rents) payable to the Company under these noncancellable operating leases at March 31, 1999 is as follows (in thousands):
DJONT BRISTOL TOTAL ----------- ------------ ------------ Remainder of 1999.................................... $ 104,392 $ 117,108 $ 221,500 2000................................................. 140,749 180,626 321,375 2001................................................. 144,123 180,647 324,770 2002................................................. 144,480 180,620 325,100 2003................................................. 130,445 177,873 308,318 2004 and thereafter.................................. 519,383 822,832 1,342,215 ----------- ------------ ------------ $ 1,183,572 $ 1,659,706 $ 2,843,278 =========== ============ ============
Certain entities owning interests in DJONT and managers for certain hotels have agreed to make loans to DJONT of up to an aggregate of approximately $17.3 million to the extent necessary to enable DJONT to pay rent and other obligations due under the respective Percentage Leases relating to a total of 34 of the Hotels. No loans were outstanding under such agreements at March 31, 1999. DJONT engages third-party managers to operate the Hotels leased by it and generally pays such managers a base management fee based on a percentage of room and suite revenue and an incentive management fee based on DJONT's income before overhead expenses for each hotel. In certain instances, the hotel managers have subordinated fees and committed to make subordinated loans to DJONT, if needed, to meet its rental and other obligations under the Percentage Leases. Bristol serves as both the lessee and manager of 102 Hotels leased to it by the Company at March 31, 1999 and, as such, is compensated for both roles through the profitability of the Hotels, after meeting their operating expenses and rental obligations under the Percentage Leases. 10 11 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. COMMITMENTS AND RELATED PARTY TRANSACTIONS -- (CONTINUED) Bristol has entered into an absolute and unconditional guarantee of the obligations of the Bristol Lessees under the Percentage Leases. As an additional credit enhancement, the Bristol Lessees obtained a letter of credit (the "Letter of Credit") issued by Bankers Trust Company for the benefit of the Company in the original amount of $20 million that is required to be maintained until July 27, 1999. This Letter of Credit is subject to periodic reductions upon satisfaction of certain conditions and at March 31, 1999, was in the amount of $15.9 million. According to Bristol's financial statements filed with the SEC, for the three months ended March 31, 1999, Bristol earned $1.1 million of net income and at March 31, 1999, had stockholders' equity of $36.6 million. The Company has a Renovation and Redevelopment Program for the Hotels and presently expects approximately $160 million to be invested during 1999 under this program, which may be funded from cash on hand or borrowings under its Line of Credit. Through the three months ending March 31, 1999 the Company has spent approximately $73 million under the Renovation and Redevelopment program. Bristol is a public company whose common stock is listed on the New York Stock Exchange under the symbol BH and that files its financial statements with the SEC in accordance with the Securities and Exchange Act of 1934. 6. SUPPLEMENTAL CASH FLOW INFORMATION During the first three months of 1999, the Company purchased the land related to three hotels which were previously leased under long term land leases for an aggregate purchase price of $19.8 million as follows (in thousands): Assets acquired...................................... $19,776 Debt assumed......................................... (7,800) Operating Partnership units issued................... (1,174) ------- Net cash paid by the Company.................... $10,802 =======
The debt assumed was paid off immediately after the purchase. 7. SEGMENT INFORMATION The Company has determined that its reportable segments are those that are consistent with the Company's method of internal reporting, which segments its business by Lessee. The Company's Lessees at March 31, 1999 were DJONT and Bristol. Prior to July 28, 1998 (the date of the Bristol Merger) the Company had only one Lessee, DJONT. Accordingly, segment information is not disclosed for the three months ended March 31, 1998. 11 12 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. SEGMENT INFORMATION -- (CONTINUED) The following table presents information the reportable segments for the three months ended March 31, 1999 (in thousands):
CORPORATE SEGMENT NOT ALLOCABLE CONSOLIDATED DJONT BRISTOL TOTAL TO SEGMENTS TOTAL ------------ ------------ ------------ ------------ ------------ Statement of Operations Information: Revenues: Percentage lease revenue.................. $ 73,072 $ 51,919 $ 124,991 $ 124,991 Equity in income from unconsolidated entities ............................... 960 286 1,246 1,246 Other revenue ............................ 24 433 457 $ 223 680 ------------ ------------ ------------ ------------ ------------ Total revenues ................. 74,056 52,638 126,694 223 126,917 ------------ ------------ ------------ ------------ ------------ Expenses: General and administrative ............... 2,244 2,244 Depreciation ............................. 20,090 16,335 36,425 36,425 Taxes, insurance, and other .............. 9,212 11,741 20,953 20,953 Interest expense ......................... 28,422 28,422 Minority interest in other partnerships .. 806 806 806 ------------ ------------ ------------ ------------ ------------ Total expenses ................. 30,108 28,076 58,184 30,666 88,850 ------------ ------------ ------------ ------------ ------------ Net income ................................. $ 43,948 $ 24,562 $ 68,510 $ (30,443) $ 38,067 ============ ============ ============ ============ ============ Funds from operations: Net income .................................. $ 43,948 $ 24,562 $ 68,510 $ (30,443) $ 38,067 Series B preferred dividends ................ (3,234) (3,234) Depreciation ................................ 20,090 16,335 36,425 36,425 Depreciation for unconsolidated entities .... 2,404 187 2,591 2,591 ------------ ------------ ------------ ------------ ------------ Funds from operations ....................... $ 66,442 $ 41,084 $ 107,526 $ (33,677) $ 73,849 ============ ============ ============ ============ ============ Weighted average units outstanding (1) ...... 75,988
(1) Weighted average units outstanding are computed including dilutive options and unvested stock grants, and assuming conversion of Series A Preferred Units to Units. 8. SUBSEQUENT EVENTS On April 1, 1999, the Company closed a five-year, $375 million term loan (the "Senior Term Loan"). The Senior Term Loan is collateralized by FelCor's stock and partnership interests in certain subsidiaries of the Company and bears interest at 250 basis points over LIBOR (30-day LIBOR at March 31, 1999, was 4.94%). The financial covenants in the Senior Term Loan are consistent with those in the Company's existing Line of Credit. In connection with this transaction, the Company's $850 million Line of Credit and existing seven and 10-year publicly-traded term notes were equally and ratably collateralized by the same collateral securing the Senior Term Loan. Upon the Company achieving investment grade credit ratings from the applicable rating agencies, the stock and partnership interest collateral will be released. The proceeds of the Senior Term Loan were used to immediately pay off the $250 million term loan, which was to mature on December 31, 1999 and to reduce borrowings under the Company's Line of Credit. 12 13 FELCOR LODGING LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. SUBSEQUENT EVENTS -- (CONTINUED) On April 1, 1999, the Company also closed a 10-year, $100 million mortgage loan (the "April 1999 First Mortgage Term Loan"). The April 1999 First Mortgage Term Loan is non-recourse (with certain exceptions), is secured by seven Embassy Suites hotels, carries a fixed rate coupon of 7.54%, matures in April 2009 and amortizes over 25 years. The proceeds from this loan were used to reduce outstanding borrowings under the Company's Line of Credit. On May 13, 1999, the Company closed a 10-year, $75 million mortgage loan (the "May 1999 First Mortgage Term Loan"). This loan is non-recourse (with certain exceptions), is collateralized by six Embassy Suites hotels, carries a fixed rate coupon of 7.55%, matures in May 2009 and amortizes over 25 years. The proceeds from this loan were used to reduce outstanding borrowings under the Company's Line of Credit. The Company presently intends to issue approximately $200 million of seven year senior notes during the second quarter of 1999, subject to market conditions. The net proceeds from the sale of such notes, if completed, will be used to reduce outstanding borrowings under the Company's Line of Credit. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For background information relating to the Company and the definitions of certain capitalized terms used herein, reference is made to Note 1 of Notes to Consolidated Financial Statements of FelCor Lodging Limited Partnership appearing elsewhere herein. FIRST QUARTER HIGHLIGHTS: o Revenues increased 121% for the quarter from $57.5 million to $126.9 million. o Net income applicable to unitholders increased 68% for the quarter from $19.7 million to $31.9 million. o Funds From Operations ("FFO") increased 77% from $41.7 million to $73.8 million. FFO per unit increased 3.2% from $0.94 to $0.97 per unit. o Revenue per available room ("RevPAR") for the Company's comparable hotel portfolio (128 hotels) increased 2.2% for the quarter. Comparable hotel RevPAR increases for the quarter by brand are as follows: Doubletree (12 hotels) 6.8% Embassy Suites (48 hotels) 1.9% Holiday branded hotels (36 hotels) 3.5% Sheraton (4 hotels) 3.9%
Additionally, the nine recently renovated and rebranded Crowne Plaza hotels (which are not included in the comparable hotel portfolio) produced a 23.3% average RevPAR increase for the current quarter, over the prior year quarter. The average daily rate (ADR) at these hotels increased 15.4% for the current quarter, over the prior year quarter. ADR at the Bristol non-comparable hotels (34 hotels including the nine Crowne Plaza hotels) increased 12.6% in the quarter. o Thirty hotels (19 of which are Bristol operated hotels) were undergoing renovation, redevelopment, or rebranding during the quarter, resulting in approximately 157,000 room nights out-of-service, or approximately 3.5% of available room nights. Included in this number were 18 Holiday Inn or Holiday Inn Select hotels, six Embassy Suites, three Doubletree, two Sheraton, and one independent hotel. Two of these hotels were closed during the quarter for redevelopment; the Allerton Hotel-Chicago, that is expected to re-open in May 1999 (to be rebranded as a Crowne Plaza), and the Holiday Inn-Tampa Busch Gardens, re-opened in late February, 1999. On April 1, 1999, two hotels were rebranded, the Dallas (DFW Airport South) hotel to an Embassy Suites and the Wilmington, Delaware hotel to a Doubletree hotel. o The Company spent $73 million (out of a planned $160 million during 1999) on renovations, redevelopment, and rebranding at 30 hotels and $9 million of additional capital expenditures to maintain the remaining hotels in a competitive condition. Approximately $20 million of the first quarter 1999 renovation expenditures related to the Allerton Hotel-Chicago. o Four of the hotels acquired in the merger with Bristol Hotel Company in 1998 were sold during the quarter - two in Colorado Springs, Colorado, and one each in Columbia, South Carolina and Flagstaff, Arizona - for an aggregate sales price of $10.5 million. One additional hotel was sold in April 1999 for $2.1 million and the Company has a pending sales contract on one hotel for $3.3 million which is expected to close within the next couple of months. One additional hotel acquired in the Bristol Merger is being actively offered for sale. No significant gain or loss has occurred or is expected to occur with respect to the sale of these hotels. 14 15 o Following the end of the first quarter, the Company has completed a five-year, $375 million Senior Term Loan, a 10-year, $100 million first mortgage term loan and a 10-year, $75 million first mortgage term loan. The proceeds from these loans were used to immediately pay off the Company's $250 million unsecured term loan, which was to mature on December 31, 1999, and to reduce outstanding borrowings under its existing $850 million Line of Credit. RESULTS OF OPERATIONS The Company Three Months Ended March 31, 1999 and 1998 For the three months ended March 31, 1999 and 1998, the Company had revenues of $126.9 million and $57.5 million, respectively, consisting primarily of Percentage Lease revenues of $125.0 million and $56.1 million, respectively. The increase in total revenue is primarily attributable to the Company's acquisition and subsequent leasing, pursuant to Percentage Leases, of interests in 114 additional hotels since March 31, 1998 including 103 hotels (net of hotels subsequently sold) that were acquired through the Bristol Merger on July 28,1998. Additionally, those hotels owned at both March 31, 1999 and 1998 recorded an increase in Percentage Lease revenues of $7.4 million or 13.2%. The Company generally seeks to acquire hotels that management believes can achieve increases in room and suite revenue and RevPAR as a result of renovation, redevelopment and rebranding, or a change in management. However, during the course of such improvements hotel revenue performance is often adversely affected by such temporary factors as rooms and suites out of service and disruptions of hotel operations. (A more detailed discussion of hotel room and suite revenue is contained in "The Hotels" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.) Total expenses increased $54.6 million in the three months ended March 31, 1999, from $34.3 million to $88.9 million, compared to the same period in 1998. This increase resulted primarily from the additional hotels acquired in 1998. Total expenses as a percentage of total revenue increased to 70% for the three months ended March 31, 1999, from 60% in the same period of 1998. The major components of the increase in expenses, as a percentage of total revenue, are taxes, insurance, and other; and interest expense. Taxes, insurance, and other increased $13.7 million primarily as a result of the increased number of hotels owned. As a percentage of total revenue, taxes, insurance, and other increased from 12.6% to 16.5%. The majority of the increase, as a percentage of total revenue, is attributed to land leases, which represents 3.2% of total revenue in 1999 but only 0.4% in 1998. Land leases as a percentage of total revenue increased because of the greater number of hotels subject to land leases acquired through the Bristol Merger. Interest expense increased as a percentage of total revenue to 22.4% in the three months ended March 31, 1999, from 16.9% in the three months ended March 31, 1998. This increase in interest expense is attributed to the increased use of debt to finance acquisitions and renovations and the assumption of debt related to the more highly leveraged Bristol assets. Debt, as a percentage of investment in hotel assets at cost, increased from 28% at March 31, 1998 to 38% at March 31, 1999. Funds From Operations The Company and FelCor consider Funds From Operations to be a key measure of a REIT's performance and should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company's and FelCor's operating performance and liquidity. The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines Funds From Operations as net income or loss 15 16 (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of properties, plus; real estate related depreciation and amortization and after comparable adjustments for the Company's portion of these items related to unconsolidated entities and joint ventures. The Company believes that Funds From Operations is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. The Company computes Funds From Operations in accordance with standards established by NAREIT which may not be comparable to Funds From Operations 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 the Company. Funds From Operations does not represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company 's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. Funds From Operations may include funds that may not be available for management's discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. The following table details the computation of Funds From Operations (in thousands):
THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ------------ ------------ Funds From Operations (FFO): Net income ........................................................... $ 38,067 $ 22,695 Series B redeemable preferred distributions ....................... (3,234) Extraordinary charge from write off of deferred financing fees .... 556 Depreciation ...................................................... 36,425 15,887 Depreciation for unconsolidated entities .......................... 2,591 2,547 ------------ ------------ FFO .................................................................. $ 73,849 $ 41,685 ============ ============ Weighted average units outstanding ................................... 75,988 44,575 ============ ============
Included in the FFO previously described is the Company's share of FFO from its interest in separate entities owning 15 hotels, a condominium management company and an entity that develops condominiums for sale and owns a recently completed hotel annex. The FFO contribution from these unconsolidated entities was derived as follows (in thousands):
THREE MONTHS ENDED MARCH 31, --------------------------- 1999 1998 ------------ ------------ Statements of operations information: Percentage Lease revenue .................................................. $ 12,571 $ 12,347 Depreciation .............................................................. $ 4,879 $ 4,263 Taxes, insurance and other ................................................ $ 2,342 $ 1,567 Interest expense .......................................................... $ 3,219 $ 3,259 Net income ................................................................ $ 3,720 $ 3,418 Percentage of net income attributable to the Company ...................... $ 1,781 $ 1,709 Amortization of cost in excess of book value .............................. (535) (416) ------------ ------------ Equity in income from unconsolidated entities ............................. 1,246 1,293 Depreciation .............................................................. 2,056 2,132 Amortization of cost in excess of book value .............................. 535 416 ------------ ------------ FFO from unconsolidated entities .......................................... $ 3,837 $ 3,841 ============ ============
16 17 The Hotels Upscale and full service hotels like Embassy Suites, Crowne Plaza, Holiday Inn, and Holiday Inn Select, Doubletree and Doubletree Guest Suites, and Sheraton, Sheraton Suites and Westin are expected to account for approximately 97% of Percentage Lease revenue in 1999. The following tables set forth historical occupancy, ADR and RevPAR at March 31, 1999 and 1998, and the percentage changes therein between the years presented for the Hotels in which the Company had an ownership interest at March 31, 1999. This information is presented regardless of the date of acquisition. COMPARABLE HOTELS (A)
FIRST QUARTER 1999 -------------------------------------- OCCUPANCY ADR RevPAR --------- ------------ ------------ DJONT Comparable Hotels: Original Hotels (11 hotels) ........................... 71.2% $ 119.10 $ 84.79 CSS Hotels (18 hotels) ................................ 76.0 135.96 103.27 1996 Acquisitions (12 hotels) ......................... 72.0 131.38 94.62 1997 Acquisitions (22 hotels) ......................... 72.1 120.78 87.02 1998 Acquisitions (2 hotels) .......................... 80.7 111.30 89.86 Total DJONT Comparable Hotels (65 hotels) ........ 73.3 126.75 92.92 Total Bristol Comparable Hotels (63 hotels) ................ 65.1 81.90 53.36 Total Comparable Hotels (128 hotels) .............. 69.2% $ 105.76 $ 73.24
FIRST QUARTER 1998 -------------------------------------- OCCUPANCY ADR RevPAR --------- ------------ ------------ DJONT Comparable Hotels: Original Hotels ....................................... 72.9% $ 116.79 $ 85.12 CSS Hotels ............................................ 74.8 132.94 99.48 1996 Acquisitions ..................................... 72.1 128.56 92.66 1997 Acquisitions ..................................... 71.2 118.86 84.59 1998 Acquisitions ..................................... 77.5 107.12 82.99 Total DJONT Comparable Hotels .................... 72.9 124.22 90.53 Total Bristol Comparable Hotels ............................ 67.0 78.72 52.76 Total Comparable Hotels ........................... 70.0% $ 102.48 $ 71.69
CHANGE FROM PRIOR PERIOD 1ST QTR. 1999 VS. 1ST QTR. 1998 -------------------------------------- OCCUPANCY ADR RevPAR --------- ------- ---------- DJONT Comparable Hotels: Original Hotels........................................ (1.7)pts. 2.0% (0.4)% CSS Hotels............................................. 1.1 2.3 3.8 1996 Acquisitions...................................... (0.1) 2.2 2.1 1997 Acquisitions...................................... 0.9 1.6 2.9 1998 Acquisitions...................................... 3.3 3.9 8.3 Total DJONT Comparable Hotels..................... 0.4 2.0 2.6 Total Bristol Comparable Hotels............................. (1.9) 4.0 1.1 Total Comparable Hotels............................ (0.7)pts. 3.2% 2.2%
(A) DJONT Comparable Hotels excludes 21 hotels undergoing redevelopment in either the first quarter of 1999 or 1998. Bristol Comparable Hotels excludes 34 hotels undergoing redevelopment in either the first quarter of 1999 or 1998, three individual hotel acquisitions and three hotels targeted for sale. 17 18 NON-COMPARABLE HOTELS
FIRST QUARTER 1999 ------------------------------------- OCCUPANCY ADR RevPAR ----------- ------------ ----------- DJONT Non-comparable Hotels 64.% $ 111.77 $ 71.91 Bristol Non-comparable Hotels (B) 61.8 94.45 58.32
FIRST QUARTER 1998 ------------------------------------- OCCUPANCY ADR RevPAR ----------- ------------ ----------- DJONT Non-comparable Hotels 71.% $ 107.64 $ 76.72 Bristol Non-comparable Hotels (B) 65.9 83.90 55.26
CHANGE FROM PRIOR PERIOD 1ST QTR. 1999 VS. 1ST QTR. 1998 ------------------------------------- OCCUPANCY ADR RevPAR ----------- ------------ ----------- DJONT Non-comparable Hotels (7.0)pts. 3.8% (6.3)% Bristol Non-comparable Hotels (B) (4.1) 12.6 5.5
(B) Excludes three closed hotels under renovation and three hotels targeted for sale. In aggregate, the three hotels targeted for sale had a 17.9% decline in RevPAR for the first quarter 1999. Comparison of The Hotels' Operating Statistics for the Three Months Ended March 31, 1999 and 1998 Revenue per available room ("RevPAR") for total Comparable hotels increased 2.2% for the three months ended March 31, 1999 compared to the same period in 1998. This increase was due to increases in RevPAR by state for hotels in Florida (increases of 5.5% in RevPAR which represents 16% of comparable room and suite revenue), and California (increases of 3.8% representing 14% of comparable room and suite revenue). These increases were offset by RevPAR decreases in Texas of 2.5% (representing 18% of comparable room and suite revenue) and Georgia of 0.4% (representing 9% of comparable revenue). These decreases were principally due to the absorption of new supply. Bristol non-comparable hotels (34) average daily room rates ("ADR") increased 12.6% and RevPAR increased 5.5%. Contributing to these increases were the nine recently renovated and rebranded Crowne Plaza hotels whose RevPAR increased 23.3% derived from a 15.4% increase in ADR. These nine hotels are in Philadelphia; Pleasanton, California; San Francisco Union Square, three in and around Dallas, Houston, Powers Ferry (Atlanta) and Meadowlands. RENOVATION, REDEVELOPMENT, AND REBRANDING The Company spent $73 million on thirty hotels (19 of which are Bristol operated hotels) undergoing renovation, redevelopment, or rebranding during the quarter, resulting in approximately 157,000 room nights out-of-service, or approximately 3.5% of available room nights. This included 18 Holiday Inn or Holiday Inn Select hotels, six Embassy Suites, three Doubletree, two Sheraton, and one independent hotel. Included are two hotels, which were closed during the quarter for redevelopment, the Allerton Hotel-Chicago, expected to re-open in May 1999 (to be rebranded as a Crowne Plaza) and the Holiday Inn-Tampa Busch Gardens, re-opened in late February, 1999. In addition, $9 million was spent on normal capital expenditures to hotels. 18 19 Included in the thirty hotels undergoing renovation are six hotels where renovations, totaling $23.8 million were completed and containing approximately 1,900 rooms, during the quarter as follows: 266-room Embassy Suites ($1.8 million) Kansas City, Missouri 140-room Hampton Inn(R)($1.9 million) Marietta, Georgia 167-room Holiday Inn ($2.4 million) Kansas City, Missouri 565-room Holiday Inn ($2.5 million) San Francisco, California 408-room Holiday Inn ($12.0 million) Tampa (Busch Gardens), Florida 395-room Sheraton Gateway ($3.2 million) Atlanta (Airport), Georgia
The Company expects to spend approximately $160 million for capital expenditures in which may be funded from cash on hand or borrowings under its Line of Credit. Through the three months ending March 31, 1999, the Company has spent approximately $73 million (of the $160 million) under the Renovation and Redevelopment program. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of cash to meet its cash requirements, including distributions and repayments of indebtedness, is its share of the cash flow from the Percentage Leases. For the three months ended March 31, 1999, cash flow provided by operating activities, consisting primarily of Percentage Lease revenue, was $61.5 million and Funds From Operations was $73.8 million. The Lessees' obligations under the Percentage Leases are largely unsecured. The Lessees have limited capital resources, and, accordingly, their ability to make lease payments under the Percentage Leases is substantially dependent on the ability of the Lessees to generate sufficient cash flow from the operation of the Hotels. During the three months ended March 31, 1999, DJONT realized a net loss of $2.8 million and at March 31, 1999, had a cumulative shareholders' deficit of $11.0 million. The shareholders' deficit results primarily from losses incurred during 1997 and 1996, as a consequence of the one-time costs of converting the CSS Hotels to the Embassy Suites and Doubletree Guest Suites brands and the substantial number of room and suite nights lost during those years due to renovation. It is anticipated that a substantial portion of any future profits of DJONT will be retained until a positive shareholders' equity is restored. It is anticipated that DJONT's future earnings will be sufficient to enable it to continue to make its lease payments under the Percentage Leases. Certain entities owning interests in DJONT and the managers of certain hotels have agreed to make loans to DJONT of up to an aggregate of approximately $17.3 million to the extent necessary to enable DJONT to pay rent and other obligations when due under the respective Percentage Leases relating to a total of 34 of the Hotels. No such loans were outstanding under such agreements at March 31, 1999. Bristol has entered into an absolute and unconditional guarantee of the obligations of the Bristol Lessees under the Percentage Leases. As an additional credit enhancement, the Bristol Lessees obtained a letter of credit (the "Letter of Credit") issued by Bankers Trust Company for the benefit of the Company in the original amount of $20 million that is required to be maintained until July 27, 1999. This Letter of Credit is subject to periodic reductions upon satisfaction of certain conditions and at March 31, 1999, was in the amount of $15.9 million. According to Bristol's financial statements filed with the SEC, for the three months ended March 31, 1999, Bristol earned $1.1 million of net income and at March 31, 1999, had stockholders' equity of $36.6 million. The Company may acquire additional hotels and may incur indebtedness to make such acquisitions or to meet distribution requirements imposed on a REIT under the Internal Revenue Code, to the extent that working capital and cash flow from the Company's investments are insufficient to make such distributions. 19 20 On April 1, 1999, the Company closed a five-year, $375 million term loan (the "Senior Term Loan"). The Senior Term Loan is collateralized by FelCor's stock and partnership interests in certain subsidiaries of the Company and bears interest at 250 basis points over LIBOR (30-day LIBOR at March 31, 1999, was 4.94%). The financial covenants in the Senior Term Loan are consistent with those in the Company's existing Line of Credit. In connection with this transaction, the Company's $850 million Line of Credit and existing seven and 10-year publicly-traded term notes were equally and ratably secured by the same collateral securing the Senior Term Loan. Upon the Company achieving investment grade credit ratings from the applicable rating agencies, the stock and partnership interest collateral will be released. The proceeds of the Senior Term Loan were used to immediately pay off the $250 million term loan, which was to mature on December 31, 1999 and to reduce borrowings under the Company's Line of Credit. On April 1, 1999, the Company also closed a 10-year, $100 million mortgage loan (the "April 1999 First Mortgage Term Loan"). The April 1999 First Mortgage Term Loan is non-recourse (with certain exceptions), is collateralized by seven Embassy Suites hotels, carries a fixed rate coupon of 7.54%, matures in April 2009 and amortizes over 25 years. The proceeds from this loan were used to reduce outstanding borrowings under Company's Line of Credit. On May 13, 1999, the Company closed a 10-year, $75 million mortgage loan (the "May 1999 First Mortgage Term Loan"). This loan is non-recourse (with certain exceptions), is collateralized by six Embassy Suites hotels, carries a fixed rate coupon of 7.55%, matures in May 2009 and amortizes over 25 years. The proceeds from this loan were used to reduce outstanding borrowings under the Company's Line of Credit. 20 21 The Company's debt outstanding as of March 31, 1999, both on a historical and pro forma basis for the previously described transactions, consists of the following (in thousands):
HISTORICAL PRO FORMA OUTSTANDING OUTSTANDING INTEREST RATE BALANCE BALANCE MATURITY DATE ------------- ----------- ----------- ------------- FLOATING RATE DEBT: Line of Credit LIBOR + 150bp $480,000 $305,000 June 2001 Term Loan LIBOR + 150bp 250,000 - December 1999 Senior Term Loan LIBOR + 250bp - 250,000 March 2004 Mortgage debt LIBOR + 200bp 63,000 63,000 February 2003 Other Up to LIBOR + 150bp 25,650 25,650 Various ---------- ----------- Total Floating Rate Debt 818,650 643,650 ---------- ----------- FIXED RATE DEBT: Line of Credit-swapped 7.24% 325,000 200,000 June 2001 Publicly-traded term notes 7.38% 174,279 174,279 October 2004 Publicly-traded term notes 7.63% 124,150 124,150 October 2007 Mortgage debt 7.24% 144,212 144,212 November 2007 Senior Term Loan-swapped 8.30% - 125,000 March 2004 Mortgage debt 7.54% - 100,000 April 2009 Mortgage debt 7.55% - 75,000 April 2009 Other 6.96%-7.23% 84,900 84,900 2000-2005 ---------- ----------- Total Fixed Rate Debt 852,541 1,027,541 ---------- ----------- Total Debt $1,671,191 $ 1,671,191 ========== ===========
The Company's future scheduled debt principal payments at March 31, 1999, pro forma for the previously described transactions, are as follows (in thousands):
YEAR ---- Remainder of 1999 $ 10,585 2000 31,240 2001 524,330 2002 9,520 2003 91,211 2004 and thereafter 1,005,877 ------------ 1,672,763 Discount accretion over term (1,572) ------------ $ 1,671,191 ============
The Company presently intends to issue approximately $200 million of seven year senior notes during the second quarter of 1999, subject to market conditions. The net proceeds from the sale of such notes, if completed, will be used to reduce outstanding borrowings under the Company's Line of Credit. The Line of Credit and the Term Loan contain various affirmative and negative covenants including limitations on total indebtedness, total secured indebtedness, and cash distributions, as well as the obligation to maintain certain minimum tangible net worth and certain minimum interest and debt service coverage ratios. At March 31, 1999, the Company was in compliance with all such covenants. The Company's other borrowings contain affirmative and negative covenants that are generally equal to or less restrictive than the Line of Credit and Term Loan. Most of the collateralized borrowings are nonrecourse to the Company (with certain exceptions) and contain provisions allowing for the substitution of collateral upon 21 22 satisfaction of certain conditions. Most of the collateralized borrowings are prepayable; however they are subject to various prepayment penalties, yield maintenance, or defeasance obligations. At March 31, 1999, the Company had $26.6 million of cash and cash equivalents and had utilized $805 million of the amount available under the Line of Credit. Significant debt statistics at March 31, 1999, after applying the previously described financing transactions are as follows: o Interest coverage ratio of 3.5x o Total debt to annualized EBITDA of 4.2x o Borrowing capacity of $345 million under the Line of Credit o Consolidated debt equal to 38% of investment in hotels at cost o Fixed interest rate debt comprising 62% of total debt o Weighted average maturity of fixed interest rate debt of approximately 6 years o Mortgage debt to total assets of 11% o Debt of less than $11 million and $32 million maturing in the remainder of 1999 and 2000, respectively. To manage the relative mix of its debt between fixed and variable rate instruments, the Company has entered into interest rate swap agreements with six financial institutions. These interest rate swap agreements modify a portion of the interest characteristics of the Company's outstanding debt under its Line of Credit without an exchange of the underlying principal amount and effectively convert variable rate debt to a fixed rate. The fixed rates to be paid, the effective fixed rate, and the variable rate to be received by the Company at March 31, 1999, are summarized in the following table:
SWAP RATE RECEIVED SWAP RATE EFFECTIVE (VARIABLE) AT SWAP NOTIONAL AMOUNT PAID (FIXED) FIXED RATE 3/31/99 MATURITY --------------- ------------ ---------- --------- --------- $ 50 million 6.11125% 7.61125% 4.97000% October 1999 $ 25 million 5.95500% 7.45500% 4.97094% November 1999 $ 25 million 5.55800% 7.05800% 4.96344% July 2001 $ 25 million 5.54800% 7.04800% 4.96344% July 2001 $ 75 million 5.55500% 7.05500% 4.96344% July 2001 $ 100 million 5.79600% 7.29600% 4.96344% July 2003 $ 25 million 5.82600% 7.32600% 4.96344% July 2003 ------------- $ 325 million =============
The differences to be paid or received by the Company under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense by the Company pursuant to the terms of its interest rate agreement and will have a corresponding effect on its future cash flows. Agreements such as these contain a credit risk that the counterparties may be unable to meet the terms of the agreement. The Company minimizes that risk by evaluating the creditworthiness of its counterparties, which are limited to major banks and financial institutions, and it does not anticipate nonperformance by the counterparties. To provide for additional financing flexibility, FelCor has approximately $946 million of common stock, preferred stock, debt securities, and/or common stock warrants available for offerings under shelf registration statements previously declared effective. INFLATION Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the Lessees' ability to raise room rates. 22 23 SEASONALITY The Hotels' operations historically have been seasonal in nature, reflecting higher occupancy rates primarily during the first three quarters of each year. This seasonality can be expected to cause fluctuations in the Company's quarterly lease revenue, particularly during the fourth quarter, to the extent that it receives Percentage Rent. To the extent the cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in lease revenue, the Company expects to utilize cash on hand or borrowings under the Line of Credit to make distributions to its equity holders. YEAR 2000 The Year 2000 issue relates to computer programs that were written using two digit rather than four to define the applicable year. In those programs the year 2000 may be incorrectly identified as the year 1900, which could result in a system failure or miscalculations causing a disruption of operations, including a temporary inability to process transactions, prepare financial statements, or engage in other normal business activities. The Company believes that its efforts to identify and resolve the Year 2000 issues will avoid a major disruption of its business. The Company has assessed its internal computer systems and believe that they will properly utilize dates beyond December 31, 1999. The Company and its managers have completed the assessment of both computer and noninformation technology systems to determine if the Hotels are Year 2000 compliant. This assessment included embedded systems that operate elevators, phone systems, energy maintenance systems, security systems, and other systems. Most of the upgrades to make a hotel Year 2000 compliant had been anticipated as part of the renovation, redevelopment, and rebranding program that we generally undertake upon acquisition of a hotel. The Company has spent approximately $3 million through the first quarter of 1999 to remediate Year 2000 issues and anticipates spending an additional $7 million to remediate all Year 2000 issues, which amount is included in the Company's 1999 capital plans. The majority of the unspent funds relate to the acquisition and systematic implementation of Year 2000 compliant computer hardware and software for the hotels. The Company has requested and received assurances from the managers of the hotels, the franchisors of the hotels and the lessees, that they have implemented appropriate steps to insure that they will avoid a major disruption of business due to Year 2000 issues. However, the Company cannot assure that such third parties will successfully avoid a disruption due to Year 2000 issues, and such disruptions could have an adverse effect upon the Company's business, financial condition or results of operations. Concurrent with the assessment of the year 2000 issue, the Company and its hotel managers and Lessees are developing contingency plans intended to mitigate the possible disruption in business operations that may result from year 2000 issues, and are developing cost estimates for such plans. Once developed, contingency plans and related cost estimates will be continually refined as additional information becomes available. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Portions of this Quarterly Report on Form 10-Q include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's current expectations are disclosed herein and in the Company's other filings under the 1933 Act and 1934 Act (collectively, "Cautionary Disclosures"). The forward looking statements included herein, and all subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf, are expressly qualified in their entirety by the Cautionary Statements. 23 24 PART II. -- OTHER INFORMATION ITEM 5. OTHER INFORMATION. For information relating to asset acquisitions and certain other transactions by the Company through March 31, 1999, 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: Exhibit Number Description ------- ----------- 4.2.3 Third Amendment to Indenture dated as of March 30, 1999 by and among FelCor Lodging Limited Partnership, FelCor Lodging Trust Incorporated, the Subsidiary Guarantors named therein, who are signatories thereto and SunTrust Bank, Atlanta (filed as Exhibit 4.7.3 to FelCor's Form 10-Q for the quarter ended March 31, 1999 (the "March 1999 10-Q"), and incorporated herein by reference). 10.20 Deed of Trust, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing Statement, dated March 1, 1999, by FelCor Hotel Company II, Ltd., as Grantor, to Howard E. Schreiber, Trustee, in trust for the benefit of Bankers Trust Company, as Beneficiary (filed as Exhibit 10.21 to the March 1999 10-Q, and incorporated herein by reference). 10.21.1 Loan Agreement, dated April 1, 1999, among FelCor Lodging Trust Incorporated and FelCor Lodging Limited Partnership as Borrower, and The Lenders Party Thereto and The Chase Manhattan Bank as Administrative Agent and Collateral Agent (filed as Exhibit 10.22.1 to the March 1999 10-Q, and incorporated herein by reference). 10.21.2 Guaranty, dated April 1, 1999, made by each of the named Guarantors therein, who are signatories thereto (filed as Exhibit 10.22.2 to the March 1999 10-Q, and incorporated herein by reference). 10.21.3 Pledge and Security Agreement, dated April 1, 1999, made by each of the named Pledgors therein, who are signatories thereto, in favor of The Chase Manhattan Bank, as Collateral Agent (filed as Exhibit 10.22.3 to the March 1999 10-Q, and incorporated herein by reference). 10.22 Form of Mortgage, Security Agreement and Fixture Filing by and between FelCor/CSS Holdings, L.P. as Mortgagor and The Prudential Insurance Company of America as Mortgagee (filed as Exhibit 10.23 to the March 1999 10-Q, and incorporated herein by reference). 27 Financial Data Schedule. (b) Reports on Form 8-K: Registrant did not file any reports on Form 8-K during the first quarter of 1999. 24 25 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 17, 1999 FELCOR LODGING LIMITED PARTNERSHIP By: FelCor Lodging Trust Incorporated Its General Partner By: /s/ Randall L. Churchey ------------------------------------------- Randall L. Churchey Senior Vice President and Chief Financial Officer (Chief Financial Officer) 25 26 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1999 10-Q OF FELCOR LODGING LIMITED PARTNERSHIP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 26,644 0 31,513 0 0 58,157 4,225,293 (214,333) 4,231,771 110,865 1,671,191 0 295,000 0 2,102,804 4,231,771 0 126,917 0 0 0 0 28,422 38,067 0 38,067 0 0 0 38,067 0.45 0.45
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